Transportation markets, coronavirus present headwinds to ORBCOMM’s 2020 outlook

driver using in-cab monitor

ORBCOMM Inc. (NASDAQ: ORBC), a provider of machine-to-machine and Internet of Things (IoT) services, reported that weakened U.S. transportation markets in 2019 resulted in a $9 million decline in hardware revenue.

On its earnings conference call, management said that while many analysts were forecasting a recovery for the transportation markets during the second quarter of 2020, that could be delayed given the recent surge in coronavirus infections.

The telematics and asset monitoring/tracking provider reported a fourth quarter 2019 net loss of $0.03 per share, $0.01 better than analysts’ expectations.

Management said that the disruption from the virus hasn’t really impacted demand from its customers yet, but noted that if there were a step down in U.S. freight shipments due to the manufacturing slowdown in China, its transportation revenue could be negatively impacted. They said that the company’s revenue derived from supplying devices and software services to transportation providers actually increased 5%, approximately $1 to $2 million, in the fourth quarter. It had been as much as $4 million per quarter lower during the peak of volume declines in 2019.

On the supply side, management said that most of ORBCOMM’s products are produced in Mexico with a much smaller amount manufactured in Germany. However, the company does have sourcing exposure to China as some components, like cables, are produced there. For the components sourced in China, management said that they have the inventory needed to accommodate hardware production during the first two quarters of 2020. If the manufacturing outages in China were prolonged, management acknowledged that could present some issues, but said that they have found another source for some of the components needed.

When pressed further on the potential for disruption to the supply chain in the second quarter, ORBCOMM CEO Marc Eisenberg noted that it’s still too early to determine the potential impact. “It’s not good news and it’s not helping the business,” said Eisenberg.

Further, given the expansion of the virus, management said that they lowered their full-year 2020 outlook since the company’s board meeting a week ago.

2020 Guidance

ORBCOMM updated its full-year 2020 expectations. The company expects total revenue growth of 5% to 8% with recurring service revenue increasing 2% to 4% and product sales growth of 7% to 15% (prior guidance called for 10% to 15% growth). The expectation for the company’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margin was lowered to a range of 23.5% to 24% (prior 24% to 26%). Cash flow from operations is expected to be approximately $40 million compared to $30.1 million recorded in 2019.

Management said that they could reach the middle of their guidance without a real recovery in trucking.

The company’s first quarter 2020 guidance is for revenue to be flat compared to the first quarter of 2019 at $66 million, again noting softness in the U.S. transportation market. Adjusted EBITDA is forecasted to be $13 to $15 million for the quarter.

Management said that longer-term recurring service revenue could grow in the 8% to 10% range as it has done in the past. They said that the company’s win rates on contract bids were much higher than 50% for container and reefer business. However, the company’s in-cab and fleet solutions win rate was running lower than the 50% threshold. They said that they only win dry van business around 35% of the time, but when combined with other offerings like reefer, that win rate surges north of 75%.

ORBCOMM recently inked a contract with The Kroger Company (NYSE: KR) to track the company’s 10,000 dry and refrigerated trailers.

Fourth quarter results

ORBCOMM reported a 5% year-over-year increase in total revenue to $69.7 million with service revenue increasing 6.9% and product revenue up 2.5%. The company ended 2019 with 2.14 million subscribers with a net addition of 73,000 net subscribers in the fourth quarter.

ORBCOMM’s Key Performance Indicators

Adjusted EBITDA increased 12.5%, excluding a favorable benefit recorded in the prior year period, to $16.9 million. ORBCOMM cited higher profits in both its service and product offerings as well as cost reductions as the reasons for the improvement.

“In 2019, we made great strides to strengthen our operations by consolidating platforms and financial systems, resulting in greater efficiency and scalability across the company. We believe our new streamlined model, coupled with product innovations and a strong pipeline, position ORBCOMM to achieve greater levels of success across the business,” said Eisenberg.

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.