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ORBCOMM Announces Third Quarter 2020 Results

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Total Revenue, Adjusted EBITDA, and Earnings Per Share Above Q2 and Consensus
Record Cash Flow from Operations of $18.7 Million, Up $8.8 Million Over Prior Year
Company Enhances Satellite IoT Strategy with Inmarsat Partnership Extension

ROCHELLE PARK, N.J., Oct. 28, 2020 (GLOBE NEWSWIRE) -- ORBCOMM Inc. (NASDAQ: ORBC), a global provider of Internet of Things (IoT) solutions, today announced financial results for the third quarter ended September 30, 2020.

The following financial highlights are in thousands of dollars and unaudited.

Three Months Ended

Nine Months Ended

September 30,

September 30,

2020

2019

2020

2019

Recurring Service Revenues

$

36,393

$

39,161

$

113,252

$

115,196

Other Service Revenues

3,345

1,389

5,439

4,099

Total Service Revenues

39,738

40,550

118,691

119,295

Product Sales

22,004

28,643

65,962

83,036

Total Revenues

61,742

69,193

184,653

202,331

Net Loss Attributable to ORBCOMM Inc. Common Stockholders

(5,525

)

(4,025

)

(19,170

)

(15,934

)

Basic EPS

(0.07

)

(0.05

)

(0.25

)

(0.20

)

EBITDA (1)

12,883

15,128

34,985

39,872

Adjusted EBITDA (1)

$

14,324

$

16,939

$

39,945

$

46,242

(1) Non-GAAP financial measure. See “Non-GAAP Financial Measures” for a reconciliation of GAAP to Non-GAAP financial measures included with the financial tables at the end of this release.

“We’re pleased that our third quarter results for revenue and Adjusted EBITDA exceeded expectations despite a difficult macro environment,” said Marc Eisenberg, ORBCOMM’s Chief Executive Officer. “Our Company’s integration plan, which has delivered enhanced efficiencies and greater scale, led to third quarter Adjusted EBITDA margin of 23.2% and a record $18.7 million in cash flow from operations, an $8.8 million increase over the prior year. We’re seeing the convergence of our investments in innovation positioning ORBCOMM to further expand its customer base and gain incremental market share. I’m excited about the next phase of ORBCOMM’s evolution, which builds on the integration framework in place, leverages key strategic partnerships and sets the stage to achieve long-term organic revenue and Adjusted EBITDA growth.”

Financial Results

Revenues

Total Revenues for the third quarter of 2020 were $61.7 million compared to $56.7 million in the second quarter this year.

Service Revenues increased to $39.7 million in the third quarter of 2020 compared to $38.4 million in the prior quarter this year. Recurring Service Revenues were $36.4 million in the third quarter, a $0.6 million decline from the second quarter as certain customers in the oil and gas and heavy equipment markets limited usage of our services in response to the ongoing COVID-19 pandemic. Other Service Revenues were $3.3 million in the third quarter, an increase of $2 million over the prior year period largely driven by one-time software license revenues. As of September 30, 2020, total billable subscriber communicators were about 2.17 million as a result of adding approximately 40,000 net subscribers in the quarter, and deactivating 90,000 subscribers, which were predominantly not generating revenue but incurring costs, as part of the Company’s platform integration efforts.

Product Sales were $22 million in the third quarter of 2020 compared to $18.3 million in the second quarter, as several large, existing customers within the Company’s North American transportation business increased hardware deployments.

Gross Margin (1)

GAAP Service Gross Margin, inclusive of depreciation and amortization expense, was 56.9% in the third quarter of 2020 compared to 58.6% in the prior year period. Non-GAAP Service Gross Margin, excluding depreciation and amortization expense, was 67.4% in the third quarter of 2020 compared to 69% in the prior year period. The year-over-year decline was largely due to the acceleration of deferred revenues recognized in the prior year period associated with the expired AT&T contract.

GAAP Product Gross Margin, inclusive of depreciation and amortization expense, was 26.5% in the third quarter of 2020 compared to 28.9% in the prior year period. Non-GAAP Product Gross Margin, excluding depreciation and amortization expense, was 29% in the third quarter of 2020 compared to 31.4% in the same period last year. The year-over-year decline was primarily due to lower product revenue on approximately $2 million of fixed costs.

