ORBCOMM Inc.
Q4 2008 Earnings Call Transcript

Published: 16 Mar 2009

[Operator:]

Welcome to Orbcomm's fourth quarter and full year 2008 financial results conference call. (Operator Instructions) I would now like to turn the call over to Lucas Binder, Orbcomm's Vice President of Business Development and Investor Relations.

[Lucas Binder:]

Good morning and thank you all for joining us. Earlier this morning we issued a press release announcing financial results for the fourth quarter and full year 2008. A full replay of this conference call will be available at 12 noon eastern time today until next Monday, March 23 at 12 noon. We have an accompanying 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 of 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:]

Good morning everyone and thank you for joining us. On the call today, I would like to provide you a quick overview of the full year 2008 and fourth quarter results, update you on recent business highlights and the current status of our new satellites, then I'll turn the call over to Robert who will provide a full year review and quarter, and I'll finish with some comments and thoughts about 2009. When we look back at 2008 I would characterize it as a year with both some successes and disappointments. For the full year 2008, we're pleased to report that we have increased both service revenue and total revenue. Service revenues increased over 34% for the year and we had over 27% growth in service revenues in the fourth quarter of 2008 versus 2007. We met our full year service revenue guidance of $22 million to $25 million with full year service revenues of $23.8 million. Additionally, we achieved positive adjusted EBITDA in each quarter of 2008, ending the year with $1.6 million in adjusted EBITDA which is also consistent of our guidance of achieving positive adjusted EBITDA. Orbcomm generated nearly $4 million in cash flow from operations for the full year 2008. At year end, our total billable subscriber base was more than 460,000 which represents disappointing annual subscriber growth of 31% from the base at December 31, 2007. The growth in subscribers led to over 34% growth in service revenues and was aided by the commencement of AIS related activities during the later half of 2008. We will discuss some of the factors that affected our billable subscriber growth as well as our outlook for 2009 later on this call. Let me start with an overview of our key customers and OEM's. Early in 2008, there were a number of factors working in Orbcomm's favor. First, a number of VARS were progressing through the development process. In addition, there were several OEM's working on incorporation Orbcomm's standard equipment. There were also resources that were directed to grow internationally and new satellites were being completed that would deliver additional capabilities including AIS and improved performance. Despite the positive momentum based on these factors, we faced some challenges. We saw continued slowdowns at some of our transportation relation VARS which affected our billable subscriber communicator uptake. This meant that the rest of the company's distribution network needed to generate a significant number of additional net subscriber communicator additions to offset the loss of this growth. Equally significant were the effects of the worsening economy which resulted in a contraction of the aftermarket business, a trend that dominated the second half of the year and was accentuated by the typical fourth quarter seasonal slowdowns. In 2008 Orbcomm continued to expand our international business by offering services in more countries around the world with either regulatory authorizations added, far more than in any other prior year. In addition, the work we did in 2008 resulted in obtaining regulatory approval in 2009 for Indonesia which is a top priority among our OEM's. Orbcomm also completed the acquisition of Orbcomm Japan in 2008. The transaction improved our profitability, strengthened our relationships with partners and customers in the regions. In terms of new business development, we entered in many new reseller partnerships around the world. In addition, we were able to work toward solidifying and diversifying our customer base. Despite being disappointed with net subscriber additions, the company has lessened its dependence on its largest VAR by strengthening the number of significant active customers. The business has now shifted from being highly dependent on one customer to several customers. A number of our OEM partners increased the number of models with factory installed communicators in 2008. There are also some after market resellers starting production such as Argon ST, Star Track and Pioneer Hybrid, a division of Dow Chemical. For a quick overview of our key metrics for 2008; net subscriber additions came in short of guidance and were disappointing. Despite this, Orbcomm was able to achieve its service revenue and adjusted EBITDA guidance. Adjusted EBITDA was positive for the full year from a negative adjusted EBITDA in 2007. Progress was shown on the stabilization and improvement in ARPU, and was achieved in a difficult market. In short, the company achieved its financial objectives despite a lower rate of net additions. Before I turn it over to Robert, let's talk about our new satellites. On June 19, 2008 we launched the Coast Guard demonstration satellite and five Quick Launch satellites. These satellites have been placed into their target orbits. The in orbit testing of these satellites continues to be challenging due to the anomalies identified during in orbit testing which have been exacerbated by the complexities associated with technology transfer restrictions and language barriers. On February 22, 2009 one of the quick launch satellites experienced a power system anomaly which has resulted in an inability to communicate with the satellite. We believe this to be a permanent condition and beyond repair. As a result of this loss, we are working to develop operational procedures and software solutions to minimize the risk of a similar problem on another satellite. While the loss of one satellite is not expected to have a material affect of our service, we continue to be very cautious with the other five. We are starting to put satellites in limited service with a watchful eye on their condition and performance. Tracking, telemetry and control of the satellites have been moved form our vendor in [Amnsk] to our control center in Dulles. During this time, we have continued to provide AIS services. Another significant operational upgrade was moving our Virginia based network operation center to a new nearby facility which was accomplished without any network downtime. As part of this move, we upgraded our telecommunications lines, adding security and reliability to the network. Before I conclude our remarks with some discussion on the outlook for 2009, I would like to turn the call over to Robert Constantini, our Chief Financial Officer.

