Iridium Communications Inc.
Iridium Communications Inc. (Form: 10-Q, Received: 07/30/2015 07:49:42)

ar

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2015

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-33963

 

Iridium Communications Inc.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

 

26-1344998

(State of incorporation)

 

(I.R.S. Employer

Identification No.)

 

 

 

1750 Tysons Boulevard, Suite 1400, McLean, Virginia

 

22102

(Address of principal executive offices)

 

(Zip code)

703-287-7400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

¨

 

 

Accelerated filer

x

Non-accelerated filer

¨

(Do not check if a smaller reporting company)

 

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of July 28, 2015 was 94,850,074.

 

 

 


IRIDIUM COMMUNICATIONS INC.

TABLE OF CONTENTS

 

Item No.

  

 

  

Page

 

 

 

 

Part I. Financial Information

 

 

 

 

 

 

 

 

 

Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

 

 

ITEM  2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

15

 

 

 

 

 

ITEM  3.

 

Quantitative and Qualitative Disclosures About Market Risk.

 

26

 

 

 

 

 

ITEM  4.

 

Controls and Procedures.

 

27

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

 

ITEM  1.

 

Legal Proceedings.

 

28

 

 

 

 

 

ITEM  1A.

 

Risk Factors.

 

28

 

 

 

 

 

ITEM  2.

 

Unregistered Sales of Equity Securities and Use of Proceeds.

 

28

 

 

 

 

 

ITEM  3.

 

Defaults Upon Senior Securities

 

28

 

 

 

 

 

ITEM  4.

 

Mine Safety Disclosures

 

28

 

 

 

 

 

ITEM  5.

 

Other Information

 

28

 

 

 

 

 

ITEM  6.

 

Exhibits

 

29

 

 

 

 

 

 

 

Signatures

 

30

2


PART I.

Iridium Communications Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

 

June 30, 2015

 

 

December 31, 2014

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

198,874

 

 

$

211,249

 

Marketable securities

 

277,974

 

 

 

261,136

 

Accounts receivable, net

 

56,634

 

 

 

50,672

 

Inventory

 

32,172

 

 

 

28,433

 

Deferred income tax assets, net

 

15,630

 

 

 

11,009

 

Prepaid expenses and other current assets

 

10,334

 

 

 

10,614

 

Total current assets

 

591,618

 

 

 

573,113

 

Property and equipment, net

 

2,140,808

 

 

 

1,971,839

 

Restricted cash

 

88,603

 

 

 

86,104

 

Other assets

 

8,449

 

 

 

7,726

 

Intangible assets, net

 

46,984

 

 

 

47,416

 

Deferred financing costs

 

132,505

 

 

 

136,444

 

Goodwill

 

87,039

 

 

 

87,039

 

Total assets

$

3,096,006

 

 

$

2,909,681

 

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

27,637

 

 

$

17,677

 

Accrued expenses and other current liabilities

 

33,316

 

 

 

38,419

 

Interest payable

 

10,897

 

 

 

9,589

 

Deferred revenue

 

38,148

 

 

 

36,665

 

Total current liabilities

 

109,998

 

 

 

102,350

 

Accrued satellite operations and maintenance expense, net

 

 

 

 

 

 

 

of current portion

 

14,716

 

 

 

15,051

 

Credit facility

 

1,393,149

 

 

 

1,291,401

 

Deferred income tax liabilities, net

 

277,312

 

 

 

245,042

 

Deferred revenue, net of current portion

 

20,820

 

 

 

20,689

 

Other long-term liabilities

 

3,311

 

 

 

3,284

 

Total liabilities

 

1,819,306

 

 

 

1,677,817

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Series A Preferred Stock, $0.0001 par value, 1,000 shares authorized,

 

 

 

 

 

 

 

issued and outstanding

 

-

 

 

 

-

 

Series B Preferred Stock, $0.0001 par value, 500 shares

 

 

 

 

 

 

 

authorized, issued and outstanding

 

-

 

 

 

-

 

Common stock, $0.001 par value, 300,000 shares authorized, 94,847

 

 

 

 

 

 

 

and 93,905 shares issued and outstanding, respectively

 

95

 

 

 

94

 

Additional paid-in capital

 

1,040,013

 

 

 

1,033,176

 

Retained earnings

 

240,803

 

 

 

201,514

 

Accumulated other comprehensive loss, net of tax

 

(4,211

)

 

 

(2,920

)

Total stockholders' equity

 

1,276,700

 

 

 

1,231,864

 

Total liabilities and stockholders' equity

$

3,096,006

 

 

$

2,909,681

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

3


Iridium Communications Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income

(In thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

$

78,016

 

 

$

76,217

 

 

$

153,440

 

 

$

149,647

 

Subscriber equipment

 

18,768

 

 

 

20,333

 

 

 

35,308

 

 

 

40,490

 

Engineering and support services

 

5,135

 

 

 

5,971

 

 

 

10,178

 

 

 

10,416

 

Total revenue

 

101,919

 

 

 

102,521

 

 

 

198,926

 

 

 

200,553

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services (exclusive of depreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and amortization)

 

14,320

 

 

 

16,730

 

 

 

29,202

 

