Orbcomm Inc. Q3 2009 Earnings Call Transcript.

Nov. 9.09 | About: ORBCOMM Inc. (ORBC)

Orbcomm Inc. (NASDAQ:ORBC)

Q3 2009 Earnings Call

November 09, 2009; 10:30 am ET

Executives

Marc Eisenburg - Chief Executive Officer

Robert Constantini - Chief Financial Officer

Lucas Binder - Vice President of Business Development & Investor Relations

Analysts

Chris Quilty - Raymond James & Associates

[James Leventhal - Leventhal & Company]

Operator

Good morning ladies and gentlemen and welcome to Orbcomm’s third quarter 2009 financial results conference call. (Operator instructions).

At this time, I would now like to turn the call over to Lucas Binder, Orbcomm’s Vice President and Business Development and Investor Relations. Please go ahead sir.

Lucas Binder

Good morning, and thank you all for joining us. Earlier this morning we issued a press release announcing financial results for the third quarter 2009. A replay of this conference call will be available beginning at 12 noon Eastern Time today until next Monday, November 16 at 12 noon. We have an audio webcast available on our website 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 Constantini, Orbcomm’s Chief Financial Officer. Before we begin, I also want to point out that during the course of this conference call, we will make 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. A reconciliation of EBITDA and adjusted EIBTDA to net loss on a GAAP basis is included in our earnings release, a copy of which is available on our website.

With that aside, I will hand it over to Marc.

Marc Eisenberg

Thank you Lucas. Good morning everyone and thank you for joining us. On the call today, I would like to provide you with an overview of the third quarter 2009 results, update you on recent business highlights and discuss the status of our satellites. I’ll then turn the call over to Robert who will provide a full financial review of the quarter, and an update on the satellite insurance claim. We will conclude the call with any questions you may have.

For the third quarter 2009 service revenues increased 10%, while total revenues declined 6.6% on anticipated lower product sales compared to third quarter of 2008. The reported adjusted EBITDA of $1 million, which is up 58% from $646,000 reported in the prior year quarter.

The year-to-date adjusted EBITDA is $2.1 million, which represents a 46% increase over the year-to-date adjusted EBITDA in 2008. The company generated $1.3 million in cash flow from operations during the quarter and year-to-date cash flow from operations of $3.3 million.

At the end of the third quarter, our total billable subscriber communicator base or subs was about 509,000, which represents annual sub growth of more than 15% from the base of September 30, 2008. The growth in subs was the key driver of service revenue growth of 10%, which was also aided by the AIS related activities during the quarter.

We added approximately 26,000 net subs consisting of 2,000 satellite adds and 24,000 terrestrial adds during the third quarter. Orbcomm experienced exceptionally high disconnects led by a few of our transportation VARS, which we have not seen repeated thus far in the fourth quarter.

The quarter reflected the migration of GE Asset Intelligences terrestrial subscribers to the Orbcomm system. While satellites subscriber growth was slow this quarter, we believe based on our conversations with the OEMs they are working through inventory levels, which has limited some of our growth in the short term. Once the OEMs worked through this inventory and starts to ramp up production again we expect this to benefit the satellite additions.

Let’s talk about our dual mode efforts. A big step forward in our efforts to offer a complete dual mode solution as the recent partnership with Sierra Wireless, which is meant to deliver some key components of our upcoming web services portal. This portal will enable our users to manage their wireless devices with more sophisticated control, which we believe positions us as a leader in the M2M device management.

Many aspects of this portal represent significant steps ahead of the offerings of our competition. Comprehensive device management and diagnostic capabilities are critical for anyone deploying M2M applications. Among the key features included in this offering are the ability to remotely administer firmware and software updates, provide detailed usage and diagnostic information, troubleshoot application or connectivity issues and manage key aspects of their data communications.

Orbcomm’s unique multi-network capabilities, which has been brought together is the ideal companion to this M2M operating portal. This portal also enables dual mode services allowing the user to combine satellite and terrestrial wireless networks. Combined with new hardware offering from Sierra wireless, Digi and Quake offers end users a complete dual mode solution maximizing terrestrial and satellite benefits while cutting time to market. We expect this portal to be available in the first quarter of 2010.

Shifting gears to AIS, despite the impairments on four of the AIS equipped satellites, we continue to offer AIS service from the remaining two satellites. In the third quarter, Orbcomm recorded over $540,000 in AIS service revenue. As previously announced, the US Coast Guard exercised its contract options to renew AIS service at the high data usage level through August 2010.

