Q1 2020 Earnings Call

And we'll be a question and answer period.

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Please note. This event is being recorded in a replay of this conference call will be available from up approximately 11 30 am eastern time today.

Through may 14th 2020.

The replay service details can be found in today's press release.

Additionally, orbcomm will have a webcast available in the Investor section of its website at www.

<unk> Orbcomm dot com.

I would now like to turn the call over to Alley, Bunia Orbcomms Vice President.

I've Investor Relations.

Please go ahead alley.

Good morning, and thank you for joining us today I'm joined by Marc Eisenberg, Orbcomms, Chief Executive Officer, and GE location for products Chief Financial Officer on today's call Mark will discuss how the company is affected in this current Clover 19 environment provide some highlights on the quarter and give an update on the business.

Yes.

He will then review the company's quarterly financial results and outlook. Following our prepared remarks, we will open the line for your questions.

Before we begin let me remind you that today's conference call include forward looking statements and that actual results may differ from the expectations reflect.

Hi, good in these statements.

We encourage you to review our press release and FCC filings for a full discussion of risks and uncertainties that pertain to these statements.

Or from assumes no duty to update forward looking statements. Furthermore, the financial information, we will discuss include non-GAAP financial measures.

Reconciliation of these non-GAAP measures to GAAP measures is included in our press release.

At this point I'll turn the call over to Marc Eisenberg.

Thanks, and good morning, everyone.

Hi region, we hope you and your families are healthy safe and secure during this challenging time in our thoughts go out to those impacted by provolone cheese.

Earlier. This morning, we issued a press release announcing our financial results.

This call.

We also support a larger share the world's food distribution.

Therefore, we continue should products supporting customers and execute on our technology Roadmaps.

That being said much. This work is being on remotely. We're certainly has its challenges. So we implemented a number of contingency plans to minimize disruption to global business operations.

Our highest priority is to service our customers while ensuring.

Our employees assays.

In an effort to hit the ground running this market is beginning to stabilize we keep our employees engaged we've implemented or early projects either really.

Revenue and adjusted EBITDA.

Total revenue for the first quarter was $66.2 million similar to the prior year.

Service and product margins improved in Q1 over the prior year reserve is increasing to 67.7% of 110 basis points and products increasing to 32.6 reserves of 300 basis points. These improvements loads with adjusted EBITDA 13.7 million.

Dollars.

Q1 was shaping up to the stronger product quarter for this market conditions worsens review as of March and lumber shipments pushed to the rose.

Yes.

We generated operating cash flow of 8.2 million in the quarter.

Looking at the macro environment. Many of our customers are also leads essential businesses equally critical roles in scaling the flow goes through this unprecedented.

However, looking across our entire base customers they fall into two cans.

Those who are extremely busy and those who have increased downtime.

Many of our customers have increasing demand for their services such as our refrigerated transportation customers, we're shipping booth pharmaceuticals, and medical supplies to ensure supermarkets drugstores and hospitals ourselves.

We're seeing stability in the maritime market, where customers leveraging vessels operating systems.

Tracking systems and issues management solutions, our minimally investors.

In other sounds starting with non.

Refrigerated transportation, depending on when they typically hall customers are seeing lower demand Julie decrease in freight flows and are slow to depends on I'd solutions.

Oil and gas is an extremely tough environments and about 3% of our business.

About 60% of order patterns revenues are made up of recurring service.

This revenue continues to be stable, where we typically see about 7% annual subscriber churn and our non trembling off significantly.

Foreign currency was a minor concern, leaving us to provide eliminating concessions for some international customers.

We're also focused on small companies in select industries, such as trucking in oil and gas, which has been struggling for quite some time.

That being said recurring service revenues. After you just $1 million or the end of the MMORPG contracts are trying to be roughly flat to last year showing the stability in our model.

The average 40% of our business in hardware sales is much more difficult to predict.

Many of our OEM customers, which represents approximately 15% of hardware business.

I would temporarily halted production furloughed employees, which in turn delayed shipments of our products.

We expect most of these factories to reopen in the quarter.

We are unsure when we will resume supplying products, creating uncertainty for hardware sales.

Regarding new business. The Kogas 19 pandemic is making it difficult for sale is travel on site to meet with customers as well as our solution delivery teams to support new installations, and providing training thus pushing many new opportunities in the rights.

Overall in Q2 harbors trending roughly about two thirds of our recent run rates.

Keep in mind, a majority of our gross profit comes into service with margins in the high Sixtys as opposed to hardware with margins at about 30%.

Differently over 75% of our gross profit comes from service that is extremely stable.