 

 

30,933

 

Cost of subscriber equipment

 

9,281

 

 

 

13,268

 

 

 

19,928

 

 

 

27,180

 

Research and development

 

4,422

 

 

 

4,645

 

 

 

8,548

 

 

 

6,766

 

Selling, general and administrative

 

18,742

 

 

 

18,493

 

 

 

39,266

 

 

 

37,679

 

Depreciation and amortization

 

12,820

 

 

 

19,672

 

 

 

26,175

 

 

 

39,938

 

Total operating expenses

 

59,585

 

 

 

72,808

 

 

 

123,119

 

 

 

142,496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

42,334

 

 

 

29,713

 

 

 

75,807

 

 

 

58,057

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

792

 

 

 

725

 

 

 

2,029

 

 

 

1,362

 

Undrawn credit facility fees

 

(930

)

 

 

(1,460

)

 

 

(1,847

)

 

 

(2,959

)

Other income (expense), net

 

215

 

 

 

(3,789

)

 

 

1

 

 

 

(4,139

)

Total other income (expense)

 

77

 

 

 

(4,524

)

 

 

183

 

 

 

(5,736

)

Income before income taxes

 

42,411

 

 

 

25,189

 

 

 

75,990

 

 

 

52,321

 

Provision for income taxes

 

(16,423

)

 

 

(10,170

)

 

 

(28,983

)

 

 

(20,759

)

Net income

 

25,988

 

 

 

15,019

 

 

 

47,007

 

 

 

31,562

 

Series A Preferred Stock dividends

 

1,750

 

 

 

1,750

 

 

 

3,500

 

 

 

3,500

 

Series B Preferred Stock dividends

 

2,109

 

 

 

1,102

 

 

 

4,218

 

 

 

1,102

 

Net income attributable to common stockholders

$

22,129

 

 

$

12,167

 

 

$

39,289

 

 

$

26,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

95,064

 

 

 

86,793

 

 

 

94,797

 

 

 

81,964

 

Weighted average shares outstanding - diluted

 

123,196

 

 

 

95,653

 

 

 

122,771

 

 

 

86,444

 

Net income attributable to common stockholders per share - basic

$

0.23

 

 

$

0.14

 

 

$

0.41

 

 

$

0.33

 

Net income attributable to common stockholders per share - diluted

$

0.21

 

 

$

0.14

 

 

$

0.38

 

 

$

0.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

25,988

 

 

$

15,019

 

 

$

47,007

 

 

$

31,562

 

Foreign currency translation adjustments, net of tax

 

22

 

 

 

274

 

 

 

(1,379

)

 

 

430

 

Unrealized gain on marketable securities, net of tax

 

27

 

 

 

2

 

 

 

88

 

 

 

62

 

Comprehensive income

$

26,037

 

 

$

15,295

 

 

$

45,716

 

 

$

32,054

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

4


Iridium Communications Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Six Months Ended June 30,

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net cash provided by operating activities

$

92,714

 

 

$

91,197

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(174,206

)

 

 

(108,073

)

Purchases of marketable securities

 

(130,977

)

 

 

(120,473

)

Sales and maturities of marketable securities

 

113,441

 

 

 

32,740

 

Net cash used in investing activities

 

(191,742

)

 

 

(195,806

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Borrowings under the Credit Facility

 

101,748

 

 

 

45,222

 

Payment of deferred financing fees

 

(6,584

)

 

 

(4,560

)

Restricted cash deposits

 

(2,500

)

 

 

(13,362

)

Releases from restricted cash

 

-

 

 

 

11,009

 

Proceeds from exercise of stock options

 

2,074

 

 

 

173

 

Tax payment upon settlement of stock awards

 

(796

)

 

 

(37

)

Excess tax benefits from stock-based compensation

 

697

 

 

 

-

 

Payment of Series A Preferred Stock dividends

 

(3,500

)

 

 

(3,500

)

Payment of Series B Preferred Stock dividends

 

(4,218

)

 

 

-

 

Proceeds from issuance of Series B Preferred Stock, net of issuance costs

 

-

 

 

 

120,753

 

Proceeds from issuance of common stock, net of issuance costs

 

-

 

 

 

98,897

 

Net cash provided by financing activities

 

86,921

 

 

 

254,595

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(268

)

 

 

-

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(12,375

)

 

 

149,986

 

Cash and cash equivalents, beginning of period

 

211,249

 

 

 

186,342

 

Cash and cash equivalents, end of period

$

198,874

 

 

$

336,328

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

$

8,911

 

 

$

7,271

 

Income taxes paid

$

1,140

 

 

$

273

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

Property and equipment received but not paid for yet

$

24,803

 

 

$

9,172

 

Interest capitalized but not paid

$

10,897

 

 

$

8,706

 

Capitalized amortization of deferred financing costs

$

10,523

 

 

$

4,897

 

Capitalized paid-in-kind interest

$

20,282

 

 

$

16,542

 

Capitalized stock-based compensation

$

623

 

 

$

597

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

 

Dividends accrued on Series A Preferred Stock

$

292

 

 

$

292

 

Dividends accrued on Series B Preferred Stock

$

352

 

 

$

1,102

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

5


Iridium Communications Inc.