We continue to work toward other distribution agreements for our existing AIS service and look forward to the launch of our next generation satellites, each of which will be equipped with AIS receivers and are currently scheduled to begin as early as the end of 2010. These new satellites are expected to improve the quality of our AIS offering.

This brings us to our satellite constellation. We have seen little degradation in our first generation of satellites as they continue to offer service to our subscriber base. We launched six satellites in June 2008, which encountered a number of different anomalies. Two satellites remain and have been placed into service with the short and expected life and are providing limited messaging service, while also supporting our current AIS efforts.

It’s important to note from a service perspective the loss of these four Quick Launch satellites can result in longer latencies in transmitting messages. We were anticipating additional opportunities from the new satellites. However, the incremental performance we expected from these satellites did not materialize and it has been pushing back our efforts to enter new markets. A number of our customers have temporarily put on hold these new offerings until the next generation satellites are launched.

We are in the process of building our next generation satellites, which will extend the life of the Orbcomm network for years to come. At this time, we are just over a year away from the scheduled launch window for the first of the next generation launches. The new satellites are being are constructed by U.S. based manufacturers, being built utilizing completely different designs from the Quick Launch program. The new satellites will have higher bandwidth, more capacity and we expect them to expand the markets we can enter with larger message sizes and quicker service.

Larger messages and lower latency provides opportunities for Orbcomm to compete in security businesses in addition, to the logistics businesses that we are supporting today. During the third quarter, Orbcomm signed a launch services agreement with SpaceX to launch 18 Orbcomm generation two satellites into low earth orbits to begin as early as the fourth quarter of 2010 and to continue through 2014.

The total value of the launch services contract of $46.6 million is within our expectations. We continue to believe that we will have the necessary liquidity to build, launch and ensure the next generation satellites, which will improve an extent our existing network.

I would now like to turn the call over to Robert who will take you through our financials.

Robert Constantini

Thanks Marc. I’m going to take you through the summary of our financials for the third quarter of 2009. Orbcomm improved adjusted EBITDA by 58% in the third quarter to $1 million, which makes seven of the last eight quarters with positive adjusted EBITDA.

Service revenues grew 10% from the third quarter of 2009 and total revenues declined 6.6% compared to the prior year period due to lower hardware sales at Orbcomm, Japan. The growth in service revenues is a result of subscriber communicator base edition and AIS revenues during the quarter.

Consistent with this trend, through the first nine months of 2009, service revenues grew 19.7% and total revenues increased 6.7% compared to the prior year. The financial results of our seller business have been presented as discontinued operations as we move forward with our efforts to sell the subsidiary. As a result, product sales and cost of product sales now primarily reflect hardware sales at Orbcomm, Japan.

Product sales decreased in the third quarter of 2009 to $92,000 from $1.2 million, this decline is predominantly due to one OEM that is working through excess heavy equipment inventory and has slowed production. We anticipate that this to get resolved over the next couple of quarters.

As we have discussed in the past, the effort to sell our seller subsidiaries consistent with our strategy to focus on network services, which is our strength and to attract multiple hardware vendors to support, develop and distribute Orbcomm enabled modem. Cost and expenses in the third quarter of 2009 was $7.6 million, a decline of $500,000 compared to the same period in the prior year. Cost and expenses in the third quarter of 2009 were impacted by a number of one time factors.

Orbcomm took an impairment charge associated with two Quick Launch satellite and the Coast Guard demonstration satellite during the third quarter, amounting to $21.9 million. This brings the total year-to-date impairment charge to $28.9 million for the four satellites.

Additionally, based on our assessment of the insurance claim, Orbcomm was allowed to record a receivable up to the amount of the impairment charges of $28.9 million. Any collections of the insurance proceeds above the receivables will be recognized as a gain when collected.

Just to be clear, the $28.9 million reflects the total amount that we were allowed to recognize as a receivable under the accounting rules offset the impairment charges, this does not reflect an expectation that $28.9 million is the total we will collect, our expectation is that we will collect in excess of that amount.

Based on our experience with the impaired Quick Launch satellites, Orbcomm place the remaining two Quick Launch satellites into service using a short and depreciation schedule that will result in both satellites being fully depreciated by the end of the fourth quarter. As a result, depreciation and amortization expense in the third quarter included $7.5 million of depreciation from these satellites. We will see significantly lower depreciation in 2010.

Expenses related to service business are being actively managed. We had a 12.2% decline of $0.8 million in the third quarter for service delivery cost, comparing cost of service, selling general and administrative expense and product development cost, excluding depreciation and amortization.

The lower cost were driven by a 21% decline in SG&A expense of $1 million on lower employee cost and lower professional fees. Even excluding stock based compensation, total SG&A expenses were still down over $400,000 or 12% year-over-year.

