ORBCOMM, Inc. Q3 2008 Earnings Call Transcript

| About: ORBCOMM Inc. (ORBC)


Q3 2008 Earnings Call Transcript

November 10, 2008, 10:30 am ET


Lucas Binder – VP, Business Development & IR

Marc Eisenberg – President and CEO

Robert Costantini – EVP and CFO


Michael Bowman – Piper Jaffray

Chris Quilty – Raymond James & Associates


Good morning. My name is Kalia [ph] and I will be your conference operator today. At this time I would like to welcome everyone to the ORBCOMM third quarter 2008 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session (Operator instructions) Thank you. Mr. Lucas Binder, you may begin your conference

Lucas Binder

Thank you very much and for clarification this is our third quarter 2008 financial results conference call. Good morning and thank you all for joining us.

Let me start with a few housekeeping items. Earlier this morning we issued a press release announcing the financial results for the third quarter of 2008.

A replay of this conference call will be available beginning at 12 noon Eastern Time today until next Monday, November 17th at 12 noon. We have an accompanying audio webcast available on our Web site at www.orbcomm.com, an archive of which will be available for the week.

With me today are Marc Eisenberg, ORBCOMM's Chief Executive Officer and Robert Costantini, ORBCOMM's Chief Financial Officer.

Before we begin I also want to point out that during the course of this conference call we will be making a number of forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. Some of these factors are described in our SEC filings including the risk factor section of our Form 10-K.

I want to remind you that ORBCOMM assumes no duty to update any forward-looking statements. The financial information we will discuss today includes non-GAAP financial measures such as EBITDA and adjusted EBITDA. The company believes that these financial measures provide an enhanced understanding of our underlying operating performance, reconciliation of EBITDA and adjusted EBITDA to net loss on a GAAP basis is included in our earnings release, a copy of which is available on our Web site. With that aside I'll hand it over to Marc.

Marc Eisenberg

Thank you, Lucas. Good morning, everyone and thank you for joining us today.

Let's start with just a quick overview of the third quarter results. In the third quarter, we increased both our service revenue and total revenue compared to the third quarter of 2007. In addition, we achieved positive adjusted EBITDA for the fourth consecutive quarter. Over the last four quarters we have generated $2.7 million in positive adjusted EBITDA which equates to a 9% margin to total revenues over the past four quarters.

Additionally, ORBCOMM has generated $4.6 million in cash flow from operations year-to-date. At the end of the third quarter our total billable subscriber base was approximately 442,000, a disappointing increase of 5% over our base as of June 30th 2008.

We will discuss some of the factors that affected billable subscriber growth during the quarter and where we see the opportunities going forward later on this call. Despite slower billable subscriber growth our service revenues increased 10.1% over the second quarter, driven predominantly by stabilizing ARPUs. Billable subscriber communicators growth and slightly aided by the commencement of AIS related activities during the third quarter.

The third quarter financial results demonstrate the effective business model at ORBCOMM, specifically our operating leverage. Over the last four quarters adjusted EBITDA has improved to a $2.7 million gain. This demonstrates the progress we are making in executing on our business strategy and driving greater adjusted EBITDA margins. Robert will take you through the numbers in more detail shortly.

I'd like to take this opportunity to update you on ORBCOMM's Quick Launch satellites. Currently, the satellites are still being positioned optimally to augment the existing ORBCOMM constellation. Spacing of these satellites is taking longer than expected due to some reaction (inaudible) that affects the satellite strategy control or affects pointing. However, over the last several weeks proper spacing has accelerated.

Additionally, we have begun offering regular ORBCOMM message services over the United States on three of the four – I'm sorry, three of the six Quick Launch satellites. Once properly spaced and placed in full service Quick Launch satellites are expected to provide additional capacity and improved message delivery speeds for current and future ORBCOMM users.

As we have mentioned these satellites are also equipped with the Automatic Identification System or AIS payloads which enable them to receive and report AIS transmission use of tracking of ships. All six of our new satellites are successfully receiving and transmitting AIS data.