Notes to Condensed Consolidated Financial Statements

 

 

1. Basis of Presentation and Principles of Consolidation

Iridium Communications Inc. (the “Company”) has prepared its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The accompanying condensed consolidated financial statements include the accounts of (i) the Company, (ii) its wholly owned subsidiaries, and (iii) all less than wholly owned subsidiaries that the Company controls. All material intercompany transactions and balances have been eliminated.

In the opinion of management, the condensed consolidated financial statements reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of its results of operations and cash flows for the interim periods covered, and of the financial position of the Company at the date of the interim condensed consolidated balance sheet. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the U.S. Securities and Exchange Commission (“SEC”). These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on February 26, 2015.

 

 

2. Significant Accounting Policies

Warranty Expense

The Company provides the first end-user purchaser of its subscriber equipment a warranty for one to five years from the date of purchase by such first end-user, depending on the product. The Company maintains a warranty reserve based on historical experience of warranty costs and expected occurrences of warranty claims on equipment. Costs associated with warranties, including equipment replacements, repairs, freight, and program administration, are recorded as cost of subscriber equipment in the accompanying condensed consolidated statements of operations and comprehensive income.  The Company experienced a $4.6 million decrease in its warranty provision for the six months ended June 30, 2015 compared to the prior year period. This decrease is primarily the result of fewer returns for the Iridium Pilot ®  units sold in 2014 and 2015, a decrease in the average repair costs, and a reduction in the Company’s estimate for future returns.  The June 2015 change in expected returns and lower repair costs reduced the warranty reserve for the three and six months ended June 30, 2015 by $1.4 million. Changes in the warranty reserve during the six months ended June 30, 2015 were as follows:

 

 

Six Months Ended

 

 

June 30, 2015

 

 

(in thousands)

 

Balance at beginning of the period

$

7,381

 

Provision

 

(1,404

)

Utilization

 

(1,551

)

Balance at end of the period

$

4,426

 

 

Fair Value Measurements

The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by management of the Company. The instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, marketable securities, prepaid expenses and other current assets, accounts receivable, accounts payable and accrued expenses and other current liabilities. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. The fair value hierarchy consists of the following tiers:

Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

6


The carrying values of short-term financial instruments (primarily cash and cash equivalents, prepaid expenses and other current assets, accounts receivable, accounts payable, and accrued expenses and other current liabilities) approximate their fair values because of their short-term nature. The fair value of the Compan y’s investments in money market funds approximates its carrying value; such instruments are classified as Level 1 and are included in cash and cash equivalents on the accompanying condensed consolidated balance sheets. The fair value of the Company’s inves tments in commercial paper and short-term U.S. agency securities with original maturities of less than ninety days approximates their carrying value; such instruments are classified as Level 2 and are included in cash and cash equivalents on the accompanyi ng condensed consolidated balance sheets.

The fair value of the Company’s investments in fixed-income debt securities and commercial paper with original maturities of greater than ninety days are obtained using similar investments traded on active securities exchanges and are classified as Level 2 and are included in marketable securities on the accompanying condensed consolidated balance sheets. For fixed income securities that do not have quoted prices in active markets, the Company uses third-party vendors to price its debt securities resulting in classification as Level 2.

Depreciation and Amortization

The Company calculates depreciation expense using the straight line method and evaluates the appropriateness of the useful life used on a quarterly basis or as events occur that require additional assessment. In September 2014, March 2015, and again in June 2015, the Company updated its estimate of the current satellites’ remaining useful lives based on the continued refinement of the launch schedule and deployment plan for the Company’s next-generation satellite constellation (“Iridium NEXT”). As a result, the estimated useful lives of the satellites within the current constellation have been extended and are consistent with the expected deployment of Iridium NEXT. The changes in the estimated useful lives resulted in a decrease of $3.3 million and $6.3 million in depreciation expense for the three and six months ended June 30, 2015, respectively, compared to the prior year period. The June 2015 change in accounting estimate reduced the depreciation expense for the three and six months ended June 30, 2015 by $0.1 million and $0.1 million, respectively. The change in estimate will have an impact on future periods. The Company will continue to evaluate the useful lives of its current satellites on an ongoing basis through the full deployment of Iridium NEXT as the satellites are placed into service.

In January 2014, the Company lost communication with one of its in-orbit satellites. As a result, an impairment charge of $0.9 million was recorded within depreciation expense for the six months ended June 30, 2014. The Company had an in-orbit spare satellite available to replace the lost satellite. Through the date of the report in which these financial statements are included, the Company has not lost any satellites in 2015.

Amortization expense decreased by $3.1 million and $6.1 million for the three and six months ended June 30, 2015, respectively compared to the prior year period due to the completion of amortization of certain definite-lived intangible assets in 2014. These definite-lived intangible assets included customer relationships, intellectual property and software which were assigned fair values as a result of the Company’s 2009 acquisition of Iridium Holdings LLC and were amortized over useful lives of five years.