[Robert Constantini:]

Thank you all for joining us on the call today. I'm going to take you through a summary of our financials for the full year and fourth quarter 2008. For five straight quarters we have achieved positive adjusted EBITDA. We recorded positive adjusted EBITDA for the fourth quarter and on a full year basis due to continued solid growth in service revenues which Marc highlighted in his comments. This underscores our effort over the 18 months to focus on service revenues as the primary driver of our growth and profitability. Service revenues represented over 80% of our fourth quarter total revenues and over 79% of full year 2008 total revenue, up from over 57% and over 62% respectively in the prior year period. Service revenues grew 34.4% for the full year 2008 and fourth quarter service revenues were up 37.3%. The growth in service revenues is a result of positive trends in the following components; additions in our subscriber communicator base, the inclusion of Orbcomm Japan, and the start of AIS revenues in the second half of 2009. Cash from operating activities for the year was positive as well as $3.9 million for the full year 2008. This is now two years of positive cash flow from operating activities. The company had $75.4 million in cash and equivalents at December 31, 2008 and $5.7 million in restricted cash for a total of about $81 million. Total revenues for the full year 2008 were $30.1 million, an increase of 6.9% compared to 2007. We are pleased that total revenue grew despite some difficult comparisons with product sales and included the sale of an earth station in the prior year fourth quarter. Total revenues for the fourth quarter ended December 31, 2008 were $8.5 million, a decrease of 1.5% compared to the fourth quarter of 2007 due to the earth station sale. Excluding the earth station sale in 2007, total fourth quarter revenues would have increased 18.6% due to higher service revenues. Service revenues increased 34.4% to $23.8 million for the full year 2008 from 2007 and increased 37.3% to $6.9 million in the fourth quarter of 2008 due primarily to the factors already mentioned, the increase in subscriber communicators, the inclusion or Orbcomm Japan and a contribution now from AIS revenue. Over the prior full year, annual service revenue growth has compounded 38.5%. Product sales decreased for both the full year and fourth quarter of 2008 to $6.3 million and $1.7 million respectively, and on a comparative basis, the last year are down 39.8% and 54.7%. A portion of the declines can be attributed to the Gateway earth station sale of $1.5 million in the fourth quarter of 2007 as well as a slowdown in volume sales at our Dulles subsidiary which was partially offset by hardware sales from Orbcomm Japan. These results reflect the company's efforts to focus on service revenue growth and let the market decide the appropriate hardware that best suits the application being developed from the hardware manufacturers that we believe this will help attract new hardware manufacturers to the network. Looking at cost and expenses, they decreased 6% to $34.6 million for the full year 2008 compared to the same period in the prior year, mostly due to lower cost of product sold. For the fourth quarter of 2008 cost and expenses increased 13.9% to $9.7 million on a comparative basis due to higher professional fees related to audit and litigation as well as one time costs related to the facility move of our network operation center in Dulles, Virginia. Most of these expenses are one time in nature except for audit fees of certainly which are timing related in the fourth quarter. Cost and expenses excluding cost of product sales were up 6.5% for the full year and 47.3% in the fourth quarter of 2008 which was driven by depreciation and amortization, greater employee costs as well as the items I mentioned before for professional fees and the extra cost to relocate our network operations that are in Dulles to a new building. We believe our business model is capable of supporting high growth in service revenues while keeping expense growth at moderate levels. We believe future growth will continue to be at moderate levels with the exception of increased depreciation related to the launch of the quick