[Satellite News 05-11-11] Two-way machine-to-machine (M2M) communications and automatic identification system (AIS) service specialist Orbcomm broke its yearlong subscriber growth streak in the first quarter of 2011 by falling 4,000 customers short of its market net subscriber addition estimates of 18,000, according to the company’s latest financial results issued May 10.

The company’s management reported 14,000 new subscribers during the period due to weaker-than-anticipated demand from original equipment manufacturers (OEMs) and lackluster activity outside of its manufacturing channels. Delphi Automotive Systems, the exclusive supplier of subscriber communicators to Orbcomm’s Stellar subsidiary, is currently operating under Chapter 11 bankruptcy protection.

Orbcomm’s stalled satellite net adds caused analysts to trim their 2011 full-year EBITDA forecasts for the company. “At some point, Orbcomm should see a substantial breakout in net adds,” analysis firm Raymond James wrote in a May 11 report. “But, given recent results we are trimming our 2011 satellite net add forecast from 100,000 to 60,000 and our 2012 forecast from 138,000 to 93,000. Consistent with this forecast, we are lowering our 2011/2012 adjusted EBITDA forecasts by 16 percent and 22 percent, respectively.”

            The company also was impacted by delays with its launch service provider SpaceX. Orbcomm’s first two OG2 microsatellites, built by German manufacturer OHB System, will now be launched in the third quarter of 2011, due to scheduling issues with SpaceX’s planned NASA COTS mission. Orbcomm is a secondary payload on the NASA COTS mission. The Orbcomm microsatellites aim to restore the company’s basic AIS service and revive an important incremental revenue stream for the company when they are launched this summer.

            Orbcomm has a history of being hampered by launch delays and failures. The company entered the AIS business in June 2008 with the launch of six AIS-enabled quick launch satellites. Five of the six satellites Orbcomm developed then failed, but not before the company was able to build a small distribution network that is generating about $3 million of annualized revenues. Orbcomm’s agreement with OHB System was tailored to give the company the ability to rapidly place two AIS microsatellites in service in order to reduce the risk that the sixth and final quick launch satellite would fail before replacement AIS satellites can be brought online.

Orbcomm has a launch insurance plan in place to mitigate risks, but its policy is generally limited to replacement value only and would not compensate for the possibility of lost sales or profits resulting from a delayed fleet upgrades.

            The 2011 first quarter did, however, provide some good news for the company. Excluding its AIS business, Orbcomm’s core service revenues grew 20 percent year-over-year, driven by a 12 percent increase in its core subscriber base and approximately 7 percent year-over-year growth in ARPUs to $4.25. Orbcomm’s satellite-based M2M solutions remain well positioned compared with existing technologies, but some analysts expressed concern that the wireless industry could develop new competitive technologies that would challenge Orbcomm’s position.

            In a conference call with investors, Orbcomm CEO Marc Eisenberg projected that the company’s ARPUs should continue to expand at a single digit rate as new satellites are launched and service levels steadily improve. “Increased data usage and improved satellite throughput from our constellation over the past year, coupled with continued double-digit growth in subscriber additions has driven growth in service revenues.”

Eisenberg added that Orbcomm anticipates that it will close its recent acquisition of monitoring solution provider StarTrak, “in a matter of weeks,” which would have a positive impact on its 2011 full-year revenue total.

 Raymond James Analyst Chris Quilty told Satellite News that his estimates are in-line with Eisenberg’s projections. “The StarTrak acquisition, although not in our forecast, should provide a nice boost to our estimates, including recurring service revenues, organic growth rate and monthly ARPUs. Furthermore, we expect StarTrak to be cash flow accretive from day one.”

Despite Orbcomm’s slowing subscriber growth rate, Quilty urged investors not to panic and said the company remains one of the most attractively valued properties in the satellite industry. “Recent growth has been a tad disappointing, but the company is poised to deliver substantial growth over the next 18 to 24 months as new satellites are placed in service, driving service revenues, ARPUs, and EBITDA margins higher,” said Quilty. “There has been some volatility with Orbcomm’s hardware sales as customers often purchase hardware in bulk, leading to lumpy sales patterns and volatile gross margin performance. This sales volatility should decrease over time as the number of resellers and the breadth of customers continue to grow.