 

 

3. Cash and Cash Equivalents, Restricted Cash and Marketable Securities

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of ninety days or less to be cash equivalents. These investments, along with cash deposited in institutional money market funds, regular interest bearing and non-interest bearing depository accounts, are classified as cash and cash equivalents on the accompanying condensed consolidated balance sheet. The following table summarizes the Company’s cash and cash equivalents:

 

 

June 30,

 

 

December 31,

 

 

Recurring Fair

 

2015

 

 

2014

 

 

Value   Measurement

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

Cash

$

97,813

 

 

$

86,792

 

 

 

Money market funds

 

95,613

 

 

 

105,497

 

 

Level 1

Commercial paper

 

5,448

 

 

 

18,960

 

 

Level 2

Total Cash and cash equivalents

$

198,874

 

 

$

211,249

 

 

 

 

7


Restricted Cash

The Company is required to maintain a minimum cash reserve for debt service related to its $1.8 billion loan facility (the “Credit Facility”) (see Note 4). As of June 30, 2015 and December 31, 2014, the Company’s restricted cash balance, which includes a minimum cash reserve for debt service related to the Credit Facility and the interest earned on these amounts, was $88.6 million and $86.1 million, respectively.

Marketable Securities

Marketable securities consist of fixed-income debt securities and commercial paper with an original maturity in excess of ninety days. These investments are classified as available-for-sale and are included in marketable securities within current assets on the accompanying condensed consolidated balance sheets. All investments are carried at fair value. Unrealized gains and losses, net of taxes, are reported as a component of other comprehensive income or loss. The specific identification method is used to determine the cost basis of the marketable securities sold. There were no material realized gains or losses on the sale of marketable securities for the three and six months ended June 30, 2015 and 2014. The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value. The Company determined that the decline in fair value of certain of its investments is temporary at June 30, 2015 as the Company does not intend to sell these securities and it is not likely that the Company will be required to sell the securities before the recovery of their amortized cost basis.

The following tables summarize the Company’s marketable securities:

 

 

As of June 30, 2015

 

 

 

 

Amortized

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

Recurring Fair

 

Cost

 

 

Unrealized   Gains

 

 

Unrealized Losses

 

 

Fair Value

 

 

Value Measurement

 

(in thousands)

Fixed-income debt securities

$

196,881

 

 

$

270

 

 

$

(58

)

 

$

197,093

 

 

Level 2

Commercial paper

 

65,944

 

 

 

-

 

 

 

(1

)

 

 

65,943

 

 

Level 2

U.S. Treasury Notes

 

14,875

 

 

 

63

 

 

 

-

 

 

 

14,938

 

 

Level 2

Total Marketable Securities

$

277,700

 

 

$

333

 

 

$

(59

)

 

$

277,974

 

 

 

 

 

As of December 31, 2014

 

 

 

 

Amortized

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

Recurring Fair

 

Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

 

Value Measurement

 

(in thousands)

Fixed-income debt securities

$

168,960

 

 

$

397

 

 

$

(314

)

 

$

169,043

 

 

Level 2

Commercial paper

 

78,915

 

 

 

-

 

 

 

-

 

 

$

78,915

 

 

Level 2

U.S. Treasury Notes

 

13,127

 

 

 

53

 

 

 

(2

)

 

 

13,178

 

 

Level 2

Total Marketable Securities

$

261,002

 

 

$

450

 

 

$

(316

)

 

$

261,136

 

 

 

 

The following tables present the contractual maturities of the Company’s marketable securities:

 

 

As of June 30, 2015

 

 

As of December 31, 2014

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

 

(in thousands)

 

Mature within one year

$

216,603

 

 

$

216,764

 

 

$

177,011

 

 

$

177,145

 

Mature after one year and within three years

 

61,097

 

 

 

61,210

 

 

 

83,991

 

 

 

83,991

 

Total

$

277,700

 

 

$

277,974

 

 

$

261,002

 

 

$

261,136

 

 

 

8


4. Commitments and Contingencies

Commitments

Thales

In June 2010, the Company executed a primarily fixed-price full-scale development contract (the “FSD”) with Thales Alenia Space France (“Thales”) for the design and build of satellites for Iridium NEXT, the Company’s next-generation satellite constellation. The total price under the FSD is $2.3 billion, and the Company expects payment obligations under the FSD to extend into the first quarter of 2018. As of June 30, 2015, the Company had made aggregate payments of $1,421.1 million to Thales, of which $1,205.0 million were from borrowings under the Credit Facility, and which were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheet. The Company currently uses the Credit Facility to pay 85% of each invoice received from Thales under the FSD with the remaining 15% funded from cash on hand. Once the Credit Facility is fully drawn, the Company expects to pay 100% of each invoice received from Thales from cash and marketable securities on hand as well as internally generated cash flow, including potential cash flows from hosted payloads and Iridium PRIME SM .

SpaceX

In March 2010, the Company entered into an agreement with Space Exploration Technologies Corp. (“SpaceX”) to secure SpaceX as the primary launch services provider for Iridium NEXT (as amended to date, the “SpaceX Agreement”). The total price under the SpaceX Agreement for seven launches is $453.1 million. As of June 30, 2015, the Company had made aggregate payments of $178.7 million to SpaceX, which were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheet. In addition, the Company made a $3.0 million refundable deposit to SpaceX in the first quarter of 2014 for the reservation of additional future launches, which is not included in the total contract price.