It is difficult to determine the extensive duration of this rapidly evolving crisis, we easily showing that our company's liquidity position remains strong.

To ensure that we ride out the storms hit the ground running as the market recovers in Q1, we drew down $15 million from our revolving credit agreement.

And in April we received a seven the half million dollar loan through the use paycheck protection program.

We are now evaluating whether return this loan as the guidelines continued to evolve.

To date.

We are not reduced our us employee counts, we've made multiple cost in non payroll expenses, such as travel and marketing and reduce future production as the company turns a great deal of focus to managing cash.

Let's move onto our business updates starting with our container programs.

Continuing to sort or initial projects with the carrier container group for one of the Premier Global shipping lung companies, our largest deployment to days.

Q1, we shipped over 19000 devices, bringing the total shifted days to nearly 40000 devices or roughly about one third of the entire hundred 50000 units lease.

We anticipate shipping approximately 8000 devices in Q2, and approximately 20000 devices in the second half of the year.

To be clear, we originally forecasted 80000 devices. This year and are currently looking at more light.

Most likely extended another couple of quarters.

Partially offsetting this reduction is an additional ordered for 7000 devices for a second shipping line customer, which is expected to start shipping in midyear.

Despite current challenges we've made strides on some new opportunities, including a recent win with caravan logistics, a leading truckload carrier in Canada for 750, dry van trailers utilizing our solar power.

Part of asset tracking and monitoring solutions.

We're continuing to make progress on our plan to integrate the web platforms from our 13 acquisitions.

All in cargo customers are now supporters on your comp platform with other market segments expected to go live in various stages during the year.

The data.

More sophisticated solutions in the Fiveg Io TV ecosystem.

Our global ERP implementations, just about managed as the last remaining acquisition schedules and transition in early Q3.

Once completed 100% Orbcomms revenues will flow through one ERP system, enabling significant efficiencies simplifies billing and improved inventory management.

We're continuing to focus on the live.

Patients as a key driver just growth in Q2 were planning to launching new products that leverages orbcomm strength in satellite.

Empty integrated with our Investor Telematics solutions, creating market, leading products really dual mode offering.

Our satellite is an accessory offer incumbency satellite loaded with antenna and a dual mode connectivity to almost every word common telematics device as well as most other devices on the market.

His product.

At this price is about a half when customers currently paid for similar products.

This means dual mode can activity a significant competitive advantage for work.

As well as an easy cost effective option for customers.

Simple plug and play connection.

We see significant as demand for this product and then secondly share dual mode products to increase.

Wrapping up we are pleased with our results in the first quarter. Despite a tough environments, we've seamlessly transitioned our employees to working remotely with minimal interruption.

We continue to manage the business with fiscal discipline will be strong balance sheets. We are confident we will emerge from this environment as a stronger more efficient company, whether integration of 13 acquisitions behind us.

With that said I'll turn the call over disease take you through the financials.

Thank you Mark and good morning, everyone I.

I think we can all agree that the business landscape has changed significantly over the last two months.

Currently in many of our products and solutions are crucial deemed essential supporting the supply chain during the cobot 19 pandemic.

We are pleased our financial performance in Q1 came in as expected.

For Q2 with caution considering the business disruption around the world.

We continue to make progress on many key initiatives focused on executing our cost reduction plan and conserving cash where these uncertain times.

Let's start with the company's first quarter financial results.

Total revenue in Q1 was $66.2 million.

Similar to the prior year inline with our outlook cited last quarter.

You want service revenues were $40.5 million up 3.9% compared to prior year period.

Recurring service revenues were $39.9 million.

I was in the quarter end up 6.2% over the prior year.

Revenue was primarily driven by new subscriber additions and recognizing $1.9 million accelerate the Chris.

Service revenues assume.

Okay.

Partially offsetting the revenue decline were increases in container programs, which benefited from the 19000 devices shipped in support throughout container project with carrier.

Turning to gross profit margin.

The margin, 54.1% in the first quarter returned 70 basis point improvement over the last year.

By growth in both product and service gross margin.

Got it margin in Q1 grew 200 basis points to 32.6% compared to the prior year period.

Improvements, primarily driven by lower warranty expenses, specifically with our I'd product line has the actual warranty expense has been trending lower their estimated warranty accruals and also by lower manufacturing costs.

Gross margin in Q1 was 67.7%.

Sure and 10 basis point improvement over the prior year period, driven primarily by incremental service revenues and lower indirect costs.

Looking at operating expenses the company occurred.

$37 million in Q1 compared to 34 million the same period last year.

