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Iridium seen as a future high flyer

Although the multinational satellite communications company is bleeding red ink, analysts continue to have high hopes for the high-flying company.

Although Iridium may be bleeding red ink, analysts continue to have high hopes for the high-flying company.

Iridium, which owns and operates the world's first satellite-powered global phone system, posted a $440 million fourth-quarter loss this week.

The company has suffered from product delays, which in turn has stymied its customer base and cut into its revenues. But despite huge financial losses and delays, analysts see huge potential for the satellite firm.

"Wall Street seems to be remaining quit bullish," said Evie Haskell, a satellite industry analyst at Media Business, a market research firm. "Their equipment is just now coming out and they have quite a backlog of orders. But [potential customers] need their telephones and pagers, that's the bottom line."

In December the company warned of production problems with the consumer equipment necessary for its wireless service. Additionally, service providers have been slow to market the service, while customer trials have taken longer than expected, analysts said.

Iridium ended 1998 with 3,000 subscribers, far short of most estimates. The company was also forced to curtail its multi-million dollar advertising campaign during the year.

Analysts said the rough rollout was not unexpected.

"I think you're seeing a new technology just being born," Haskell said. "Any new technology is going to be delayed."

Friends on Wall Street
Despite the subscriber shortfalls, which lead to the company's loss, fourth quarter financial results topped financial analysts' expectations, according to First Call.

"While the earnings results were better than expected, we would emphasize that this is not the main focus with Iridium at this point," Credit Suisse First Boston analyst Cynthia Motz wrote in a recent report. "We believe market demand for the service is the key issue on investors' minds right now."

Analysts are forecasting strong demand in the corporate, industrial, and government market segments.

Iridium recently signed deals with the U.S. State Department and the U.S. Defense Department. Companies such as Shell, Exxon, and Monsanto are currently conducting trials of Iridium services.

Donaldson Lufkin & Jenrette analyst Eric Weinstein, however, sees a more tepid future, and holds a "market perform" rating on Iridium.

"We remind investors that moving from concept to commercialization isn't always easy," Weinstein wrote in a report, although he admits many of the technical issues are now behind the company.

Iridium executives anticipate having at least 500,000 customers by the end of 1999.

Credit Suisse's Motz, who has a "buy" rating on the stock, expects the company to have 400,000 subscribers by the end of the year.

Surprisingly, some analysts expect the company to break even or turn "cash flow positive" by early 2000, a remarkably fast turnaround for a company currently bleeding red ink. Those estimates stand as a testament to the projections of consumer demand for wireless communications services.

Meanwhile, the company's stock has suffered through ups and downs. Following a record high of 72.1875 last spring, shares have tumbled to the low 30s of late.

A chip off the Motorola block
Using special phone handsets and pagers, Iridium promises to connect users anywhere in the world via a 66-satellite network.

The company was founded by a handful of executives from Motorola's Satellite Communications Group. Chief executive Ed Staiano and senior vice president for Strategic Planning Leo Mondale both previously worked for Motorola.

Motorola owns an 18.8 percent stake in the company, which is divided into several separate corporations in various countries around the world. Iridium World Communication, with headquarters in Bermuda, is the publicly-traded operating company of Iridium LLC, based in Washington.

The independent franchises in various countries typically serve as "gateways," where the satellite messages are connected to the on-the-ground networks. Many of the gateway companies, including Iridium North America, market the voice and text paging service to service providers such as Sprint.

On a similar vein, PageNet signed an exclusive paging deal with Iridium North America today.

The concept of launching a network of low Earth orbiting (LEO) satellites was first discussed in 1987. Motorola spun off Iridium in 1991 when the company first reserved the radio frequencies necessary for its service.

The first satellite was sent into orbit in 1996, and another 47 "birds" were launched in 1997 when the company went public. The Iridium telephone and paging service became commercially available in November--after its launch was pushed back five weeks from initial plans for a late September kick-off.

Despite the initial delays, analysts expect the company to make large strides in 1999. Executives confirmed they are in talks with Motorola about launching advanced satellites within two years, according to Merrill Lynch analyst Thomas Watts. Watts, who has a long-term "buy" rating on Iridium, also expects second-generation phones--which will be smaller and less expensive--within 12 to 18 months. The improved devices could expand the company's market share, he said.

Although the demand for wireless communications is likely to spur competitors to action, launching a massive satellite constellation such as Iridium's is cost prohibitive. And, Iridium has the first-to-market advantage.

Globalstar Telecommunication, backed by Loral Space & Communications, is launching a similar network as is London-based ICO.