Kosmotras

In June 2011, the Company entered into an agreement with International Space Company Kosmotras (“Kosmotras”) as a supplemental launch service provider for Iridium NEXT (the “Kosmotras Agreement”). The Kosmotras Agreement originally provided for the purchase of up to six launches with options to purchase additional launches. Each launch can carry two satellites. In June 2013, the Company exercised an option for one launch to carry the first two Iridium NEXT satellites. If the Company does not exercise any additional options, the total cost under the contract including this single launch will be $51.8 million. As of June 30, 2015, the Company had made aggregate payments of $33.2 million to Kosmotras, which were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheet. The option to purchase two dedicated launches expired as of December 31, 2013. The Company has agreed with Kosmotras to extend the option to purchase the remaining three dedicated launches through a date to be determined.

Credit Facility

In October 2010, the Company entered into the Credit Facility with a syndicate of bank lenders (the “Lenders”). The Credit Facility was subsequently amended and restated in August 2012. In May 2014, the Company entered into a supplemental agreement (the “Supplemental Agreement”) with the Lenders under the Credit Facility to further amend and restate the Credit Facility. The Company had borrowed an aggregate total of $1,393.1 million as of June 30, 2015. The unused portion of the Credit Facility as of June 30, 2015 was $406.9 million. Pursuant to the Credit Facility, the Company maintains a minimum cash reserve for repayment. As of June 30, 2015, the minimum required cash reserve balance was $88.5 million. This amount is included in restricted cash in the accompanying condensed consolidated balance sheet. This minimum cash reserve requirement will increase over the term of the Credit Facility to $189.0 million in 2017.


9


 

Interest costs incurred under the Credit Facility were $15.6 million and $30.5 million for the three and six months ended June 30, 2015, respectively.  All interest costs incurred related to the Credit Facility have been capitalized during the construction period of the Iridium NEXT assets. The following table presents interest activity for the Credit Facility for the six months ended June 30, 2015 and 2014 payable via cash or deemed loan:

 

 

 

Six Months Ended

 

 

 

June 30, 2015

 

 

 

Cash

 

 

Deemed Loan

 

 

Total

 

 

 

(in thousands)

 

Beginning interest payable

 

$

2,936

 

 

$

6,653

 

 

$

9,589

 

Interest incurred

 

 

9,301

 

 

 

21,200

 

 

 

30,501

 

Interest payments

 

 

(8,911

)

 

 

(20,282

)

 

 

(29,193

)

Ending interest payable

 

$

3,326

 

 

$

7,571

 

 

$

10,897

 

 

 

 

Six Months Ended

 

 

 

June 30, 2014

 

 

 

Cash

 

 

Deemed Loan

 

 

Total

 

 

 

(in thousands)

 

Beginning interest payable

 

$

2,435

 

 

$

5,543

 

 

$

7,978

 

Interest incurred

 

 

7,499

 

 

 

17,042

 

 

 

24,541

 

Interest payments

 

 

(7,271

)

 

 

(16,542

)

 

 

(23,813

)

Ending interest payable

 

$

2,663

 

 

$

6,043

 

 

$

8,706

 

The Company is obligated to pay a cash commitment fee of 0.80% per year, in semi-annual installments, on any undrawn portion of the Credit Facility. In April 2015, the Company paid $2.3 million as a semi-annual installment of the commitment fee. The commitment fee payable on the undrawn portion of the Credit Facility as of June 30, 2015 was $0.9 million and is included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheet.

Contingencies

From time to time, in the normal course of business, the Company is party to various pending claims and lawsuits. The Company is not aware of any such actions that it would expect to have a material adverse impact on its business, financial results or financial condition.

 

 

5. Stock-Based Compensation

The Company accounts for stock-based compensation at fair value. The fair value of stock options is determined at the grant date using the Black-Scholes option pricing model. The fair value of restricted stock units (“RSUs”) is equal to the closing price of the underlying common stock on the grant date. The fair value of an award that is ultimately expected to vest is recognized on a straight-line basis over the requisite service or performance period and is classified in the condensed consolidated statements of operations and comprehensive income in a manner consistent with the classification of the recipient’s compensation. The expected vesting of the Company’s performance-based RSUs is based upon the likelihood that the Company achieves the defined performance goals. The level of achievement of performance goals, if any, is determined by the compensation committee of the Board of Directors. Stock-based awards to non-employee consultants are expensed at their fair value as services are provided according to the terms of their agreements and are classified in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.

In May 2015, the Company’s stockholders approved the 2015 Equity Incentive Plan (the “2015 Plan”) to provide stock-based awards, including nonqualified stock options, incentive stock options, restricted stock and other equity securities, as incentives and rewards for employees, consultants and non-employee directors. As of June 30, 2015, 23,203,009 shares of common stock were authorized for issuance as awards under the 2015 Plan, of which 11,157,563 shares were reserved for issuance under outstanding awards.

