US satellite operator Orbcomm (NASDAQ:ORBC) has secured a US$25m revolver as the M2M specialist looks to preserve financial flexibility following a string of acquisitions in recent years.

It will help the acquisitive company offset a US$31.2m impairment charge it recorded in Q3 2017 – mirroring a US$10.7m satellite impairment charge in Q3 2016 – due mostly to three OG2 spacecraft suffering a loss of communications.

Orbcomm’s loss widened for the quarter, US$39.7m compared to US$14m for the year-ago period, largely due to the charge. It also noted higher operating and interest expenses, mostly to two acquisitions in 2017, and higher depreciation, amortisation and M&A-related integration costs. 

Though Orbcomm is a frequent buyer of companies, it is not likely to swallow another target in the near-term unless it finds a deal with incredible terms, a banker and an analyst said separately. Indeed, CEO Marc Eisenberg said on the Q3 earnings call that, for the next quarter or two, “you are not going to see it”, after an analyst had asked him about buys.

JPMorgan Chase Bank is serving as administrative and collateral agent for the new facility, which matures in December 2022.

A call left with Orbcomm was not returned. The company said it would use the revolver for working capital and general corporate purposes as part of its announcement.

Investors are generally reacting positively, as Orbcomm’s stock has inched up about 6% since the day before the announcement of the facility, trading this afternoon at US$10.62.

Organic investments possible

The operator could use the revolver to make organic investments, such as product enhancements and introductions and service improvements, the two sources noted, especially as part of its conversion strategy. Orbcomm aims to convert high-volume, low-margin equipment revenues into higher-margin service revenues.

Data show that the company strategy is bearing some fruit, as revenues for the product segment almost doubled in Q3 2017, to US$34.4m from US17.4m in the same period of 2016. Service revenues went up 22%, to US$35m.

Moreover, Orbcomm’s subscriber count in Q3 2017 grew by more than 70,000, marking the “best” quarterly number ever and taking the base to almost 1.9 million subscribers at the end of September 2017, a 12.5% increase over last year. The company sells devices to get subscribers for its telematic services, principally in transportation and maritime markets.

Despite these positive developments, margins are being “weighed down” by deployments, including a couple of “significant” ones in transportation as well as one of the “largest” fleet deployments in oil and gas being done by the recently acquired telematics solutions provider inthinc, Eisenberg said. Service margins were around 61%, though the CEO said “normalised levels” in the upper 60s or 70s should return in 2018, as the company seeks to keep costs under tighter control.

Indeed, Orbcomm’s selling, general and administrative expenses year-to-date went up almost 13%, to US$39.3m.

Meanwhile, on the OG2 front, Orbcomm is making efforts to recover the three troubled spacecraft. The company said it has not found a systemic flaw in the OG2 constellation and is not experiencing issues on the other 14 spacecraft in the constellation.

In late summer the company established an investigation team that an included an independent consultant as well as Orbcomm engineers and OG2 contractors to determine the root cause and corrective measures. US-based Sierra Nevada was the lead contractor for the OG2 system, and Argon ST, a Boeing (NYSE:BA) subsidiary, was also involved in production. In 2013, UK-based MSS operator Inmarsat forged a strategic alliance to use Orbcomm’s technology.

“Our team was able to narrow down these anomalies to the two most likely causes and have developed comprehensive operational procedures and are implementing software enhancements to mitigate these issues from occurring,” Eisenberg said.

‘Hole-filling’ strategy

As investors consider this situation, Orbcomm is likely to continue making buys in the IoT category in part because it is still fragmented, the banker said.

(Source: Orbcomm/Boston Consulting)

The company could branch out into new subsectors as part of its “hole-filling” strategy, the person said, suggesting the industrial area.

Echoing the banker, the analyst said the company is likely to branch into something that complements its transportation stronghold, such as logistics.

Indeed, Eisenberg said as much, noting that the company’s reaper business improved after it added the related dry van category. Moreover, inthinc added fleet vehicles and Blue Tree, which Orbcomm acquired in October for an undisclosed sum, added the in-cab service to the company’s cargo business.

“So we fill those holes in the markets,” Eisenberg said. “And right now, at least on the transportation side, as we check off every asset that our customers are looking us to support, we are nearly there.”

The company is also seeking to keep pace with its peers in satellite services in terms of acquisitions, the banker said, noting that private equity-owned Marlink, Rignet (NASDAQ:RNET) and private equity-owned Speedcast International (ASX:SDA) are hungry for acquisitions. Each company made multiple deals in 2017.

In IoT, other peers include GPS tracking and telematics specialist Omnitracs, remote-monitoring-solutions specialist Telular and GPS solutions specialist Trimble (NASDAQ:TRMB). In connectivity, Inmarsat and US-based Iridium (NASDAQ:IRDM) are peers.

In addition to the revolver, Orbcomm has US$37.4m in cash on its balance sheet, up from US$25m at the end of 2016, and US$34.5m in cash “held for acquisitions”. The company has US$250m of total debt outstanding under its 8.0% senior secured notes due 2024.