Keep in mind Q1 of 2018 included $2 million favorable net benefit associated with the and think acquisition.

Excluding the benefit from last year operating expenses in Q1 increased $1 million year over year.

Primarily by higher SNA I agree thousand dollars.

Depreciation and amortization expense of $700000.

Well, that's cheniere was at $500000 there were $1.9 million a bad debt expense the receivables in Q1 2020 compared to the prior year period.

Largely relates disruptions caused by the Kroger 19 pandemic.

Offsetting these market driven increases nesting expenses for decreases in employee compensation of $1 million.

Actually from prior year head count reductions and from lower professional fees of $400000.

As we move forward in the year, you'll continue to focus on our 2020 cost reduction plan, while recognizing the full year benefits from previously implemented cost savings initiatives.

Adjusted EBITDA in Q1 was $13.7 million near the midpoint of our outlook with margin at 20.7%.

Keep in mind, there were significant accounting adjustments in both directions in Q1, 2020, resulting in no material net benefit compared to $2 million favorable net benefit recognized in Q1 2019.

Excluding these adjustments adjusted EBIT in Q1 increased $600000 over the prior year.

Thanks for the balance sheet cash flows.

The company ended Q1, 2020 with $70.1 million of cash and cash equivalents.

An increase of nearly $16 million from the end of Q4 2019.

The majority to increase came from trailing down $15 million from our revolving credit facility. As we felt was prudent to strengthen our cash reserves and our liquidity during the pandemic should business disruptions continue for an extended period.

In addition in Q1 2020, we repurchased over 800000 shares of common stock for total cost of approximately $2.5 million.

Considering the current environment and our focus on preserving cash we put our share repurchase grow them on hold for the foreseeable future.

In Q1 cash from operations was $8.2 million Capex was $4.8 million, resulting in $3.4 million of free cash flow before financing activities.

Let's move onto our outlook.

Slightly is uncertain times, we do have some visibility into Q2 based on orders received in those currently being worked on.

As Mark mentioned earlier, there's uncertainty surrounding product sales in the second quarter has some Oems have temporally suspended production lines and due to reduced onsite supports simply to delay deployments.

Looking at service revenues, we completed 18 key contract anticipate continue fluctuations in foreign exchange rates.

Both of which was slightly impacts the second quarter.

As a results we anticipate recurring service revenue to be flat to down 3% over the prior year period.

We believe toll revenues in second quarter to be $55 million on the low end.

$60 million on the high end, depending on how market conditions evolve.

We anticipate adjusted EBITDA margin in second quarter to be approximately 19%.

You extend certainties rounding level business disruption caused by the club in 19 across the multiple markets Orbcomm serves.

Where withdrawing our previously announced full year 2020 outlook and expect to drive better visibility on our Q2 earnings call.

In closing we are pleased underperformance in Q1 came in line with expectations, despite business disruptions, causing revenues be similar to prior year, we continue to improve on our service and product margins.

The second quarter will be challenging for many of us, but we have taken necessary steps to enhance our operations and strengthen our liquidity position. So you can emerge in this environment fully integrated in stronger company.

This concludes our much of the call ill now take your questions.

Thank you.

We will now begin the question and answer session.

You asked the question you May Press Star then one on your question Sam.

Thank you are using a speakerphone. Please pick up your handset before passing the key antibody draw. Your question. Please press Star then Q.

We'll go past Cabelas at this time somewhere our roster.

Our first question today will come from Rick Prentiss Raymond James. Please go ahead.

Thanks, Good morning, guys and hope you in your families. The employees are saving oil as well.

Thanks.

Thanks.

Couple of questions, obviously, very uncertain times, but focusing on the recurring service revenue.

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You mentioned Mark I think that you haven't really seen any will change in the 7% annual churn rate.

Versus deteriorate and.

How about any effect on our foods are people using it less how much of the revenues are kind of monthly recurring versus usage charges.

And does it vary by segment.

Yes, Rick I think you're I think you're.

You are kind of hitting to the heart of is there.

We're going to add subscribers. This quarter you know there's no doubt about it.

But we are focused on first and foremost some foreign exchange.

And don't get me wrong, most of what we sell is priced in dollars.

In places like Brazil, when the.

Really has gotten weaker by about 30% in some cases, you're charging your customer more than they're charging you know your reseller more than they're charging their there so.

You know, there's one hundreds of thousands of dollars that that's going to affect us, but not millions of dollars. So that is the first thing that you're seeing him in the second switches.

Pretty clear in our financials is the other thing that you're you're monitoring is you know your ability to collection, we just came out as a.

