Iridium L.L.C.’s first full quarter of operation was marked with handset production delays, distribution problems, low subscriber numbers and a deepening net loss, the aftermath of which has led the company to re-evaluate its strategic focus and upper management team.
Since launching in November, Iridium said it has signed up just more than 10,000 subscribers, far short of the 27,000 needed to comply with its bank loan covenants. The lower subscriber count, while expected, led to first-quarter revenues of $1.45 million, which in turn resulted in a quarterly net loss of $505 million, or $3.45 per share. Iridium’s bank covenants also required first-quarter accrued revenue of $30 million.
“Although we have succeeded in building a network that is providing high-quality service to our customers, we were very disappointed with our first-quarter customer and revenue numbers,” said John A. Richardson, interim chief executive officer. Ed Staiano, former vice chairman and CEO, announced his resignation last week.
“Clearly, we have a great deal of work to do to improve our marketing, distribution and sales activities all over the world,” added Richardson.
Ever since commercially activating the network, Iridium said it would begin to make the transition from its building phase to a marketing one. As part of its first-quarter earnings presentation, the company announced more concrete actions to complete that transition.
Marketing
Iridium laid out several marketing plans, including adjusting its target market and possibly reducing the cost of service and handsets.
The company said it had about 10,294 subscribers on the Iridium system when the quarter ended March 31. About 7,000 of those were identified as satellite voice customers, 1,000 cellular roaming customers and 2,000 satellite paging customers.
Iridium blamed the disappointing figures on the limited availability of handsets because of distribution issues, continued lack of trained sales staff and Kyocera Corp.’s delay in production, which was not resolved until late in the first quarter.
Leo Mondale, senior vice president of planning and business development, detailed Iridium’s plans to reverse this trend.
“We are tailoring Iridium products to better fit the marketing channel,” he said. “We will accelerate the introduction of Iridium products and services to channels proven most effective to date and reconsider product and service pricing.”
The most popular early adopters to date have been those in fields such as maritime, natural resource extraction, aeronautics and government.
“Many of Iridium’s early customers are coming from vertical segments,” Mondale said. “Iridium and the gateway providers will increase distribution focus on those segments.”
Also, the company will direct more of its advertising dollars at these vertical markets, away from the original target of the international business traveler.
Mondale said Iridium is taking a more active role in training sales staff and has developed a new training program for service providers. Previously, Iridium left sales training efforts to its gateway providers. In particular, the company wants sales staff with intimate knowledge of the vertical fields Iridium is targeting so sales staff can better address those requirements.
Toward that end, Mondale said Motorola and Kyocera plan to market the service more aggressively in areas where they hold sway, such as Motorola’s recent contract extension with the U.S. government.
“In general, they are putting in a substantial effort … in their own interest as well as for Iridium,” he said.
Lower prices
Hand-in-hand with the sales and marketing effort is a move to lower prices. Although Iridium has long contended its pricing scheme is misunderstood, analysts and others have attacked the company’s pricing model for being too confusing or expensive-a criticism that seems to have hit home.
“Perhaps one thing we have not done well is explain what the real pricing we’ve got is,” Mondale said.
Iridium plans to lower the price of wholesale service it provides the various gateway providers around the world. Those providers, in turn, will lower their prices to the various retail partner carriers in their respective regions, which market the system. Iridium hopes to convince retail providers to lower their prices as well, and not take advantage of higher margins.
“I would say we have an excellent consensus at Iridium and among the gateway (providers) to go to work on exactly that,” Mondale said. “We intend to bring some order to the retail offering and make sure we have enough to (provide incentives to) the resellers and sell the service, but we also have to get it down to the point where the users find in attractive.”
Cutting costs
Looking to its bottom line, Iridium said it hopes to improve its net loss by reducing certain expenses in the face of low revenues. Cost-cutting measures will include cuts in operations and operating expenses, maintenance and financing costs.
Iridium’s new marketing and business plans will be revealed in more detail as the company renegotiates its financing covenants this month. Iridium has $260 million of available loan financing until that time.
Management changes
To see these changes through, the company is reshuffling its upper-management team. Staiano announced his resignation late last month. His departure marks the most significant indication Iridium is willing to fully shift gears from a technical focus to a marketing one. Staiano was largely responsible for the network buildout phase, pushing the company to meet as close as possible its launch deadline.
However, reports from Iridium indicate Staiano and the Iridium’s board of directors had differences over the company’s future strategy. The fact that the company has stated its intention to target vertical markets instead of the original international business traveler is perhaps the most immediate effect of his absence.
Just before Staiano’s departure, Chief Financial Office Roy Grant resigned as well, following news Iridium would have to renegotiate its bank covenants. Grant was responsible for the original negotiation process.
In the latest shift, Mondale said Iridium would not renew the contract of Mauro Sentinelli, executive vice president of marketing, expected to leave by the end of May. He is on personal leave until that time.
“Iridium has never been a one-man show,” Mondale said. “We have a real strong team of employees.
“We are going to need time for these changes put into place to take effect,” he continued. “In global business, there is no silver bullet … We’ve learned a lot about what works and what doesn’t work in the market.”
Tim O’Neil, analyst at SoundView Financial Group Inc., said the changes Iridium announced are in line with what analysts and Wall Street expects.
“Those are steps that needed to be taken,” he said, adding Iridium is making the changes sooner than many had expected.
“They’ve handed the baton from a technology expert over to a sales-and-marketing-focused individual,” he said, referring the shift from Staiano to Richardson. “We hope this is a positive trend. The next step is a permanent selection with a similar if not stronger background in telecom.”
O’Neil also expressed support for the company’s “continued focus on reducing expenses and on targeting the low-hanging fruit,” referring to the vertical-market focus.
However, O’Neil said he is waiting for the company to begin fully subsidizing handsets, which Iridium has yet to endorse.
“Give them time, they’ll get there,” he said. “When they bring on an individual who understands the wireless industry and understands telecom, they’ll realize that it’s imperative that customers come on sooner rather than later. Subsidies will drive acceptance.
“It’ll take them time to realize the heavy usage these vertical markets will bring,” he continued. O’Neil said t
he usage potential for this market is so high, Iridium eventually will give the handset away for free to get at the lucrative minutes of use they can provide.
However, others watching Iridium are not as pleased. Several law firms have filed class-action lawsuits against the company on behalf of investors who feel Iridium misled them about its achievable subscriber base, handset production problems and other matters.