Our business model supports high growth and service revenues while keeping expense growth at moderate levels and we believe this will continue as we go forward. Other than depreciation, which we have indicated increases as new satellites replacement service, we believe future operating expense increases will continue to be at moderate levels.

Operating loss slightly increased for the quarter to $0.6 million compared to $0.5 million in the third quarter of 2008. If we adjust for the increase in depreciation related to the Quick Launch satellite short and depreciation schedule, and the impact of the satellite impairments and of the insurance recovery, we would have improved operating loss over the prior year of third quarter.

Net loss attributable to Orbcomm Inc. for the third quarter was $1.2 million or $0.03 per share, compared to $1 million in the prior year period of $0.02 per share. Orbcomm’s entered in the third quarter of 2009 was $7.7 million which benefited from the insurance recovery receivable that offset the impairment charges incurred in the first quarter of 2009, compared to an EBITDA loss of $0.4 million in the quarter of 2008.

Adjusted EBITDA for the third quarter of 2009 was $1 million, which compares to adjusted EBITDA in the third quarter of 2008 of $0.6 million, representing a 58% increase year-over-year. At the end of the third quarter of 2009, cash, cash equivalents and restricted cash was $58.2 million. Just want to remind you, we use our cash mainly to pay for an X Generation satellite program.

Cash flows from operating activities generated $1.3 million in the third quarter of 2009 versus $1.6 million in the prior year period. We continue to expect to generate positive cash flow from operations for the full year. So just to sum up for the quarter, in the third quarter we increased service revenues by 10%, decreased service delivery cost by 12% and this resulted in a 58% increase in adjusted EBITDA and $1.3 million in cash flow from operations.

Now an update on our $50 million satellite insurance claims. We are significantly through the proof of loss process and we hope to have our claims settled before the end of the year. The receivable of $28.9 million is the maximum we were allowed to record under the accounting rules. We expect to collect more than this amount. Our expectation is based on the strength of our claim and discussions with insurers. Any money received in excess of the receivable will be recognized through the gain when collected.

Now, we’ll be happy to take your questions.

Question-And-Answer session

Operator

(Operator Instructions) Your first question comes from Chris Quilty - Raymond James & Associates.

Chris Quilty - Raymond James & Associates

Just looking at the satellite net ads in the quarter, do you have a sense of where you are actually seeing gains or net ads by vertical markets?

Marc Eisenburg

Sure Chris. We are seeing ads, specifically in the heavy equipments, we were seeing some churn especially on the transportation side, trucking but overall, we’ve seen a slow quarter because last year OEMs 2008 production was ramping in the middle of the year, so when demand fell of we saw large building of inventory that we’ve been battling through all year.

Even though the OEMs have reported sales as low as 60% we are down in activations even more than that, since to activate their units at production or most of them do. So, our OEMs adds have fallen even more than that. As they run out of their inventory, we would expect the opposite effect.

Chris Quilty - Raymond James & Associates

We’ve seen positive announcements coming out of, DRR (ph) hiring more people, Caterpillar ramping production, your sense is, may be you work through those inventories in the fourth quarter and by first quarter you are back to more of a normalized demand level.

Marc Eisenburg

Yes, I think what we are seeing is, what we have been told it’s different for each OEMs, each one is built their own levels and are working through it. So, I don’t know that they all click in the same day, but it should have the opposite effect. The inventory is out and then they start building it up again. Again, they activate us at the line and they continue to test the units.

Chris Quilty - Raymond James & Associates

Okay and do you know, are your OEM customers continuing to do the engineering work to expand the number of models, into which the Orbcomm product is integrated or was that process stopped, back when production started to slow?

Marc Eisenburg

What we’ve seen is there’s been less and less intros of new models, but we are not aware that they’ve stopped putting us on the new models.

Chris Quilty - Raymond James & Associates

Okay. And a question on the insurance settlement. I think you guys finally were able to submit that back, what in the late summer early fall pipe time frame, and typically you would expect to add a 90-day window. Does that mean we are likely to see some or all of those announcements by the end of the year here?

Marc Eisenburg

Yes, we believe we are close to a conclusion, we’ve responded to the diligence questions from the insurers. It’s been a difficult process with nine separate insurers, technology transfer restrictions in different languages and time zones.

We still expect the resolution by the end of the year. However, we believe we have a strong claim and we don’t want to accept less than we are entitled to. So, if one or more of the insurers are not willing to offer us what we are entitled to, then we are prepared to enforce our rights, which would take a longer period of time, but again we don’t expect that.

