ORBCOMM Inc.
Q2 2013 Earnings Call Transcript

Published: 9 Aug 2013

[Operator:]

Good morning, ladies and gentlemen, and welcome to ORBCOMM's second quarter 2013 financial results conference call. (Operator Instructions) I would now like to turn the call over to Marc Eisenberg, ORBCOMM's Chief Executive Officer. Please go ahead, sir.

[Marc Eisenberg:]

Good morning, and thank you for joining us. I am Marc Eisenberg, ORBCOMM's Chief Executive Officer; and with me today is Robert Constantini, ORBCOMM's Chief Financial Officer. Before we begin, let me remind you that this conference call includes forward-looking statements and that actual results may differ from the expectations reflected in these forward-looking statements. We encourage you to review our press release and SEC filings for a full discussion of the risks and uncertainties that pertain to these statements. I want to remind you that ORBCOMM assumes no duty to update forward-looking statements. In addition, the financial information we will discuss includes non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures is included in our press release. It's been another busy quarter and we've got a lot to cover. So let's get started. Earlier this morning, we issued a press release announcing financial results for the second quarter ending June 30, 2013. On this call, I will summarize the financial results; give some detail on our second quarter business highlights; talk about the progress on OG2; update you on the recent acquisitions, which closed during the first week of April; and talk about some near-term opportunities. Robert will then take you through the detailed financials. The second quarter was stronger than we previously guided. We achieved $18.6 million in total revenues and $13.5 million in service revenues. In the second quarter our service revenues increased year-over-year to 8.9% and total revenues increased 13.7%. Net income for the second quarter was $1.7 million or $0.04 a share compared to $1.9 million or $0.04 a share in the same period last year. Adjusted EBITDA for the second quarter was $3.9 million, $100,000 lower than the same period last year. However, the quarter had two non-recurring costs, $216,000 in acquisition related expenses and an inventory write-down that Robert will discuss shortly. Our subscriber counts grew by 23,000 net subscriber communicators or subs, 200,000 of which came from the acquisition of GlobalTrak. Keep in mind that the majority of the MobileNet subs were already on our switch. We ended the quarter slightly surpassing the 800,000 mark. On the Q1 call, there was some question as to where the growth in our service revenue line was coming from. So for Q2, I took the liberty of breaking out some of the detail to allow for better clarity. In Q2 2012, we reported $12.4 million in service revenues, while in Q2 2013 we're reporting $13.5 million, which is an increase of $1.1 million or approximately 9%. MobileNet and GlobalTrak produced over $510,000 in service revenues. A portion of these revenues, approximately $60,000 were already being sold by ORBCOMM at wholesale rate, the year before. So their net contribution was $450,000. A devaluation of the Japanese yen negatively impacted the comparison a $160,000 versus the prior year. When taking all this into consideration, ORBCOMM service revenues grew approximately $800,000 or 6.4%. To provide even a bit more detail $200,000 of this increase came from AIS, with approximately $600,000 being generated from the other components included in last year's business. While our growth is respectable, it's important to keep in mind that we are on the cusp of launching a superior constellation with dramatically better features versus our existing satellite constellation that is now 14 years old. As we drive towards that milestone, not only do we have that to look forward to, but we also have strong near-term opportunities from within our solutions business. When you couple these opportunities with the timing of our core satellite service ramping up as OG2 launches, you can understand why we are excited about our future. I will expand on this point in a few moments. Revenue from product sales were $5 million, up by 29% when compared to the same period last year. In addition, while the previously mentioned devaluation in the Japanese yen created a negative impact of $150,000, that was more than offset by growth in hardware demand from our solutions business, including the initiation of over $1 million deployment spanning from Q2 to Q3 from GlobalTrak in support of the U.S. Defense Logistics Agency or DLA. Looking forward, we expect hardware in Q3 2013 to be in the same range as Q2 2013. On the cost