Alan Gottlieb's  Instablog

 Orbcomm, in my view, represents an extremely high-risk investment with very limited probability of success. While the Company experienced a recent “pop” in its stock due to the award of $44 Million insurance settlement, its future prospects as a business remain highly questionable. My assessment is based on the following factors:

 

·      A history of technological failures, cost overruns and delays in launching its original satellite constellation as well as the recent failure of its six “quick launch” satellites.

 

The original constellation of 36 satellites was slated to cost $332 Million, experienced significant delays and a 29% increase in cost just during the delay period. The Orbcomm experience is paralleled by the Iridium constellation, which cost significantly more than projected. 

 

Once launched, the Orbcomm satellites experienced significant technical difficulties including an anomaly in their solar power systems and electronic outages. Based on past history, there is certainly no reason to expect that Orbcomm’s new constellation will launch on time, function properly, or will adhere to its original cost estimate of $176 Million for construction of the satellites and launch. I also anticipate an insurance premium in the range of $50 Million bringing the costs at minimum to over $200 Million.

 

·      Insufficient Revenue Likely to Support the New Constellation. In 2008, the Company recorded just under $30 Million in revenue. In 2009, Q1-Q3 revenues totaled $20.5 Million. Revenues for 2009 will also be under $30 Million. Currently, the company’s major market segments, trucking and heavy equipment sectors are very weak, and although recovery can be expected, it is highly unlikely that revenue sufficient to support a $200 Million investment can be obtained. Note that if the $200 Million were financed with a debt issue and amortized over 7 years at 8%, monthly payments would be over $3 Million per/month or $36 Million annually, a number in excess of the $30 Million revenue figure. Clearly, the only way to finance this venture is to sell enough equity to unwary investors to finance the constellation.

·      Heavy Competition: Both Iridium and Inmarsat compete in the asset tracking and M2M Market. Qualcomm is also a major player in the truck tracking market with its OmniTracs service. Even Skybitz, a local company, is also involved in tracking assets and, unlike Orbcomm, is not burdened by the high cost of building and launching its own satellites. So while the asset tracking and M2M markets are large and growing, Orbcomm faces significant competitors.

·      A History of Bankruptcy and Revenue Over Expectation: Originally staffed with over 800 employees, the Company now employees 80 post bankruptcy. Like Iridium, its ability to stay above water is based largely on the elimination of the need to service the debt on the original investment. While the company no longer develops applications and now is a wholesaler only, it relies heavily on third party application developers/VARS to generate revenue; a practice that affords it limited control of revenue growth.

·      Past Lawsuit Involving Misstatement of Facts in IPO Offering: Plaintiffs alleged that Orbcomm failed to disclose declining demand for its services. The suit was settled and Orbcomm with Orbcomm paying legal costs and an undisclosed sum.

In conclusion, Orbcomm’s ability to generate sufficient revenues to justify an over $200 Million investment in a new satellite constellation is questionable. In addition, based on a past history of technical problems, delays and launch and operational problems and cost over runs, there is real doubt as whether the constellation can be launched on time and become operational in the time frame projected. Add to this, a highly competitive environment, and I see an investment in Orbcomm as extremely high risk with limited upside.

Disclosure: No Position