In January 2015, members of the Company’s board of directors elected to receive a portion of their 2015 annual compensation in the form of equity awards, in an aggregate amount of approximately 103,000 stock options and 62,000 RSUs. These stock options and RSUs were granted in January 2015 under the 2012 Plan and vest through the end of 2015, with 25% vesting on the last day of each calendar quarter. The estimated aggregate grant-date fair value of the stock options was $0.4 million. The estimated aggregate grant-date fair value of the RSUs was $0.6 million.

10


During the six months ended June 30, 2015, the Company granted approximately 637 ,000 stock options and 596,000 service-based RSUs to its employees. Employee stock options and service-based RSUs generall y vest over a four-year service period with 25% vesting on the first anniversary of the grant date and the remainder vesting ratably on a quarterly basis thereafter. The estimated aggregate grant date fair values of the stock options and service-based RSUs granted during the six months ended June 30, 2015 were $2. 6 million and $5.6 million, respectively.

In addition, in March 2015, the Company awarded approximately 161,000 performance-based RSUs to the Company’s executives. The Company records stock-based compensation expense related to performance-based RSUs when it is considered probable that the performance conditions will be met. Vesting of the March 2015 performance-based RSUs is dependent upon the Company’s achievement of defined performance goals over fiscal years 2015 and 2016. The number of performance-based RSUs that will ultimately vest may range from 0% to 150% of the original grant based on the level of achievement of the performance goals. If the Company achieves the performance goals, 50% of the performance-based RSUs will vest at the end of two years and the remaining 50% will vest at the end of the third year, subject to continued service. The estimated aggregate grant date fair value of the performance-based RSUs granted in March 2015 was $1.5 million.

In June 2015, the Company granted 30,000 stock options to non-employee consultants. The stock options granted to consultants are generally subject to service-based vesting and vest quarterly over a two-year service period. The fair value of the consultant options is the then-current fair value attributable to the vesting portions of the awards, calculated using the Black-Scholes option pricing model. The estimated aggregate grant-date fair value of the stock options granted to non-employee consultants during the six months ended June 30, 2015 was $0.2 million.

In June 2014, the Company awarded performance-based RSUs to its executives and employees. Vesting of the June 2014 performance-based RSUs was dependent upon the Company’s achievement of defined performance goals for the 2014 fiscal year. The level of achievement of performance goals in connection with the June 2014 performance-based RSUs was determined by the compensation committee in March 2015. Approximately 304,000 of the June 2014 performance-based RSUs were vested and released in March 2015 at an estimated aggregate fair value of $2.4 million which was recognized as compensation expense over the vesting period.

 

 

6. Equity Transactions and Instruments

Warrants

On September 29, 2009, in connection with the Company’s acquisition of Iridium Holdings LLC, the Company issued warrants, each of which entitled the holder to purchase from the Company one share of common stock at a price of $11.50 per share. On February 14, 2015, all of the outstanding and unexercised warrants expired in accordance with their terms.

Preferred Stock

The Company is authorized to issue 2.0 million shares of preferred stock with a par value of $0.0001 per share. As described below, the Company issued 1.0 million shares of preferred stock in the fourth quarter of 2012 and 0.5 million shares of preferred stock in the second quarter of 2014. The remaining 0.5 million authorized shares of preferred stock remain undesignated and unissued as of June 30, 2015.

Series A Cumulative Perpetual Convertible Preferred Stock

In the fourth quarter of 2012, the Company issued 1.0 million shares of its 7.00% Series A Cumulative Perpetual Convertible Preferred Stock (the “Series A Preferred Stock”) in a private offering. The Company received proceeds of $96.5 million from the sale of the Series A Preferred Stock, net of the aggregate $3.5 million in initial purchaser discount and offering costs. The net proceeds of this offering were used to partially fund the construction and deployment of Iridium NEXT and for other general corporate purposes.

Holders of Series A Preferred Stock are entitled to receive cumulative cash dividends at a rate of 7.00% per annum of the $100 liquidation preference per share (equivalent to an annual rate of $7.00 per share). Dividends are payable quarterly in arrears on each March 15, June 15, September 15 and December 15. The Series A Preferred Stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. The Series A Preferred Stock ranks senior to the Company’s common stock and pari passu with the Company’s 6.75% Series B Cumulative Perpetual Convertible Preferred Stock (the “Series B Preferred Stock”) with respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding-up. Holders of Series A Preferred Stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in other specified circumstances. Holders of Series A Preferred Stock may convert some or all of their outstanding Series A Preferred Stock at an initial conversion rate of 10.6022 shares of common stock per

11


$100 liquidation preference, which is equivalent to a n initial conversion price of approximately $9.43 per share of common stock (subject to adjustment in certain events).

In 2014, the Company paid $7.0 million in cash dividends to its holders of Series A Preferred Stock. During the three and six months ended June 30, 2015, the Company paid cash dividends of $1.8 million and $3.5 million, respectively, to holders of the Series A Preferred Stock. As of June 30, 2015 and December 31, 2014, the Company had accrued $0.3 million in cash dividends for the holders of the Series A Preferred Stock, which is included within accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheet.