You know, we just came out of the transportation recession. It was improving early in Q1 was just beginning to make return and then some of these companies in the trucking side that we already struggling.

You know kind of walk into this environment. So we're focused on them as well but.

If you kind of look at the Q1 versus Q2, you know, we're predicting it down a little bit assuming 50% of it you know is the end of the 18th humorous deal in the other 50% or just fees, even $80 million in these dogs and cats, but.

That being said.

We are.

Service revenues will be within 97% last year, but maybe even his eyes on 3%.

Thanks, and have you experience any bad debt collection issues yet.

With that you might say they deem it but what are your thoughts first reserve and what might happen on the bad debt side.

Yes.

We were actually seeing greater collections through the first month the quarter so nothing.

Nothing significant on the bad debt side, we did you cleanup some stuff in Q1, some some stuff from the transportation market slowdown last year. Once we were a bit aggressive and just cleaning up that risk accounts, but I don't see upcoming anywhere near that in Q2.

Okay.

And then you mentioned some of the factories that are temporary shut their lives I know you guys are doing some southern Mexico.

Okay shall is Mexico duly from its lockdown in so assume you mentioned you guys are considered essential business not just because its silica look as a two distribution, but is it Mexico, where some of the factory issues have been felt in what is your visibility on them returning to open.

So our factory in Mexico is open because we will yield and essentially essential business and I believe.

We could be the only lines open in this massive sanmina factory.

We are open.

Continuing to produce goods.

We've taken so far this year I know there's a different.

To answer than what you asked but we've taken about.

$8 million it costs over the next few quarters and pull that out of our production plan. So we are going to produce less you've answered to make sure that we focus on cash separate from.

Our factory in San Lena.

Mexico, you're also focused on every factory that builds a component.

That's used in your in your devices and there's products coming out of China, which is actually pretty stable right now.

You know, there's there's stuff coming from all over the world and so far.

We believe we'll be able to.

Make our entire Q2 build so even where we struggled with a component we were able to find another component I mean, it's pretty pretty wild we got a.

You know 80 letter the other day from Jim Aldo you know they just can't slice imports because their factory in the Philippines is closed down so.

You know, but what we do have another supplier for that and we were able to.

Fine that product from somewhere else, but it is something that every every company that manufacturers.

In the World is focused on right now.

Great appreciate no again stay safe and well we'll come out of this.

Thanks.

Our next question Dan will come from Mike Walkley Canaccord Genuity. Please go ahead.

Great. Thanks for taking my question then also hope everybody on the call stays well.

The maybe I'll jump in the Hugh just.

Obviously, some higher bad debt expense in Q1, but theres cost savings.

Ongoing how should we think about.

Overall opex levels into June and going forward can you kind of helped us with a run rate of the business.

Yes no.

Yes, Opex was high with with some of the cleanup we live in Q1, I expect SDMA and in Q2 to be about $17.5 million, which is a pretty big drop from the 19.

0.6, 0.7, we have in Q1.

And product development of $3.8 million should be pretty consistent.

Going forward for the rest of 2020.

So that's that's a Q2 plan and I wouldn't expect estimated to grow much beyond that and the rain quarters further for the 2020 year.

Okay, Great Thats helpful.

Then mark just just on kind of I know the visibility, it's challenging out there, but it and talking with some of your larger customers any comments may be on.

How the year plays out I know, you're pulling guidance, but any comments just on how they're maybe thinking about orders are these cancelled or just push to future period, just given logistics challenges to open up and then just with the difficult getting to your customers to install equipment you. How should we think about the impact to net ads on the shorter term.

That's implied in your guidance.

Yeah I think.

Hi, almost as a separate comment for.

All 4000 companies, because they're all experiencing something different right you're experiencing from our refrigerated guidances.

Gee, how we're struggling to install because we're so busy.

And then you marine guys.

You know out in the fishing fleets in the.

The buoys their business really hasn't changed at all.

And every trucking company has a completely different story, depending on what you install the commodities guys are off a little bit you know the guys that ship on rail.

Sure a lot of our guys shift auto parts when their business is struggling and then.

Some of the ownership and consumer goods.

Their businesses through the roof. There is a separate story, which is what makes it harder to get high because.

Well, it's literally in a one plus one plus one plus one if you going until you get 2000 unit to figure out what the.

And then it's evolving because you know if your.

Delivering auto parts, then you're not just sitting there you're moving you now bidding on other types of goods that you don't typically carry.

That affects other guys right. So.

It is just a wildly evolving scenario.