Orbcomm Sells Off On Quarterly Report As It Pushes Subscription Service

Orbcomm, Inc. ORBC, a provider of machine-to-machine and Internet of Things (IoT) solutions, reported a $4 million loss in the third quarter of 2019. This was a penny worse than the prior year period and consensus estimates of a $0.04 per share loss.  

The telematics and asset monitoring/tracking provider reported total revenue of $69.2 million, 2.6% lower year-over-year. The larger than expected downturn in the transportation market and prior year comparisons that included new product deployments were the reasons for the decline. Service revenue improved 5.4% year-over-year as the company grew its subscriber base to 2.6 million, 12% higher than the prior year period.  

On their earnings conference call the company's management team provided an update on several new product and service initiatives.

"We have several high-profile opportunities across our markets that are starting to fall in line, and I'm confident that we'll be able to build on this momentum, setting the stage for a strong start to 2020," said Orbcomm's CEO Marc Eisenberg.

The bulk of the call centered on Orbcomm's transition from hardware to a subscription service model for the transportation industry. Management believes that offering a subscription model will allow the company to grow total revenue because the subscription service reduces up-front capital expenditures for the user. However, the company will see a bit of a revenue delay as the contract extends over the life of the device and revenue will be recognized slower than it would be in an up-front product sale. Management said that their larger customers with a lower cost of capital will still purchase the hardware outright, but that through subscription the company will be able to serve a greater portion of the total addressable market.

Orbcomm plans an initial capital expenditure of $9 million for roughly $12 million of hardware for deployment in the subscription offering. Management noted that it will be closing on deals representing a total of 50,000 units in the near-term for use in the subscription service. However, management said that they don't want to go back to the market to raise additional capital and plan to use cash flow generation (more than $20 million so far in 2019) and cash on the balance sheet (approximately $51 million) to fund the subscription initiative.

Orbcomm Key Performance Indicators

Other new technology initiatives that will see new business wins soon include: a reefer container retrofit program; satellite capabilities for small marine vessel monitoring; satellite container visibility for produce at sea; video monitoring of ocean cargo; as well as continued improvements in fleet safety, in-cab notifications, in-cab video monitoring and improved analytics in the trucking industry.  

Adjusted gross margin for the service group improved 220 basis points to 69% due to increased recurring service revenue and cost management. Additionally, the division benefitted from the acceleration of deferred revenue from an expiring container contract at the end of the year. Adjusted gross margin improved 720 basis points to 31.4% in the product division as the delivery of higher margined products increased.

"In the third quarter we continued to ship greater quantities of the new cost-reduced, feature-rich products and made great progress in significantly raising product margin and service margin, increasing cash flow from operations," said Eisenberg.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was down 2.6% year-over-year to $16.9 million in the quarter. The prior period included a $2.5 million earn-out net benefit. Adjusted EBITDA margin was flat compared to the prior year at 24.5%.

The company expects fourth quarter 2019 revenue of $68 million to $72 million, which is below prior expectations "due largely to the slowdown in the North American transportation market and a number of opportunities moving to a subscription model, which recognizes revenue over the term of the contract." Orbcomm expects an adjusted EBITDA margin of approximately 24% in the quarter.

Orbcomm issued full-year 2020 expectations calling for 10% to 15% product revenue growth noting tailwinds like a $13 million increase on a large container contract and roughly 100,000 units in its near-term pipeline that are expected to close. The product revenue guidance could have been higher, but roughly 10% of new deployments will be under the subscription model and fall in the service division. Recurring service revenue will ramp from low single-digit growth in the beginning of 2020 to high single-digit growth by the end of 2020. Additionally, management believes that service revenue will be grown in the high single-digit range in the out years. 2020 Adjusted EBITDA margin is expected to be in the range of 24% to 26%.

Shares of ORBC are off roughly 18% on the day.

ORBC Stock Chart – SONAR: STOCK.ORBC

Orbcomm is a provider of machine-to-machine and IoT solutions. Its asset monitoring and control solutions provide support to the transportation, supply chain, warehousing and inventory, heavy equipment and maritime industries.

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