On or after October 3, 2017, the Company may, at its option, convert some or all of the Series A Preferred Stock into the number of shares of common stock that are issuable at the then-applicable conversion rate, subject to specified conditions. On or prior to October 3, 2017, the holders of Series A Preferred Stock will have a special right to convert some or all of the Series A Preferred Stock into shares of common stock in the event of fundamental changes described in the Certificate of Designations for the Series A Preferred Stock, subject to specified conditions and limitations. In certain circumstances, the Company may also elect to settle conversions in cash as a result of these fundamental changes.

Series B Cumulative Perpetual Convertible Preferred Stock

In May 2014, the Company issued 500,000 shares of its Series B Preferred Stock in an underwritten public offering at a price to the public of $250 per share. The purchase price received by the Company, equal to $242.50 per share, reflected an underwriting discount of $7.50 per share. The Company received proceeds of $120.8 million from the sale of the Series B Preferred Stock, net of the $3.8 million underwriter discount and $0.4 million of offering costs. The net proceeds of this offering are being used to partially fund the construction and deployment of Iridium NEXT and for other general corporate purposes.

Holders of Series B Preferred Stock are entitled to receive cumulative cash dividends at a rate of 6.75% per annum of the $250 liquidation preference per share (equivalent to an annual rate of $16.875 per share). Dividends are payable quarterly in arrears on each March 15, June 15, September 15 and December 15, beginning September 15, 2014. The Series B Preferred Stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. The Series B Preferred Stock ranks senior to the Company’s common stock and pari passu with respect to the Company’s Series A Preferred Stock with respect to dividend rights and rights upon the Company’s voluntary or involuntary liquidation, dissolution or winding-up. Holders of Series B Preferred Stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in other specified circumstances. Holders of Series B Preferred Stock may convert some or all of their outstanding Series B Preferred Stock at an initial conversion rate of 33.456 shares of common stock per $250 liquidation preference, which is equivalent to an initial conversion price of approximately $7.47 per share of common stock (subject to adjustment in certain events).

In 2014, the Company paid $5.0 million in cash dividends to its holders of Series B Preferred Stock. During the three and six months ended June 30, 2015, the Company paid cash dividends of $2.1 million and $4.2 million, respectively, to holders of the Series B Preferred Stock; the Company paid no dividends during the six months ended June 30, 2014. As of June 30, 2015, the Company had accrued $0.4 million in cash dividends for the holders of the Series B Preferred Stock, which is included within accrued expenses and other current liabilities on the accompanying condensed consolidated balance sheet.

On or after May 15, 2019, the Company may, at its option, convert some or all of the Series B Preferred Stock into the number of shares of common stock that are issuable at the then-applicable conversion rate, subject to specified conditions. On or prior to May 15, 2019, in the event of certain specified fundamental changes, holders of the Series B Preferred Stock will have the right to convert some or all of their shares of Series B Preferred Stock into the greater of (i) a number of shares of the Company’s common stock as subject to adjustment plus the make-whole premium, if any, and (ii) a number of shares of the Company’s common stock equal to the lesser of (a) the liquidation preference divided by the market value of the Company’s common stock on the effective date of such fundamental change and (b) 81.9672 (subject to adjustment). In certain circumstances, the Company may elect to cash settle any conversions in connection with a fundamental change.

 

 

7. Net Income Per Share

The Company calculates basic net income per share by dividing net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share takes into account the effect of potential dilutive common shares when the effect is dilutive. The effect of potential dilutive common shares, including common stock issuable upon exercise of outstanding stock options and stock purchase warrants, is computed using the treasury stock method. The effect of potential dilutive common shares from the conversion of outstanding convertible preferred securities is computed using the as-if converted method at the stated conversion rate. The RSUs granted to members of the Company’s board of directors contain non-forfeitable rights to dividends and therefore are considered to be participating securities in periods of net income. The calculation

12


of basic and diluted net income per share excludes net income attributable to the unvested RSUs from the numerator and excludes the impact of unvested RSUs from the denominator.

The computations of basic and diluted net income per share are as follows:

 

 

Three Months Ended June 30,

 

 

2015

 

 

2014

 

 

(in thousands, except per share data)

 

Numerator:

 

 

 

 

 

 

 

Net income attributable to common stockholders

$

22,129

 

 

$

12,167

 

Net income allocated to participating securities

 

(11

)

 

 

(11

)

Numerator for basic net income per share

 

22,118

 

 

 

12,156

 

Dividends on Series A Preferred Stock

 

1,750

 

 

 

-

 

Dividends on Series B Preferred Stock

 

2,109

 

 

 

1,102

 

Numerator for diluted net income per share

$

25,977

 

 

$

13,258

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Denominator for basic net income per share - weighted

   average outstanding common shares

 

95,064

 

 

 

86,793

 

Dilutive effect of stock options

 

786

 

 

 

9

 

Dilutive effect of contingently issuable shares

 

16

 

 

 

27

 

Dilutive effect of Series A Preferred Stock

 

10,602

 

 

 

-

 

Dilutive effect of Series B Preferred Stock

 

16,728

 

 

 

8,824

 

Denominator for diluted net income per share

 

123,196

 

 

 

95,653

 

 

 

 

 

 

 

 

 

Net income per share attributable to common

   stockholders - basic

$

0.23

 

 

$

0.14

 

Net income per share attributable to common

   stockholders - diluted

$

0.21

 

 

$

0.14

 

 

For the three months ended June 30, 2015, 1.5 million unvested RSUs were not included in the computation of basic net income per share and excluded from the computation of diluted net income per share, as the effect would be anti-dilutive.