side, we are seeing a rise related to the opportunities associated with launching next generation service, the associated hardware and new products in our end-to-end businesses. We've added over 24 employees since the start of 2013, mostly in engineering, marketing, sales and operations, in preparation for the expected influx of new business activities relating to these opportunities. Over the past two years, we've done four acquisitions into vertical markets, in which we were underrepresented, knowing that these companies had great technology, but were lacking scale. This strategy is now taking hold. We've been investing in very targeted large scale new opportunities that span various vertical markets, geographies and channels across ORBCOMM. Several of these opportunities, we anticipate to announce in the near term, but are expected to have impact on our 2014 revenues and beyond. Today, however, you are predominantly only seeing the costs. Let's discuss some of these opportunities. While Doosan did a limited amount of business with us through its U.S. subsidiary, after months of detailed technical discussions, customization and developments, Doosan is expected to begin to deploy the MobileNet solutions starting in Q4, with a full global deployment expected by the end of 2014. While ORBCOMM has relationships with many OEMs, in this case, ORBCOMM is expected to deliver a full hardware solution, dual-mode service from ORBCOMM in our tier-one wireless partners, as well as our advance management portal that has benefits to the OEM, dealers and fleet owners as well. This results in a far different revenue model, where we're seeing more revenue at a quicker pace. This is a great example of how we're concentrating our resource around opportunities. MobileNet was initially acquired with a handful of employees. Now, over 15 of our 70 ORBCOMM technical resources from our solution side of the business have been added to the project to work alongside Doosan, to customize their application and create the industry-leading solution that they have been looking for. Doosan is a multibillion dollar heavy equipment OEM, one of the largest players in the heavy equipment industry, and we anticipate over time that they will be one of our largest customers. We anticipate distributing a press release shortly. MobileNet is also currently piloting with other OEMs and large fleets. We hope to have more news for you over the coming quarters. Our GlobalTrak team completed the shipment its state-of-the-art fuel monitoring system, which features unique fuel sensors and advanced tracking and monitoring technology. It is designed to prevent theft of mission-critical fuel transported for the U.S. Defense Logistics Agency and used by U.S. and NATO forces in Afghanistan. Systems have been operating since May, and installations are expected to be completed by the end of Q3. This program is valuated at over $4 million between hardware and the service over a two-year period, and could grow larger due to an option for the third year. We believe this solution can become a major deterrent to fuel theft in both military and commercial applications throughout the globe, and could significantly improve operational efficiency for fuel transporters and other key stakeholders. GlobalTrak second quarter exceeded their 2012 full year sales. And during the quarter, GlobalTrak received new orders for $1.3 million in product, yet to be shipped. At StarTrak, we added seven new transportation and distribution customers during the second quarter, increasing our already substantial list of over-the-road cold chain customers. These customers are Wisconsin Express Lines, Bill Davis Trucking, Kottke Trucking, Combined Transport, Elite Express, HB Distribution and John Christner Trucking. StarTrak's ReeferTrak solution was chosen to provide visibility and increased logistic support for their temperature control fleets. The ReeferTrak platform continues to be the preferred cold chain logistics application, providing customers with increased efficiency and proven return on investment for the transportation logistics industry. Last quarter, we announced that ORBCOMM's GT 1100 won the 2013 CTIA E-Tech Award for innovation in M2M. As you may recall, the GT 1100 is a ruggedized, easy to install, M2M asset tracking and monitoring device, that can be installed external to the asset. Its low one-inch high profile and small form factor, ideal for tracking and monitoring trailers, fitting seamlessly in between the indented spacing on intermodal containers, as well as tracking and monitoring other types of assets. The device is sensor-compatible and self-powered with solar recharging technology for low