launch and coast guard satellites, the timing of which will depend on new service dates. Operating loss improved 48.1% for the full year 2008 over 2007, to $4.5 million from a loss of $8.7 million. This represents two straight years of improving loss from operations. Net loss amounted to $4.5 million for the full year 2008 compared to a net loss of $3.6 million in 2007. While the operating loss improved by $4.2 million, this was offset by lower interest income and foreign exchange driven losses which led to the net loss for the year. Interest income is down significantly, mostly due to our focus on cash preservation and safety in order to avoid interest rate risk and liquidity risk. Orbcomm's net loss per common share was $0.11 for the full year of 2008 compared to net loss per common share of $0.09 for the prior year. Net loss was negatively impacted by the reduction in interest income just mentioned which equated to about $0.09 a share and foreign exchange losses equating to $0.02 a share and essentially equal to the full $0.11 a share loss for 2008. For the fourth quarter net loss per common share was $0.05 compared to net income per common share of $0.03 in 2008 with the prior year benefiting from the sale of the earth station. An area where we continue to see improvement in our profitability metrics and EBITDA and adjusted EBITDA, we continue achieve positive adjusted EBITDA for the full year which is consistent with our guidance to be positive for the full year 2008. EIBTDA loss for the full year 2008 was $2.7 million compared to an EBITDA loss of $6.2 million in 2007 representing over $3.5 million year over year improvement. For the fourth quarter, EBITDA loss was $1 million versus positive EBITDA in the fourth quarter of 2007 of $739,000. As a reminder, EBITDA is an important non-GAAP metric we use to gauge our performance and manage our business and is tracked closely and used for financial reporting purposes. Please refer to our press release and Form 10-K 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, other consolidated subsidiary and minority interest was positive in the fourth quarter, making it five straight quarters of positive adjusted EBITDA. Adjusted EBITDA for the full year was positive $1.6 million compared to an adjusted EBITDA loss of $1.8 million in 2007. Adjusted EBITDA for the fourth quarter of 2008 was positive $187,000 compared to a positive adjusted EBITDA of $1.3 million in the fourth quarter of 2007, again that quarter benefiting from the benefit of the sale of the Gateway earth station. I'd like to mention a few items related to cash movement through 2008. For the full year cash decreased $40.2 million which was largely the result of $40.3 million in capital expenditures throughout the year. We expect capital expenditures in 2009 to range between $25 million and $30 million. I'd like to point out that in our consolidated statements of cash flow we have positive cash provided by operating activities of $3.9 million for the full year of 2008 which is an improvement of $4.7 million from the $3.8 million for the full year 2007, again positive for two years in a row. At this point, I'd just like to mention that the announced impairment for the quick launch satellite of $7 million will not be a cash charge in the first quarter. It's a non cash charge. Now let me take a moment to discuss our plans for 2009 with regard to guidance and subscriber reporting. In view of the uncertain global economic environment, Orbcomm will not be providing guidance for the fiscal year 2009 at this time. Beginning with the first quarter of 2009, Orbcomm will report subscribers when we report the financial results for the quarter so we can discuss subscriber additions and the impact of subscribers will have on our business in the context of the financial results. Because subscribers remain importantly an indicator of our business, the subscriber additions are only part of the story without the financial results to go along with them. So as a result, we will provide all the data that we have at the same time when we report quarterly earnings which we will address on our regular earnings call. At this time, I'd like to turn it back to Marc who will provide some thoughts about our outlook for 2009.