Operating Expenses

Operating Expenses for the third quarter of 2020 were $32.5 million compared to $34.7 million for the same period in 2019. The $2.2 million decrease was primarily driven by reductions in travel and entertainment, professional fees, labor costs, and marketing expenses, as well as lower product development costs.

Net Income (Loss) and Earnings Per Share

Net Loss Attributable to ORBCOMM Inc. Common Stockholders for the third quarter of 2020 was $5.5 million, or $0.07 per share, compared to a Net Loss of $4 million, or $0.05 per share in the third quarter of 2019.

EBITDA and Adjusted EBITDA
(1)

EBITDA for the third quarter of 2020 was $12.9 million compared to $15.1 million in the prior year period.

Adjusted EBITDA for the third quarter of 2020 was $14.3 million compared to $16.9 million in the prior year period but increased from the $11.9 million in the prior quarter. The year-over-year decline was primarily due to the flow-through impact from lower revenue, mainly product sales, partially offset by reduced operating expenses. The Company’s Adjusted EBITDA Margin was 23.2% in the third quarter of 2020, slightly down versus the prior year period but up sequentially as the Company recovers from the pandemic.

Balance Sheet and Cash Flow

As of September 30, 2020, Cash and Cash Equivalents totaled $76.3 million, an increase of $14 million in the quarter. Cash Flow from Operations totaled $18.7 million for the third quarter of 2020, an increase of about $9 million over the prior year period primarily driven by improvements in working capital. Capital Expenditures were $4.9 million in the third quarter of 2020. Subsequent to the third quarter, the Company repurchased $30 million of its senior secured notes and is actively exploring refinancing options.

Strategic Partnership Update

On October 27, 2020, the Company announced that its long-standing strategic partnership with Inmarsat, the world leader in global mobile satellite communications, has been enhanced and extended through at least 2035. The two companies will collaborate on joint product innovation and distribution of next-generation IoT satellite services, telematics devices and end-to-end solutions that offer the best-in-class combination of high bandwidth data packets with low-cost terminals. As part of this partnership, ORBCOMM and Inmarsat are developing a next-generation service called OGx, which is expected to become available in 2022 and features two new offerings to address future customer demand. The first is a higher data rate service designed to be nearly 40 times faster than the current IsatData Pro service, allowing for much larger messages and faster delivery times. The second offering is designed to be extremely power-efficient to support daily messages for multiple years on a satellite terminal utilizing a single AA battery, making it ideal for remote monitoring and environmental sensing applications. In addition to supporting the OGx service through its L-band constellation, Inmarsat will distribute ORBCOMM’s portfolio of OGx telematics devices globally through its extensive commercial and government sales channels. The Company looks forward to continuing to work with Inmarsat to deliver the industry’s best satellite offering with the broadest geographic coverage, the most regulatory authorizations and best value to users.

Outlook (2)

Many areas around the world are seeing a rise in COVID-19 cases, making it difficult to anticipate future business trends. In addition, customer demand for the Company’s subscription model offering affects hardware sales near-term but benefits service revenues long-term. Taking these factors into consideration, the Company expects fourth quarter Total Revenues to be between $60 million and $64 million and anticipates Adjusted EBITDA margin to be between 22.5% and 23.5%. The Company intends to provide first quarter 2021 guidance during the earnings conference call in late February.

(2) The Company’s outlook includes non-GAAP measures, such as Adjusted EBITDA and Adjusted EBITDA Margin, which exclude charges or credits not indicative of core operations, which may include but not be limited to stock-based compensation expense, acquisition-related and integration costs, impairment loss, and other significant items that currently cannot be predicted. The exact amount of these charges or credits are not currently determinable, but may be significant. Accordingly, the Company is unable to provide equivalent reconciliations from GAAP to non-GAAP for these financial measures.