Let's discuss the AIS business in a little more detail. The AIS capability on board, the recently launched satellites make ORBCOMM the only company capable of providing space based worldwide commercial AIS data services.

In early October, the U.S. Coast Guard amended its agreement with ORBCOMM to elect the high usage option for AIS data from one of the new satellites. These amendments added almost 500,000 in services to be delivered over the next 12 months to the existing agreement which we began recognizing in August of this year.

Additionally, ORBCOMM in Eight Test and Evaluation Agreements for AIS data with a diverse group of perspective VARs, partners and potential end users. The company expects these agreements will lead to a number of direct and indirect contracts that will become the basis of a worldwide distribution network for AIS Services.

Included in this diverse group of entities with whom ORBCOMM has signed agreements are U.S. government agencies, corporations engaged in providing services to foreign governments, and those engaged in commercial activities.

Growth in our subscriber base is driven by both OEM and after-market partners we have relationships with. In the third quarter, OEM subscribers represented 69% of the net additions to the billable subscriber communicators. We were disappointed with the subscriber growth experienced in the third quarter.

We believe that the net additions of billable subscriber communicators for the third quarter was negatively affected by technical issues at two heavy equipment OEMs according to information we received from these OEMs, but unrelated to the ORBCOMM network.

Based on conversations with these OEMs, the problems are being addressed. We continue to expand globally with regulatory authorizations for ORBCOMM services recently received in Nigeria, Singapore, Mongolia, and the Republic of Cyprus. We pursue regulatory authorizations in regions where there are most helpful to IVARs and OEMs.

In many cases, these IVARs and OEMs have established sales and distribution channels in these foreign markets. The new territories also provide ORBCOMM the opportunity to grow our reseller base. As a result, ORBCOMM enabled Modem that begun shipping to two new foreign OEMs which are expected to ramp up deployment in 2009. This includes the trailer manufacturer in Brazil and heavy equipment manufacturer in Korea.

I'd like to give you a quick update on the next generation satellite build. The first satellites are scheduled to be available for launch as early as the third quarter of 2010. Business growth rates, the implied capacity needs as well as the current satellite performance will drive the timing of the next generation satellite launches.

Like most companies we are watching our business as well as how the weak global economy is affecting our resellers. We are taking precautions to protect our cash and avoid a capital raise. If the growth is not as brisk as we had hoped we have an opportunity to space future launches, launch in smaller lots and reduced or spread costs. While growth is extremely important, conserving our cash through this CapEx cycle is also of great importance.

Now I'd like to turn the call over to Robert Costantini, our CFO who will take you through the financial results.

Robert Costantini

Thank you, Marc. I would summarize our financials for the third quarter of 2008 before we take questions. We continue to improve our profitability metrics both in the quarter and year-to-date. We achieved positive adjusted EBITDA for the fourth consecutive quarter due to continued solid growth in service revenues which Marc highlighted in his comments.

Service revenues are and will continue to be the primary driver of our growth and profitability. Service revenues now comprising over 79% of total revenue, up from 66% in the prior year, and growing 39.2% in the third quarter.

The growth in service revenues is a result of positive trend in the following components. Additions to our subscriber communicator base, improvements in ARPU and as mentioned the start of AIS revenues in the third quarter.

We narrowed operating losses, improved our EBITDA loss and as mentioned reported positive adjusted EBITDA now for four consecutive quarters. Over the past four quarters starting with the fourth quarter 2007 we have generated $2.7 million in adjusted EBITDA which has been improving over the last several quarters and demonstrates the higher level of operating leverage.

Additionally, cash from operating activities has been positive at $4.6 million for the nine months ended September 30th 2008 and now positive eight of the last nine quarters. The company has $88.5 million in cash as of September 30th and $5.6 million in restricted cash for a total of about $94 million as of 9/30/2008.