power consumption and long service life in the field, which can also work well for tracking and monitoring other remote unpowered assets, such as construction and mining equipment. The device includes a suite of supported sensors for monitoring key asset parameters, including cargo, fuel, engine-endorsed status. This product is expected to begin shipping in Q3, and we are working with over 20 separate companies in the transportation sector to power this product with potential upside in tens of thousands of units. In addition, the ORBCOMM GT 1200 will also soon be commercially available. The GT 1200 is a battery-based intermodal monitoring device, device to be installed inside the container with both cargo and door-sensing capabilities. This product is ideal for transportation customer, who needs logistics control over their assets that could be dispersed around the world. While we've been developing these products over the last year or two, we've recently received cellular carrier certification, begun to setup the production lines at our manufactures, kicked-up multiple pilots and now are in a contract phase with multiple large customers. In short, we believe these products will have a large impact in 2014 and we expect to ship in tens of thousands of units. As dual-mode devices, the GT 1100 and GT 1200 will leverage the current and future relationship that ORBCOMM has built with tier-one cellular carriers around the world. We anticipate that many of these carriers will market and distribute these devices in conjunction with ORBCOMM's suite of M2M vertical solutions. This will open entirely new distribution and marketing channels, dramatically expanding our reach. Service revenues from our Automatic Identification System for vessel tracking or AIS were over $700,000 in Q2, increasing 39% from the same period last year. During the quarter, we signed two new contracts and issued 70 licenses. ORBCOMM service currently provides access to vessel tracking information from well over a 100,000 unique vessels on a daily basis. As a reminder, when OG2 launches, ship detections will go from a couple times a day to near real-time visibility. With respect to OG2 and its launch, let's spend a few moments providing you with an update. The next SpaceX launch features an upgraded version of the Falcon 9 launch vehicle. The upgrades include higher performance engines, larger tanks and a fairing that protect satellites during the launch vehicle ascent. SpaceX has completed a comprehensive qualification program for these upgrades and plans to launch the Cassiope satellite on this first upgraded Falcon 9 on September 5, 2013. Although, there have been some delays for the Cassiope launch dates, we believe the timeline adjustments were prudent to ensure a successful launch. Additionally, there are two more launches scheduled before ours, thus adding to our confidence. We are currently scheduled for a Q4 launch. However, it is probable that it could occur early next year. On the spacecraft side, SNC is in the process of receiving Boeing payloads on a regular basis and ramping up their production effort. These fully reprogrammable payloads meet our requirements to have many times more receivers and operate at twice the speed as OG1, using a more efficient protocol, enabling the capacity per satellite to be in the millions of subscribers. On the OG2 hardware side of the business, we continue to make significant progress on modem development. The beta version modems will undergo full verification testing over the next several weeks, leading to an expected production release this fall. With the backwards capability of these OG2 modems, customers will be able to start immediate deployments, using the OG1 messaging services and will see immediate improvements in performance and coverage. Customers can start using OG2 services, when available, without having to replace or physically access the modem for seamless operation with our new satellite constellation. Finally, regarding ORBCOMM's acquisitions of StarTrak, LMS, GlobalTrak and MobileNet, we now have the expertise to deliver complete M2M solutions across many vertical markets, including multiple networks, a diverse range of hardware configurations and sensors, and a choice of web platforms, backed by a team of engineers that have experienced interfacing with most legacy and enterprise software systems. A great example of this can be seen in the recent Berg Insight 2013 Container Tracking and Security Report, which listed ORBCOMM as the largest vendor of intermodal tracking solutions containing satellite or cellular technology. With that, I'd like to turn the call over to Robert to take you through the financials.