Investment Community Conference Call

ORBCOMM will host a conference call and webcast for the investment community this morning at 8:30 AM ET. Senior management will review the results, discuss ORBCOMM’s business, and address questions. To access the call, U.S. participants should dial 1-844-735-3762 at least ten minutes prior to the start of the call. International participants should dial 1-412-317-5710. To hear a live web simulcast or to listen to the archived webcast following completion of the call, please visit the Company’s investor relations website at http://investors.orbcomm.com and then select “Events & Presentations” to access the link to the webcast. To listen to a replay of the conference call, please dial 1-877-344-7529 or 1-412-317-0088 for International callers using access code 10148847. The audio replay will be available from approximately 11:00 AM ET on October 28, 2020 through November 11, 2020.

About ORBCOMM Inc.

ORBCOMM (Nasdaq: ORBC) is a global leader and innovator in the industrial Internet of Things, providing solutions that connect businesses to their assets to deliver increased visibility and operational efficiency. The company offers a broad set of asset monitoring and control solutions, including seamless satellite and cellular connectivity, unique hardware and powerful applications, all backed by end-to-end customer support, from installation to deployment to customer care. ORBCOMM has a diverse customer base including premier OEMs, solutions customers and channel partners spanning transportation, supply chain, warehousing and inventory, heavy equipment, maritime, natural resources, and government. For more information, visit www.orbcomm.com.

Forward-Looking Statements

Certain statements discussed in this press release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to our plans, estimates, objectives and expectations for future events, as well as projections, business trends, and other statements that are not historical facts. Such forward-looking statements are subject to known and unknown risks and uncertainties, some of which are beyond our control, which may cause our actual results, performance or achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include but are not limited to: the impact of the novel coronavirus (“COVID-19”) pandemic; demand for and market acceptance of our products and services and our ability to successfully implement our business plan; our dependence on our subsidiary companies (Market Channel Affiliates (“MCAs”)) and third-party product and service developers and providers, distributors and resellers (Market Channel Partners (“MCPs”)) to develop, market and sell our products and services, especially in markets outside the United States; substantial losses we have incurred and may continue to incur; substantial competition in the telecommunications, Automatic Identification Service (“AIS”) data and industrial Internet of Things (“IoT”) industries; the inability to effect suitable investments, alliances and acquisitions or the inability to successfully integrate acquired businesses and systems; defects, errors or other insufficiencies in our products or services; failure to meet minimum service level commitments to certain of our customers; our dependence on significant customers for a substantial portion of our revenues, including key customers such as JB Hunt Transport Services, Inc., Caterpillar Inc., Komatsu Ltd., Carrier Corporation and Satlink S.L.; our ability to expand our business outside the United States and risks related to the economic, political and other conditions in foreign countries in which we do business; fluctuations in foreign currency exchange rates; unanticipated domestic or foreign tax or fee liabilities; the possibility we will be required to collect certain taxes in jurisdictions where we have not historically done so; economic, political and other conditions; extreme events such as man-made or natural disasters, earthquakes, severe weather or other climate change-related events; our dependence on a limited number of manufacturers for many of our products and services; interruptions, discontinuations, slowdown or loss of the supply of subscriber communicators from our vendor Sanmina Corporation; legal proceedings; our reliance on intellectual property; increased regulatory restrictions and oversight; lack of in-orbit or other insurance for our ORBCOMM Generation 1 or ORBCOMM Generation 2 satellites; our reliance on third-party wireless network service providers to deliver existing and developing services in certain areas of our business; significant interruptions, discontinuation or loss of services provided by Inmarsat plc; failure to maintain proper and effective internal controls; inaccurate estimates in accounting or incorrect financial assumptions; significant operating risks related to our satellites due to various types of potential anomalies and potential impacts of space debris or other spacecrafts; the failure of our systems or reductions in levels of service due to technological malfunctions or deficiencies or other events outside of our control; difficulty upgrading or replacing aging hardware and software we use in operating our gateway earth stations and our customers’ subscriber communicators; technical or other difficulties with our gateway earth stations; security risks related to our networks, data processing systems and software systems and those of our third-party service providers; liabilities or additional costs as a result of laws, governmental regulations and evolving views of personal privacy rights; failure of our information technology systems; cybersecurity risks; the level of our indebtedness and the terms of our 8.0% senior secured note indenture and our revolving credit agreement, under which we may borrow up to $25.0 million, that could restrict our business activities or our ability to execute our strategic objectives or adversely affect our financial performance; and the other risks described in our filings with the Securities and Exchange Commission (“SEC”). For more detail on these and other risks, please see our Annual Report on Form 10-K for the year ended December 31, 2019 (“Annual Report”), other documents we file with the SEC. We undertake no obligation to publicly revise any forward-looking statements or cautionary factors, except as required by law.