Total revenues for the quarter-ended September 30th were $8 million, an increase of 15.3% compared to the third quarter of 2007. Service revenues increased 39.2% to $6.3 million for the third quarter from the comparable period of 2007, due primarily to an increase in higher revenue billable subscriber communicators, the inclusion of ORBCOMM Japan and a slight contribution from the expenses with AIS revenue.

Product sales decreased in the third quarter to $1.6 million, a 30.8% decline from the third quarter of 2007 due to a decline in purchases by a large VARs are set partially by product sales made by ORBCOMM Japan.

As of September 30th 2008, ORBCOMM had approximately 442,000 billable subscriber communicators compared to 420,000 as of June 30th a sequential increase of 5%. Billable subscriber communicator net additions of over 21,000 units for the third quarter of 2008 were down 46.1% from the net additions in the third quarter of 2007, the reasons Marc described.

By combining the growing base of billable subscriber communicators, stabilizing ARPU and the addition of AIS revenues we experienced solid revenue growth in the third quarter. As a result of these trends we are maintaining our service revenue outlook of $22 million to $25 million for the year.

Costs and expenses decreased 0.5% to $8.8 million in the third quarter of 2008 compared to the same period in the prior year. Costs and expenses excluding cost of product sales were up 13.2%, driven by higher depreciation and amortization expense, professional fees and employee costs mainly due to expenses related to the inclusion of ORBCOMM Japan.

We believe our business model is capable of supporting high growth and service revenues while keeping expense growth at very moderate level. We believe future expense growth will be at moderate levels for the remainder of 2008 with the exception of the increased depreciation related to the launch of the Coast Guard at Quick Launch satellite which will add over 5 million annually and the pro rata amounts for 2008 based on estimated and service dates.

Operating loss improved 55.5% in the third quarter of 2008 over 2007, to 880,000 from a loss of $2 million. For the nine months ended September 30th 2008, the operating loss improved 62.7% to $3.3 million, compared to a loss of $8.8 million in the first nine months of 2007.

Net loss widened to $1 million for the third quarter of 2008 compared to a net loss of $422,000 in the prior year period. While operating loss improved by $1.2 million, this was offset by lower interest income and foreign exchange driven losses that widen the net loss in the quarter. However, the larger trend is for net loss to narrow for the nine months ended 2008, net loss improved to 46% to $2.5 million from a net loss of $4.7 million in the comparable period of 2007.

ORBCOMM's net loss per share was $0.02 for the three months ended September 30, 2008 compared to a net loss per common share of $0.01 for the prior year quarter and ORBCOMM's net loss per common share was $0.06 for the nine months ended September 30th 2008 compared to a net loss per common share of $0.12 for the prior year nine months ended September 30th 2007.

EBITDA loss for the third quarter of 2008 was $436,000, compared to an EBITDA loss of $1.4 million in the third quarter of 2007, representing over $900,000 year-over-year improvement.

As a reminder EBITDA is an important non-GAAP metric we use to gauge our performance and manage our business. It's tracked closely and used for management reporting purposes.

Please refer to our press release in Form 10-Q for a reconciliation of non-GAAP figures to GAAP results.

Adjusted EBITDA which we define as EBITDA adjusted for stock-based compensation, pre-controlled earnings at the consolidated subsidiary and minority interest was positive in the third quarter making a four straight quarters of positive adjusted EBITDA.

Adjusted EBITDA for the third quarter of 2008 was positive $646,000 compared to an adjusted EBITDA loss of $476,000 in the third quarter of 2007 and we continue to expect to have positive adjusted EBITDA for the full year.

A few items related to cash movement in the quarter are worth noting. During the third quarter cash decreased $10.5 million which was in part a result of $12.3 million in CapEx during the quarter.

And again I'd also like to point out that our statement of cash flows we've had positive cash provided by operating activities of $4.6 million for the first nine months of 2008, which is an improvement of 65.1% from the $2.8 million for the first nine months of 2007. This is now eight of the last nine quarters of positive cash flow from operating activities.

We would be happy now to take your questions. Operator, if would you go through the instructions for asking questions we will go from there.