[Robert Costantini:]

Thank you, Marc. The team at ORBCOMM had a busy second quarter, integrating the acquisitions and undertaking new opportunities, as you just heard from Marc, some of which impacts Q2 and future quarters, as we'll explain further. Overall, the second quarter of 2013 included 9% growth in service revenues for $13.5 million and 29% growth in product sales to $5 million. Total revenues increased to $18.6 million rather compared to $16.3 million during the same period of 2012, an increase of 14%. The company is reporting $1.7 million in net income or $0.04 per share for the second quarter of 2013 comparable to last year's second quarter. We're pleased to continue to show profitability in the business, including the acquisition-related transaction costs and cost to integrate the new acquisitions. We now have over a 188 employees, 13 of which came from the two most recent acquisitions, and this is up from a 164 at the beginning of the year. This additional cost driver will have an impact on our cost and expenses going forward. Adjusted EBITDA for the second quarter of 2013 was $3.9 million and includes $0.2 million in acquisition related costs. There were also a few offsetting items that netted out in the quarter to an immaterial amount. However, the company is incurring cost to execute a multiple large opportunity, the costs of which are leading revenues and had an effect on Q2 net income and adjusted EBITDA. We expect the revenues from these activities to materialize in 2014. The current Japanese yen exchange rate versus the U.S. dollar continues to effect comparisons of reported revenue and profitability on a constant currency basis, when compared to the same period last year. Revenues would have been higher by over $300,000 in the quarter and over $500,000 year-to-date. The yen exchange rate also lowered actual profitability in the second quarter of 2012 on a transactional basis by over $50,000. This hardware supply costs in Japan are denominated in U.S. dollars and are higher due to the weaker yen. Acquisition related costs was $0.2 million in the quarter, reflecting the GlobalTrak and MobileNet acquisition, and the amount is comparable to last year's second quarter, when we had similar cost for the LMS acquisition. Looking at the income statement in more detail. Service revenues for the second quarter of 2013 were up 9% year-over-year to $13.5 million, an increase of $1.1 million compared to the $12.4 million in the second quarter of 2012. Approximately $450,000 came from our two most recent acquisitions with the remainder of the growth from all service components of our business. StarTrak, AIS and ORBCOMM core services were all up, and would have been higher, but for the impact of the yen exchange rate compared to last year in the second quarter, lowering reported service revenues by over $156,000 in Q2 of 2013. Product sales were also higher during the second quarter of 2013, increasing 29% year-over-year to $5 million compared to $3.9 million in the second quarter of 2012. The year-over-year increase included a 17% increase of $0.4 million and organic product sales at StarTrak and LMS. In Q2 this year $1.8 million of product sales are from the recent acquisitions, compensating for lower product sales from Japan of $1.1 million in the quarter, including a negative exchange rate impact of a $150,000 on a constant currency basis. To recap, total revenues for the quarter ended June 30, 2013, were $18.6 million compared to $16.3 million during the same period of 2012, an increase of 14%. On the cost side, costs of product sales were $4.2 million in the second quarter, up from $2.6 million in the prior year, an increase of $1.6 million. Most of the increases from higher product sales' were in the second quarter, but also includes an inventory adjustment in this years second quarter of $0.4 million, as well as the impact of the weaker yen, increasing supply cost in Japan. These items lowered gross profit margins in the second quarter of 2013 to 17% from 34% in Q2, 2012. Going forward, we expect hardware gross profit margins to be in the 30% range as the inventory adjustment is nonrecurring and relates to a cleanup of the inventory balance. This includes inventory use for warranty, repair and other unusable inventory, much of which should not repeat as a result of LMS converting customers to StarTrak's hardware platform, consistent with our previously stated strategy to achieve scale and hardware by consolidating product offerings. Selling, general and administrative expenses and product development costs were $7.2 million for the second quarter of 2013 and $970,000 higher than the second quarter last year, mainly due to additional operating costs from the acquisitions, new initiatives, and costs in anticipation of the OG2 launch. As the company transitions from a pure wholesale business to a full end-to-end solutions provider, we are scaling our business and investing resources to multiple large opportunities, including adding over 24 employees mostly in engineering marketing, sales and operations. For the reasons just outlined, income from operations was $1.6 million or $767,000 lower for the second quarter of 2013 compared to $2.4 million in Q2 of 2012. Going forward for the remainder of 2013, the cost and expenses will continue to edge higher. I expect we'll see quarterly cost of service in the mid $5 million range, quarterly SG&A to range around the mid $6 million amount, and quarterly product development arranging around $600,000. Income before income taxes for the second quarter of 2013 was $2 million compared to $2.4 million for the second quarter of 2012. Net income was $1.7 million for the three months ended June 30, 2013 compared to $1.9 million for the same three months period in 2012. Earnings per share was $0.4 for the three month ended June 30, 2013, and $0.4 for the same period last year. EBITDA for the second quarter of 2013 was $3.3 million compared to $3.5 million in Q2 of 2012. Adjusted EBITDA for the second quarter of 2013 was $3.9 million compared to last years $4 million in the second quarter, lower by about $100,000. This reduced the adjusted EBITDA margin about 3.5% to 21.1% due to the effect of lower product sales gross margin, partially attributable to the inventory adjustment and the yen exchange rate effect discussed earlier. Looking at the balance sheet, cash and cash equivalents, restricted cash and marketable securities were $80.2 million as of June 30, 2013, decreasing $12.6 million from $92.8 million as of March 31, 2013, mainly due to the payments made related to the OG2 satellite program of $6.5 million, as well as cash used of $5.6 million to acquire the assets of MobileNet and GlobalTrak in April of this year. Cash from operating activity was $2.5 million for the quarter ended June 30, 2013. And total equities approximately $188.1 million in June 30, 2013. So wrapping up ORBCOMM's second quarter results included growth and revenues from subscribers, continued strong profitability in net income and adjusted EBITDA, the rise in cost related to activities to prepare the business for our next generation of satellites, the associated hardware and new products and services the company will introduce as it transitions from a pure wholesale business to a full end-to-end solutions provider. We have invested significant resources towards growing our business and have an exciting pipeline of opportunities that we hope to share with you shortly. With that we'll now be happy to take your questions.