Contacts

Investor Inquiries:

Media Inquiries:

Aly Bonilla

Michelle Ferris

Vice President, Investor Relations

Senior Director, Corporate Communications

ORBCOMM Inc.

ORBCOMM Inc.

703-433-6360

703-433-6516

bonilla.aly@orbcomm.com

ferris.michelle@orbcomm.com


ORBCOMM Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2020

2019

2020

2019

Revenues:

Service revenues

$

39,738

$

40,550

$

118,691

$

119,295

Product sales

22,004

28,643

65,962

83,036

Total revenues

61,742

69,193

184,653

202,331

Cost of revenues, exclusive of depreciation and amortization shown below:

Cost of services

12,968

12,568

38,608

39,123

Cost of product sales

15,629

19,640

46,121

58,275

Operating expenses:

Selling, general and administrative

16,417

18,211

53,621

52,842

Product development

3,308

3,686

9,912

11,385

Depreciation and amortization

12,654

12,794

38,427

37,998

Acquisition-related and integration costs

134

4

336

693

Income (loss) from operations

632

2,290

(2,372

)

2,015

Other income (expense):

Interest income

260

444

941

1,408

Other (expense) income

(421

)

188

(921

)

130

Interest expense

(5,225

)

(5,287

)

(15,881

)

(15,850

)

Total other expense

(5,386

)

(4,655

)

(15,861

)

(14,312

)

Loss before income taxes

(4,754

)

(2,365

)

(18,233

)

(12,297

)

Income tax expense

789

1,504

788

3,354

Net loss

(5,543

)

(3,869

)

(19,021

)

(15,651

)

Less: Net (loss) income attributable to noncontrolling interests

(18

)

144

149

271

Net loss attributable to ORBCOMM Inc.

$

(5,525

)

$

(4,013

)

$

(19,170

)

$

(15,922

)

Net loss attributable to ORBCOMM Inc.
common stockholders

$

(5,525

)

$

(4,025

)

$

(19,170

)

$

(15,934

)

Per share information-basic:

Net loss attributable to ORBCOMM Inc.
common stockholders

$

(0.07

)

$

(0.05

)

$

(0.25

)

$

(0.20

)

Per share information-diluted:

Net loss attributable to ORBCOMM Inc.
common stockholders

$

(0.07

)

$

(0.05

)

$

(0.25

)

$

(0.20

)

Weighted average common shares outstanding:

Basic

77,962

79,695

78,115

79,591

Diluted

77,962

79,695

78,115

79,591

ORBCOMM Inc.
Condensed Consolidated Balance Sheets
(In thousands, except par value and share data)

September 30,
2020

December 31,

(Unaudited)

2019

ASSETS

Current assets:

Cash and cash equivalents

$

76,346

$

54,258

Accounts receivable, net of allowances for doubtful accounts of $7,767 and $4,480, respectively

53,928

60,595

Inventories

34,239

39,881

Prepaid expenses and other current assets

15,773

18,003

Total current assets

180,286

172,737

Satellite network and other equipment, net

132,762

145,553

Goodwill

166,129

166,129

Intangible assets, net

63,728

73,280

Other assets

20,252

23,149

Deferred income taxes

145

132

Total assets

$

563,302

$

580,980

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable

$

13,769

$

16,722

Accrued liabilities

41,659

36,951

Current portion of deferred revenue

6,188

3,865

Total current liabilities

61,616

57,538

Note payable – related party

1,332

1,275

Notes payable, net of unamortized deferred issuance costs

247,265

246,683

Deferred revenue, net of current portion

3,119

6,771

Deferred tax liabilities

13,726

14,894

Other liabilities

14,015

16,303

Total liabilities

341,073

343,464

Commitments and contingencies

Equity:

ORBCOMM Inc. stockholders’ equity

Series A Convertible Preferred Stock, par value $0.001; 1,000,000 shares authorized; 40,624 shares issued and outstanding at September 30, 2020 and December 31, 2019

406

406

Common stock, par value $0.001; 250,000,000 shares authorized; 77,972,828 and 78,062,451 shares issued at September 30, 2020 and December 31, 2019, respectively

78

78

Additional paid-in capital

450,403

447,681

Accumulated other comprehensive loss

(5

)

(1,013

)

Accumulated deficit

(230,112

)

(210,942

)

Total ORBCOMM Inc. stockholders’ equity

220,770

236,210

Noncontrolling interests

1,459

1,306

Total equity

222,229

237,516

Total liabilities and equity

$

563,302

$

580,980

ORBCOMM Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

Nine Months Ended September 30,

2020

2019

Cash flows from operating activities:

Net loss

$

(19,021

)

$

(15,651

)

Adjustments to reconcile net loss to net cash provided by operating activities:

Change in allowance for doubtful accounts

4,386

1,766

Change in the fair value of acquisition-related contingent consideration

(2,063

)

Amortization and write-off of deferred financing fees

582

582

Depreciation and amortization

38,427

37,998

Stock-based compensation

4,475

5,406

Foreign exchange loss (gain)

835

(194

)

Deferred income taxes

(1,194

)

(1,097

)

Other

1,665

1,971

Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable

2,591

(5,972

)

Inventories

5,703

(3,973

)

Prepaid expenses and other assets

3,095

(3,338

)

Accounts payable and accrued liabilities

1,344

6,960

Deferred revenue

(1,328

)

(348

)

Other liabilities

(2,123

)

(1,246

)

Net cash provided by operating activities

39,437

20,801

Cash flows from investing activities:

Capital expenditures

(14,710

)

(16,234

)

Capital expenditures associated with the subscription model

(894

)

Net cash used in investing activities

(15,604

)

(16,234

)

Cash flows from financing activities:

Purchases of common stock under share repurchase program

(2,527

)

(7,875

)

Payments under revolving credit facility

(15,000

)

Proceeds under revolving credit facility

15,000

Payments under the Paycheck Protection Program

(7,588

)

Proceeds under the Paycheck Protection Program

7,588

Proceeds from issuance of common stock under employee stock purchase plan

430

604

Net cash used in financing activities

(2,097

)

(7,271

)

Effect of exchange rate changes on cash and cash equivalents

352

(158

)

Net increase in cash and cash equivalents

22,088

(2,862

)

Beginning of period

54,258

53,766

End of period

$

76,346

$

50,904

Supplemental disclosures of cash flow information:

Cash paid for:

Interest

$

10,136

$

10,000

Income taxes

$

3,826

$

2,439

Non-GAAP Financial Measures

The following table reconciles Net Loss Attributable to ORBCOMM Inc. to EBITDA and Adjusted EBITDA for the periods shown:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands and unaudited)

2020

2019

2020

2019

Adjustments to EBITDA

Net loss attributable to ORBCOMM Inc.

$

(5,525

)

$

(4,013

)

$

(19,170

)

$

(15,922

)

Income tax expense

789

1,504

788

3,354

Interest income

(260

)

(444

)

(941

)

(1,408

)

Interest expense

5,225

5,287

15,881

15,850

Depreciation and amortization

12,654

12,794

38,427

37,998

EBITDA

$

12,883

$

15,128

$

34,985

$

39,872

Adjustments to Adjusted EBITDA

Stock-based compensation

1,325

1,663

4,475

5,406

Noncontrolling interests

(18

)

144

149

271

Acquisition-related and integration costs

134

4

336

693

Adjusted EBITDA

$

14,324

$

16,939

$

39,945

$

46,242

The following tables reconcile GAAP Service Gross Margin to Non-GAAP Service Gross Margin and GAAP Product Gross Margin to Non-GAAP Product Gross Margin for the periods shown:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands, except margin data and unaudited)