Chris Quilty - Raymond James & Associates

Okay and with regard to the AIS service, I guess first a question for Robert, can you give us a sense of what the depreciation would look like for the fourth quarter on the two remaining satellites just for modeling purposes and the fact that, your end of depreciation is the end of the year, does that mean that you are not expecting those satellites to operate beyond the end of year?

Robert Constantini

No, to answer your first question, I mean I think the depreciation levels are going to be similar to what you saw in this quarter, yes we shortened that time frame and we wrap that up before the end of the year.

So, if you look at the number that we had in this quarter about $8 million, that would be comparable in the fourth quarter. The estimated useful life that we took for depreciation purposes was based on sort of scientific engineering related to the experience we had with the prior satellite.

We are going to do everything in our power to continue to operate these things beyond the end of the year, but experience would suggest that they are going to be in the short and depreciation schedule. So, using some extrapolation models that the engineers typically use we came up with this short and depreciation schedule, but our expectation is that they are going to continue to operate beyond the end of the year, but we don’t know how long and we will do everything we can do to continue to operate them.

Chris Quilty - Raymond James & Associates

Okay, and well I have you Robert, an update on the CapEx cycle, has any of the timing on that moved in anyway?

Robert Constantini

Right now we think we are getting to a critical junction to some of those contracts where we can see, some of those milestone schedules flip to the right a little bit, right now it’s scheduled and we expect that incur about another $9 million in CapEx through the end of the year, but I would say we are not seeing a lot of flippage right now.

Chris Quilty - Raymond James & Associates

Okay, and when are you expecting to take first delivery?

Robert Constantini

To schedule the first ship set I believe is next spring, and at that point we will be coordinating shipping out to launch side and the integration that’s required to get them on to the launch vehicle in anticipations for that launch at the end of the year. So there is a little bit of flexibility in the schedule should less that we can still maintain that launch window towards the end of 2010.

Chris Quilty - Raymond James & Associates

Okay, and question on the service cost, obviously there is a big chunk of DNA, in there, how much of the depreciation and amortization that’s recorded is related to cost of service just if I wanted to back into both this year and last year service cost to see what kind of increase in your service margin you might be experiencing?

Robert Constantini

Yes, about $8 million of the number, it’s really the network, the additional satellites and the additional CapEx around the network, so about $8 million of that $8.8.

Chris Quilty - Raymond James & Associates

It goes into cost of service?

Robert Constantini

Yes.

Chris Quilty - Raymond James & Associates

Okay, and it looks like if I ran the numbers right here, your overall ARPU for the company was about flat, with last quarter, are you seeing any changes in trends or mix with the types of terrestrial and satellite subscribers?

Marc Eisenburg

We certainly saw an increase, a much higher share of satellite subscribers last quarter and terrestrial subscribers this quarter, which is kind of the flattening as you kind of balance those out.

Chris Quilty - Raymond James & Associates

But, do the GE terrestrial adds that you brought in this quarter have a distinctly different ARPU than the other terrestrial adds here you have been adding on independently?

Marc Eisenburg

They are slightly lower.

Operator

Your next question comes from [James Leventhal - Leventhal & Company]

James Leventhal - Leventhal & Company

Just a couple of quick questions; on the transportation issues, is that something that’s specific to the industry? Obviously your trucking industry has had a pretty rough time during this recession, or is that more reflective of competitive positioning of Orbcomm versus other competing M2M providers?

Marc Eisenburg

We don’t see a bunch of deals getting done on anyone’s network, what we have been seeing in the market is trucking companies holding on to their cash, and not spending that upfront CapEx to outfit their vehicles waiting for loads to increase.

James Leventhal - Leventhal & Company

Okay, that’s kind of what I expected, and then somewhat related but, with regards to reporting of sub adds, obviously the fourth quarter, when you guys report the fourth quarter it’s going to be March, so that’s a good four months away, is there any chance you guys will update us on how the fourth quarter looks before then, I know that something you have changed in the last year, but just wondering if the given the long time delay here you might update us before the fourth quarter report.

Marc Eisenburg

I think we will consider James, but I would say it’s unlikely and the reason we have kind of pushed it off is to give everyone some full visibility around the sub number why it is, and what we expect as opposed to just a pure number. So, that’s why we have decided to do away with that.

Operator

(Operator Instructions) And Mr. Eisenberg there are no further questions at this time. I would like to turn the floor back to you for any closing comments.

Marc Eisenberg

Thank you. Thank you all for joining us today and thank you for your questions. We look forward to speaking with you again next quarter.

Operator

Thank you. Ladies and gentlemen this does conclude our conference call for today. We do thank you for your participation on today’s call. You may now disconnect your lines at this time.

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