[Operator:]

(Operator Instructions) Our first question is from the line of Chris Quilty with Raymond James & Associates.

[Chris Quilty:]

Marc, just a follow-up. Your discussion about the new products, the GT 1100 and 1200, just wanted to clarify, were those being designed with the new modem design that makes them more compatible for OG2?

[Marc Eisenberg:]

Yes, they are. So you've got these products that are pretty configurable. So they are in a casing. There is a cellular modem in there and then there is a snap-in portion were the OG2 modem was designed to just, kind of, snap right in. So it's available in the dual-mode and the single-mode option, so yes.

[Chris Quilty:]

And do you expect, maybe, this is for Robert, any inventory issues with the migration for OG1 compatible equipment to OG2, and the fact that, I would suspect most customers are going to start making that shift?

[Robert Costantini:]

We don't own any OG1 equipment. The OG1 equipment is sold through third-party providers. So no, I think that the hardware business that we're building is all new incremental business.

[Chris Quilty:]

And have any of your partners come out with OG2 compatible equipment yet?

[Marc Eisenberg:]

QUAKE is in the process of working on it and we imagine they will announce something shortly.

[Chris Quilty:]

Also, Robert, any other lingering acquisition-related costs we should expect in Q3 or beyond?

[Robert Costantini:]

Yes. Two acquisitions, there is some times there is twice as much cost even though they have nothing to do with the size, so we've got a new fair values and thing like that. So there will be some cost in Q3.

[Chris Quilty:]

And in terms of facility closures, movements, consolidations, is all that done?

[Robert Costantini:]

Yes. I said the bulk of that has been done. So I don't expect, sort of, one-time integration-related type of cost at this point going forward. I mean, the integration that we're doing is just building up the businesses to handle the opportunities in front of us.

[Chris Quilty:]

And do you have handy in front of you what the headcount was this year versus last year? And do you expect to grow the headcount further by the end of the year or have you got everybody hired on that you think you need?

[Marc Eisenberg:]

We started the year with the 164, we're at 188. And we think we're going to top-out at the end of the year at 200.

[Robert Costantini:]

And that was roughly the number at same time last year on a comp basis. It was the 161 versus 164 at the end of the year.