Question-and-Answer Session


(Operator instructions) Our first question comes from the line of Michael Bowman of Piper Jaffray.

Marc Eisenberg

Good morning, Michael.

Michael Bowman – Piper Jaffray

I guess the first question I have for you is if you could give us a little bit more of an update on the two OEM on how far along you think they are as far as fixing the issues with the communicators, and how long you guys think it will actually take to be able to catch up on those units that are already out in the field? I know that you had mentioned to me at one point it's going to take time for these things to be remedied because you can't do it over the air so to speak you have to wait until they come in for service so any view on that would be very helpful.

And then second question, if you could talk to us a little bit about the penetration you believe you have in your four core markets, the heavy equipment, commercial transport, et cetera, that would be great. Thanks.

Marc Eisenberg

Sure. Michael, those who don't know the history, there have been a couple of short-term issues with the OEM business and one longer term. First, we had a procedural issue at one of the OEMs where even though the units are built in at the factory only around half of the units were getting provisioned at the dealer network. We believe that this was a training issue that we were told affected over 7,000 units. In addition, we were supposed to be rolling out on a new class of machine from another of our current OEMs that's been delayed due to technical issues that we don't believe to be related to our network. For the fourth quarter, we do not see these issues as being as severe. But they are still not at a full roll-out.

The longer term issue that I just previously mentioned is that some construction manufacturers are reducing their outlook and many are projecting a down year for 2009. While this certainly can affect the total pool that we can be deployed on we are also anticipating it's kind of offset because we are anticipating adding more models and countries which should be a positive offset. In addition, we have two new OEMs kicking off in 2009. So in terms of your market question, we believe in spite of some headwinds it should still be an up year for OEMs in 2009.

To the other part of your question, when do you catch up and get those units back, once these units are deployed in the fields, they probably will struggle to get them turned on until these pieces of heavy equipment go back in for service.

Michael Bowman – Piper Jaffray

Any just follow-up, any view into the window of how often these pieces of equipment come in for service? Is it based on hours in service? Are there set schedules where for the first six months or the first three months they are required to come back in?

Marc Eisenberg

I don't believe so. I think it's more on an hours of service. So it may take a year to get these back on.

Michael Bowman – Piper Jaffray

Maybe you guys can over the air send, get a default message into the units.

Marc Eisenberg

The problem is they are not powered for us to get to.

Michael Bowman – Piper Jaffray

Got it. Thanks, guys.


Your next question comes from the line of Chris Quilty of Raymond James & Associates.

Chris Quilty – Raymond James & Associates

Have you?

Robert Costantini

Good morning, Chris.

Chris Quilty – Raymond James & Associates

Okay. A question on the new satellite constellation and tracking system, is that something that is used primarily for the initial deployment or is it something that might impact the longer term service of the satellites?

Marc Eisenberg

I don't understand.

Chris Quilty – Raymond James & Associates

In other words, the problem you've encountered taking longer than expected to get the satellites positioned, is that function of the tracking system or tracking wheel primarily in the deployment stage or is it something you use on a constant basis after they are deployed?

Marc Eisenberg

I see, I see. Yes, these wheels that are on the satellites are they control satellite pointing. So the satellite antenna needs to point to the earth and the solar panels need to point to the Sun for power and that's to space the satellites and to have ongoing service. These satellites have redundant wheels on them. Other than the Coast Guard satellite they are all launched with five wheels and for full power you only need three of them. So there is some redundancy built in, but I think the first priority is to get these satellites spaced. And when you space them they tend to waddle just a little bit. So the wheel certainly comes to play an awful lot more. But while they are not being – while they are not being spaced they are providing pretty good service over the United States currently.

Chris Quilty – Raymond James & Associates

Okay. You don't expect a long-term impact on their serviceability?

Marc Eisenberg

We don't. And we said while we don't anticipate losing any more wheels, but if it should happen, it's – it could still provide service with reduced power which would still provide some pretty good service with no wheels. You are still providing AIS service. So we don't, I think we are in a pretty good spot right now.