2020

2019

2020

2019

Service revenue

$

39,738

$

40,550

$

118,691

$

119,295

Minus – Cost of services, including depreciation and amortization expense

17,146

16,804

51,253

51,858

GAAP Service gross profit

$

22,592

$

23,746

$

67,438

$

67,437

Plus – Depreciation and amortization expense

4,178

4,236

12,645

12,735

Non-GAAP Service gross profit

$

26,770

$

27,982

$

80,083

$

80,172

GAAP Service gross margin

56.9

%

58.6

%

56.8

%

56.5

%

Non-GAAP Service gross margin

67.4

%

69.0

%

67.5

%

67.2

%


Three Months Ended

Nine Months Ended

September 30,

September 30,

(In thousands, except margin data and unaudited)

2020

2019

2020

2019

Product sales

$

22,004

$

28,643

$

65,962

$

83,036

Minus – Cost of product, including depreciation and amortization expense

16,163

20,352

47,685

60,385

GAAP Product gross profit

$

5,841

$

8,291

$

18,277

$

22,651

Plus – Depreciation and amortization expense

534

712

1,564

2,110

Non-GAAP Product gross profit

$

6,375

$

9,003

$

19,841

$

24,761

GAAP Product gross margin

26.5

%

28.9

%

27.7

%

27.3

%

Non-GAAP Product gross margin

29.0

%

31.4

%

30.1

%

29.8

%

ORBCOMM publicly reports its financial information in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). To facilitate external analysis of the Company’s operating performance, ORBCOMM also presents financial information that are considered “non-GAAP financial measures” under Regulation G and related reporting requirements promulgated by the U.S. Securities and Exchange Commission. Non-GAAP measures should be considered in addition to, and not as a substitute for, or superior to, Net Income or other measures of financial performance prepared in accordance with GAAP and may be different than those presented by other companies. EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin are not performance measures calculated in accordance with GAAP and are therefore considered non-GAAP measures. Reconciliation tables are presented above.

The Company’s outlook includes non-GAAP measures, such as Adjusted EBITDA Margin, which exclude charges or credits not indicative of core operations, which may include but not be limited to stock-based compensation expense, acquisition-related and integration costs, impairment loss, and other significant items that currently cannot be predicted. The exact amount of these charges or credits are not currently determinable, but may be significant. Accordingly, the Company is unable to provide equivalent reconciliations from GAAP to non-GAAP for these financial measures.

EBITDA is defined as earnings attributable to ORBCOMM Inc. before interest income (expense), provision for income taxes, depreciation and amortization, and loss on debt extinguishment. ORBCOMM believes EBITDA is useful to its management and investors in evaluating operating performance because it is one of the primary measures used to evaluate the economic productivity of the Company’s operations, including its ability to obtain and maintain its customers, its ability to operate its business effectively, the efficiency of its employees and the profitability associated with their performance. It also helps ORBCOMM’s management and investors to meaningfully evaluate and compare the results of the Company’s operations from period to period on a consistent basis by removing the impact of its financing transactions and the depreciation and amortization impact of capital investments from its operating results. In addition, ORBCOMM management uses EBITDA in presentations to its board of directors to enable it to have the same measurement of operating performance used by management and for planning purposes, including the preparation of the annual operating budget.

The Company also believes that Adjusted EBITDA, defined as EBITDA adjusted for stock-based compensation expense, noncontrolling interests, impairment loss, and acquisition-related and integration costs, is useful to investors to evaluate the Company’s core operating results and financial performance because it excludes items that are significant non-cash or non-recurring expenses reflected in the Condensed Consolidated Statements of Operations. Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by Total Revenues.

Non-GAAP Service Gross Margin is defined as Non-GAAP Service gross profit divided by Service Revenue. Non-GAAP Service gross profit is defined as Service Revenue, minus costs of services (including depreciation and amortization expense) plus depreciation and amortization expense. Non-GAAP Product Gross Margin is defined as Non-GAAP Product gross profit divided by Product Sales. Non-GAAP Product gross profit is defined as Product Sales, minus cost of product (including depreciation and amortization expense) plus depreciation and amortization expense. The Company believes that Non-GAAP Service Gross Margin and Non-GAAP Product Gross Margin are useful to evaluate and compare the results of the Company’s operations from period to period on a consistent basis by removing the depreciation and amortization impact of capital investments from its operating results.