[Marc Eisenberg:]

As you are all aware the nature of the global economic climate made 2008 a challenging year and 2009 could be just as challenging. As we look to our plans for 2009, we continue to execute our business strategy and position Orbcomm to maintain its overall health and financial base while ensuring that the company is in a positive position to capitalize on new opportunities as the business climate improves. Our goals for 2009 include creating a more diverse base of customers, an expanded international presence, and the introduction of new services and continued focus on operational efficiency. We have stressed test the model and are moving forward with our satellite build and launch lines. Between the cash and cash equivalents on hand and expected cash from operations, we do not currently anticipate a need to access the capital markets as we move through these difficult economic times. Orbcomm is in the process of implementing several strategic initiatives aimed at continuing to grow our customer base. In 2009 the company plans to make improvements of current sales staff through strategic hires as well as investing in a customer relationship management system that will be used to improve the entire sales process. One of Orbcomm's strengths has been the adoption of our network into several of the world's leading OEM's in commercial markets. In 2009 the company expects to announce additional relationships and further advance Orbcomm's position as the most widely adopted satellite network for commercial OEM's. Orbcomm's modem manufacturers continue to introduce industrial grade subscriber communicators that are smaller, less expensive and more feature rich including multi-mode devices that should lead to further adoption at both after market and OEM customers. Orbcomm's international group is expected to provide greater contribution to the overall business growth in 2009 and beyond. Regulatory approvals that open new markets for our international VAR's will continue to be a major focus. In addition to pursing regulatory authorizations in more countries, the company plans to expand its ground infrastructure enabling us to offer our near real time service of messaging in more parts of the globe. In addition, in an effort to expand the jewel-mode offering, the company plans to enter into agreements with additional terrestrial partners. Now, I'd like to share with you some information about our latest AIS business developments and strategies. We recently launched a number of AIS enabled satellites which have been spaced and we are starting to build the distribution channels for the AIS businesses. In 2009 the focus will be on three areas that we expect will drive growth and position the business to grow. The key to this growth is building a distribution network that has the depth, customer base and product portfolio to maximize our unique position as the only company in the world with a commercially available space based AIS data offering. Those three key areas are

[Operator:]

(Operator Instructions) Your first call comes from [Jennifer Law]

[[Jennifer Law]:]

If you could just speak a little bit more about the satellites, their status, are they fully operational or are they still in sort of the test phase right now? If you could just give a little bit more color in that area I'd really appreciate it.

[Marc Eisenberg:]

Those satellites are somewhere in between, so we've taken control of the new satellites from our vendor in [Amnsk], which is one of the necessary steps to get them fully operational. We're watching these satellites carefully as we develop the software work around in response to the power anomaly that impacted the satellite that we'd written off, but we still need some more time to assess the risk to the other satellites. Many of the satellites are now turned on again over the U.S. For a small period of time prior to losing that one satellite, all six were turned on over the U.S. and so a couple of these satellites or a few of them are already you know, transmitting full Orbcomm data over the U.S. And in addition to that, we are giving full AIS service as we go along.

[[Jennifer Law]:]

Do you have any plans to launch any new ones in the near future?

[Marc Eisenberg:]

Yes. We have 18 more satellites that are on a line at Sierra Nevada and I think the contract calls for these to be launched in the end of 2010. But you know, it's likely that we start launching at the beginning of 2011, so between 2011 toward the end of 2012, we anticipate launching 18 more satellites.

[Operator:]

There are no further questions at this time. I'll turn the floor back to you for any remarks.

[Marc Eisenberg:]

Thank you all for joining us today and for your questions. We look forward to speaking with you again after the first quarter.