For the three months ended June 30, 2014, warrants to purchase 0.3 million shares of common stock and options to purchase 4.3 million shares of common stock were not included in the computation of diluted net income per share as the effect would be anti-dilutive. In addition, 10.6 million shares of Series A Preferred Stock, which represent the weighted-average number of shares of common stock calculated using the as-if converted method, were also excluded from the calculation of diluted net income per share for the three months ended June 30, 2014, as the effect would be anti-dilutive. For the three months ended June 30, 2014, 1.4 million unvested RSUs were not included in the computation of basic net income per share and excluded from the computation of diluted net income per share.

 

13


 

 

 

Six Months Ended June 30,

 

 

2015

 

 

2014

 

 

(in thousands, except per share data)

 

Numerator:

 

 

 

 

 

 

 

Net income attributable to common stockholders

$

39,289

 

 

$

26,960

 

Net income allocated to participating securities

 

(22

)

 

 

(30

)

Numerator for basic net income per share

 

39,267

 

 

 

26,930

 

Dividends on Series A Preferred Stock

 

3,500

 

 

 

-

 

Dividends on Series B Preferred Stock

 

4,218

 

 

 

1,102

 

Numerator for diluted net income per share

$

46,985

 

 

$

28,032

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Denominator for basic net income per share - weighted

   average outstanding common shares

 

94,797

 

 

 

81,964

 

Dilutive effect of stock options

 

621

 

 

 

4

 

Dilutive effect of contingently issuable shares

 

23

 

 

 

40

 

Dilutive effect of Series A Preferred Stock

 

10,602

 

 

 

-

 

Dilutive effect of Series B Preferred Stock

 

16,728

 

 

 

4,436

 

Denominator for diluted net income per share

 

122,771

 

 

 

86,444

 

 

 

 

 

 

 

 

 

Net income per share attributable to common

   stockholders - basic

$

0.41

 

 

$

0.33

 

Net income per share attributable to common

   stockholders - diluted

$

0.38

 

 

$

0.32

 

 

For the six months ended June 30, 2015, warrants to purchase 0.1 million shares of common stock were not included in the computation of diluted net income per share as the effect would be anti-dilutive. For the six months ended June 30, 2015, 1.4 million unvested RSUs were not included in the computation of basic net income per share and excluded from the computation of diluted net income per share.

For the six months ended June 30, 2014, warrants to purchase 0.3 million shares of common stock and options to purchase 4.8 million shares of common stock were not included in the computation of diluted net income per share as the effect would be anti-dilutive. In addition, 10.6 million shares of Series A Preferred Stock, which represent the weighted-average number of shares of common stock calculated using the as-if converted method, were also excluded from the calculation of diluted net income per share for the six months ended June 30, 2014, as the effect would be anti-dilutive. For the six months ended June 30, 2014, 1.3 million unvested RSUs were not included in the computation of basic net income per share and excluded from the computation of diluted net income per share.

 

 

14


ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion along with our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed on February 26, 2015 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. The important factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed on February 26, 2015, and in this Quarterly report, 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 second largest provider of satellite-based mobile voice and data communications services based on revenue, and the only commercial provider of communications services offering true global coverage. Our satellite network provides communications services to regions of the world where wireless or wireline networks do not exist or are limited, including remote land areas, open oceans, 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 in-orbit satellites with in-orbit 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.

We sell our products and services to commercial end-users through a wholesale distribution network, encompassing 75 service providers, more than 190 value-added resellers, or VARs, and 50 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. We expect that demand for our services will increase as more applications are developed and deployed that utilize our technology.

At June 30, 2015, we had approximately 766,000 billable subscribers worldwide, representing an increase of 9% from approximately 705,000 billable subscribers at June 30, 2014. We have a diverse customer base, with end users in the following lines of business: land-based handset; machine-to-machine, or M2M; maritime; aviation; and government.

We recognize revenue from both the sale of equipment and the provision of services. We expect a higher proportion of our future revenue will be derived from service revenue. Revenues from providing voice and data service historically have generated higher gross margins than sales of subscriber equipment.

In December 2015, we expect to begin launching our new satellite constellation, Iridium NEXT. Iridium NEXT will maintain the architecture of our current constellation, with 66 in-orbit satellites, as well as six in-orbit spares, and we are building nine ground spares. We have contracted with Thales Alenia Space France, or Thales, to construct the Iridium NEXT satellites, which are designed to be compatible with our current constellation and current end-user equipment, so that as the Iridium NEXT satellites are launched, they will replace satellites in the current constellation without affecting the service to our end users. We plan to deploy the first two satellites on a Dnepr rocket launched by International Space Company Kosmotras, or Kosmotras, with the remaining 70 satellites to be deployed on seven Falcon 9 rockets launched by Space Exploration Technologies Corporation, or SpaceX. We expect to complete the deployment of the Iridium NEXT constellation in 2017. We estimate the costs associated with the de