Orbcomm Set To Rebound From Here

Orbcomm (ORBC) is a satellite communications company that primarily provides machine-to-machine communication. In the last five years, this small-cap firm trended lower. ORBC stock finally bottomed at $1.24 during the March sell-off. It managed to hold its rebound since then. Ahead of its quarterly earnings report scheduled for Oct. 28, the stock is stuck in a range.

Orbcomm needs another round of good news to convince investors that its eCommerce and logistics will continue expanding.

Orbcomm Posts Strong Second Quarter Results

In Q2, Orbcomm posted earnings per share GAAP loss of 9 cents. Revenue fell 15.5% to $56.7 million. At a $288.5 million market capitalization, investors would not know that the company has an impressive list of customers:

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Source: ORBC Investor Presentation

The company’s vertical markets are a source of consistent growth. For example, cold chain transportation involves shipping food, medical supplies, and pharmaceuticals.

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Conversely, in Q2, non-refrigerated transportation customers fell slightly. Also, factory closures due to the furlough hurt its heavy equipment business. As businesses reopen and stay that way, Orbcomm’s heavy equipment segment should rebound in the current quarter.

The decline in OEM for trucks and trailers should follow with a rebound that began in June. Plus, as customers replace their aging assets, hardware orders should improve steadily in the coming quarters.

Opportunity

Orbcomm completed a dozen acquisitions and is approaching completion of its integration plan. Shareholders naturally expect their next step of cutting costs and improving efficiency. Unexpected write-downs and excessive costs over weak revenue growth are near-term risks. Still, the company lowered its SKU count by 75%, consolidated its accounting system, and went live with its OEM platform.

The platform replaces 25 of its customer-facing web portals. So, as transactions grow, the system will scale to support the 5G IoT-enabled ecosystem.

The 15% revenue drop in the second quarter and the lower net subscriber growth are near-term headwinds. Despite the underperformance, the device shipment and installations in the period should result in higher billable subscribers this quarter.

Improving Financial Trends

The adjusted EBITDA is growing steadily. The higher margins will lead to better cash flow generation:

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Source: Orbcomm

The company is making progress in cutting its leverage:

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Operating cash flow is growing. With acquisitions complete, its capital expenditure requirements should fall in the next few years:

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Subscription Growth

Orbcomm needs favorable average revenue per user trends and net additions in subscriptions. CEO Marc Eisenberg said,

The bigger issue with subs right now is these factory closures being open and close, just shipping new goods, getting them received in time, the subscription model, getting stuff installed in this environment, that was the bigger problem.

Orbcomm’s customers faced weak billings, hurting its customer billing rates. Unfortunately, the company said weak oil and gas numbers keep worsening, hurting its business, too. For now, investors will need to examine Orbcomm’s ARPU figures closely. And in the long term, the company has a large tailwind with its subscription model.

Future Growth Opportunities

Orbcomm is emerging from its transformation as a fully integrated firm. Next quarter’s subscription figures will confirm that the business pivot is headed in the right direction. Otherwise, ORBC stock may re-test support levels found at the 200-day moving average or at below $3.50.

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Per SA Premium, ORBC’s quant grades are not great. It has only one A+ on earnings revisions:

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The company has a mixed track record for beating consensus estimates:

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Source: SA Premium

In the earnings report set for late October, the company will give investors its fourth quarter guidance. It forecast Q3 total revenue will come in between $59 million and $62 million. The adjusted EBITDA margin will be around 21.5%.

Your Takeaway

Orbcomm will need to post another better-than-expected quarterly earnings report. If it does so and issues a strong fourth quarter outlook, the stock will continue its rebound that began after the March sell-off.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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