Investing in IIoT and Newspace with ORBCOMM Stock
There are some things that defy classification. Take Goofy, the Disney cartoon character. What the fcuk is Goofy? It’s a debate that has raged for decades. Many just assume he’s a dog-like human, but his romantic partner is a cow, so perhaps he’s a anthropomorphized bovine? Some companies are also hard to peg down. Is Tesla a car manufacturer or a green energy company or both? A similarly spirited debate arose among our MBAs over a company that recently came on our radar: ORBCOMM (NASDAQ:ORBC). In recent years, the 25-year-old New Jersey company seems to have grown from a satellite network operator for machine-to-machine communication into a significant player in the Industrial Internet of Things. So, is ORBCOMM a NewSpace satellite company or an IIoT company or both—and is it worth adding to your portfolio to get some direct exposure to either (or both) of these sectors?
First, let’s talk about what ORBCOMM exactly does. Basically, the company operates its own telecommunications network to provide connectivity pretty much anywhere in the world. It’s like having access to a kind of private global internet connection, though one primarily devoted to basic messaging and data transfer for connected devices. The network consists of ORBCOMM’s own low-Earth-orbiting satellite network, as well as a geostationary satellite network operated by British satellite telecommunications company Inmarsat (LON:ISAT). Its communications system also employs cellular networks from most of the big names like AT&T, Verizon and T Mobile.
That worldwide coverage allow ORBCOMM’s customers to remotely track and monitor assets—from cargo vessels and truck fleets to mining operations and oil wells—anywhere on the planet. The company also sells the hardware, such as modems, sensors and other devices, necessary for its expansive IIoT solutions.
Here’s how it works in a real-world example: A mining company in Chile wanted to speed up copper mining operations in the remote Andes mountains. The original solution was to install a fast refueling system that shaved 20 minutes off the clock each time one of the mine’s 55 dump trucks stopped to refuel. Unfortunately, the new high-pressure system blew out the fuel sensors. That meant truckers had to guess as to when to refuel, which caused all sorts of problems, as you might imagine if your car fuel gauge stopped working. The installation of new a third-party fuel sensor system and one of ORBCOMM’s dual cellular-satellite terminals meant real-time data could be transmitted about fuel levels and truck locations, which made the fueling system far more efficient. Trucks made 10 fewer stops per month, which equated to being able to process 4,000 additional tons of copper. That’s more than 1.2 billion pennies based on the pre-1982 penny when it was made out of 95 percent copper.
Transportation is one of the key industries where ORBCOMM is focusing its energy and money, particularly in vehicle fleet management where we see some rapid growth in companies digitizing the trucking industry, for example. In fact, ORBCOMM made two acquisitions last year to strengthen its position in that sector, spending about $70 million, not including up to $30 million more subject to certain operational milestones. Some of its technological solutions might sound like backseat driving, such as sending automated in-cab verbal alerts in real-time when drivers are speeding or driving aggressively. Other features sound more useful, especially if you’re hauling freight on the backroads of some third world country, where the system can detect the use of GPS signal jamming technology that might be used to hijack a vehicle.
Moving in the Right Direction
ORBCOMM claimed more than two million monthly subscribers to its communications system at the end of 2017, an increase of 17.5 percent from a year ago. So ORBCOMM is adding customers at a good clip. It’s also been adding companies at a rapid clip, making about a dozen acquisitions since 2011. In 2015, for example, the company bought SkyWave Mobile Communications for about $130 million. SkyWave is a provider of machine-to-machine communication that brought ORBCOMM about a quarter of a million subscribers and $60 million in annual revenues.
Those moves seem to have the company moving in the right direction. Total revenues for 2017 increased $67.5 million, or about 36 percent, to $254.2 million, compared to $186.7 million in 2016. Last year, revenue was split pretty evenly between services and products:
One interesting thing to note is that product sales accounted for a significant portion of that bump. Total product sales were up more than 60 percent between 2016 and 2017, largely due to the addition of J.B. Hunt as a customer. The deal included the sale of more than 70,000 pieces of hardware that provide the freight service company’s trailing equipment with solar-rechargeable GPS tracking devices and sensors that determine the presence or absence of cargo inside the trailing unit.
Some Bumps in the Road
While the company boasts a long list of clients, nearly a third of ORBCOMM’s revenues in 2017 came from only seven customers: J.B. Hunt, Walmart, Caterpillar, Komatsu, Hub Group Inc., Onixsat and Satlink S.L. You can see the impact of adding just one client, J.B. Hunt, in 2017 had on the company’s bottom line. Losing one or more clients from that roster could have some serious downside.
Profitability has also eluded ORBCOMM for the most part. Aside from some modestly profitable years in 2012 and 2013, the company has lost money since its inception, with an accumulated deficit of $166.2 million. While 2017 was its best year for revenue, it was also a big year for losses—about $60 million—compared to previous years:
However, a little more than half of that loss, about $31 million, was due to the failure of several of its satellites. A report on SpaceNews implied that ORBCOMM, moving forward, may pull away from adding many new satellites and instead rely on its partnership with Inmarsat and the development of new hardware. It’s obviously not cheap to operate satellites, as it cost ORBCOMM about $117 million just to build its second-generation constellation of 18 satellites based on the 2008 contract—and only a third of those are operational today. On the other hand, the reliance on a third-party carries its own risks, though the alliance between ORBCOMM and Inmarsat appears pretty solid. The latter has invited ORBCOMM to collaborate on the development of Inmarsat’s next generation of geostationary satellites, which should begin launching in 2020.
Debt will also continue to eat into ORBCOMM’s bottom line. The company issued $250 million in secured senior notes last year that come due in 2024. It turned around and used some of that cash after paying off $150 million in previous loans to buy Salt Lake City-based inthinc, which provides vehicle communication and safety products, and Blue Tree Systems, a transportation management solutions company out of Ireland.
It’s likely the buying spree is mostly over for now, as we expect the company will now focus on continuing to integrate its new acquisitions and customers. Despite the lack of profitability, the market has mostly looked kindly upon ORBCOMM since the company launched its acquisition strategy in 2011, showing a pretty steady trajectory in market cap during that time:
We haven’t really been able to find much in terms of space or satellite stocks that are appealing, especially when it comes to dreadful historical stock price performance. Companies like IntelSat or Avanti Communications have lost more than -90% of their share price value in the past 5 years. While ORBCOMM hasn’t beat the 5-year NASDAQ return of +149%, they’ve managed to return a positive +90% in the same time frame. Then there’s “business focus”. Many of the 10 satellite stocks we covered before are heavily dependent on video revenues, or spend all their time operating and maintaining expensive space hardware. ORBCOMM seems to be the exception with their vertically integrated IIoT platform, even though they may now be (perhaps wisely) giving up on operating the capital intensive satellite infrastructure and leasing it instead.
Of course, as the disclaimer goes, past results are no guarantee of future performance, so buyers beware. But ORBCOMM offers an intriguing bet (we made a small one ourselves) for investors interested in exposure to space-based stocks and the Industrial IoT landscape. It’s the latter where ORBCOMM could prove to be a significant player—or an attractive acquisition for a company like GE that is building it’s on IIoT empire.