Chris Quilty – Raymond James & Associates

Okay. You had said previously you expected to begin shipping your dual mode OEM unit for the transportation market during this quarter. Any status update there?

Marc Eisenberg

Yes, I think the first one that was coming out was the wave comp device and then you've also got Stellar and (inaudible) coming out soon after. The wave comp one is being shipped in small quantities to get the developments and the pilots done. So I think to the best of my knowledge that still on time.

Chris Quilty – Raymond James & Associates

Okay. And any interest level indications by your transportation OEM or resellers given the end market conditions?

Marc Eisenberg

Yes, I think, for that particular – for that particular modem which will be put into a lot of in cab devices and high usage scenarios – the good news in those markets is for the most part it's more of a must have than like to have. So in those markets you do particularly well. And if we come out with a device that's saves money and improves RoI those should be okay.

Chris Quilty – Raymond James & Associates

So do you expect it will be more of a replacement system, an upgrade to an existing system than new market penetration?

Marc Eisenberg

I think it will be a replacement for someone system. I don't think it would be mine.

Chris Quilty – Raymond James & Associates

Right. Okay. And also on the OEM you had a new Delphi announcement that was attached to the queue, talking about minimum purchase levels for devices can you give us the background on that?

Marc Eisenberg

Yes, with this new pricing agreement we've committed to when the (inaudible) is commercially available to certain volumes and that was I think an indicative of the preliminary indication of reception that brought us and get into the market. But it's – volumes that we think we can usably absorb into the market. And it's just a little bit of strength that we believe is warranted for the quality and the appeal of that product.

Chris Quilty – Raymond James & Associates

Okay. And finally on the AIS opportunity, Robert, you had talked in the past I think about potentially doing different sort of segment reporting for that revenue stream. Can you give us an update on your thoughts there on when you might segment it? And the second part of the question, you had the announcement yesterday or the day – last week, excuse me, with the new AIS opportunities. How long might you expect those things to actually translate into revenue?

Robert Costantini

Sure. With respect to the first item on segmentation, we are providing visibility right now in our disclosures. There is references to the revenue streams that are being recognized under the contract. Right now we only have that one contract with the Coast Guard. So part of the segmentation question is going to also be able to segment some costs associated with it if you look at a pure segmentation under accounting rules. But I think we are committed to providing visibility as we get it to the AIS revenue stream. We are extremely excited about its ability to generate very high margins for the business. So we are happy to bring that to everyone's attention. Right now we just have this one Coast Guard contract. I think until we move forward with some additional contracts we are going to just continue to disclose it as we do in the financials.

Marc Eisenberg

I think, Chris, to answer your other question, if you look at the Eight agreements, while we are not announcing who they are with yet we can tell you that one of them is with a U.S. government agency, two are associated with directly or on behalf of foreign governments. One is a defense contractor and has a complementary satellite offering that would be attractive if not AIS, but it would be attractive to government applications. And three of them are commercial guys that currently offer AIS services that use terrestrial coastal limited technology and we think that those would be a pretty quick to market solution. And several have beta tests already going specifically in the oil and gas industry.

In terms of the AIS and when we'll see and maybe guide on the size of that, the AIS business is composed of such large lumpy deals that it's difficult to time. So we are hesitant to kind of guide there. For 2009, there's roughly $1.5 million between new and deferred revenue that should come from the U.S. Coast Guard. We are also closing in on some pilots and government projects that could lead to business as early as Q4, but starting modestly. So we are hoping that some of our new partners can get their development done and marketed shortly. But as I said before it's difficult to time.

Chris Quilty – Raymond James & Associates

Got it. Thank you, gentlemen.

Robert Costantini

Thank you, Chris.


(Operator instructions) There are no further questions at this time.

Lucas Binder

With that I want to thank everybody for joining us. And if you have any questions you can please feel free to reach me at 703-433-6505 and I could talk with anybody has any questions. Thanks.


Thank you. This concludes today's conference call. You may now disconnect.

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