[Chris Quilty:]

Can you also talk about some of the OEM opportunities and specifically with Doosan? Was the delay in their rollout driven by what factors, because you announced that, jeez, I think it was over a year ago?

[Marc Eisenberg:]

No. We've never announced this Doosan thing. Understand, we bought MobileNet in April and Doosan was a MobileNet customer, but it was a deal that MobileNet had done with Doosan where they were deploying just on specific U.S. units. So we were speaking to Doosan while we were acquiring MobileNet and MobileNet was too small to do the global deployment. So putting ORBCOMM and MobileNet together did the trick, but this has never been previously announced, this global thing.

[Robert Costantini:]

You are thinking of the Japanese OEM that we previously announced, not Korean.

[Chris Quilty:]

Also, on the AIS business, Marc, you mentioned, I think, two licenses and seven contracts. Can you explain the difference between the two?

[Marc Eisenberg:]

Our contract is a new customer, and a license is a new customer dealing with a new one of their customers. So the two big guys that we have out there, guys like Lloyd's or IHS. So when they sign a new customer that would be a license and if we were to sign a new one of those guys, it would be a contract.

[Chris Quilty:]

And what's your expectations for the AIS revenues on a go-forward basis, next couple of quarters until you get OG2 launched?

[Marc Eisenberg:]

We think there is going to be small incremental growth in the tens of thousands per quarter until OG2 launches or unless, until the government freeze ups in cash to do something larger with us.

[Chris Quilty:]

Now, is that something that's still on the plate in terms of, I know, Northrop had a contract to look at satellite-based AIS deployment, is that still in the pipes?

[Marc Eisenberg:]

We are being told it is, yes.

[Chris Quilty:]

What would be the, sort of, scale with that opportunity, do you think?

[Marc Eisenberg:]

In the millions, not in the tens of millions, but in the millions per year.

[Operator:]

Our next question is from the line of Noel Atkinson with Loewen, Ondaatje, McCutcheon. Noel Atkinson - Loewen, Ondaatje, McCutcheon I was wondering if you could talk a little bit about the Doosan win and in terms of the ARPU, so are you able to capture significantly higher ARPU with this sort of an OEM win versus what you've been providing to Cat and the other folks?

[Robert Costantini:]

It's night and day. The difference between a wholesale solution and a retail solution is significant. I mean just to start out with, you startup by selling hardware. So you get hundreds of dollars of hardware to begin with. And then you sell a complete solution, so you're selling ORBCOMM's service; you're selling Terrestrial service; and you are selling portal service. So it's more in line with our retail ARPUs, which are in the mid-teens as opposed to our wholesale business which is in the $4 to $5 range. But just to give you a feel, I mean if you were to deploy, let's say, a 1,000 units for our wholesale guy and its $5 a month that first year it's a relatively small deal, it's something like $60,000. But if you were to deploy the same 1,000 units and it's a retail application you've got hundreds of dollars times that 1,000 units and then you're roughly deploying the airtime, tripled the rate. So it certainly escalates much, much quicker. The other exciting thing about Doosan and why we love this business is, we've got this uniqueness of our network that we are able to provide global service with ORBCOMM, and to do it at reasonable rates and that's what drove OEM's to our network. But now, not only is that what's driving people to our network, but the applications that we're able to provide along side it is bringing as many customers as the network is today. So we're really excited about this strategy that we picked up, couple of years ago, and it's kind of coming to fruition right now. Noel Atkinson - Loewen, Ondaatje, McCutcheon And then, to that end, so how do you see the level of functionality that you're able to provide through this solution versus what, sort of, the baseline OEM offerings are for heavy equipment? And then, to that end, is there an opportunity to be offering, sort of, the baseline on a wholesale basis through your partners and then also be able to offer a premium version to that same OEM through your own solution?

[Robert Costantini:]

Listen, OEMs all have different solutions and they all do different things, and they are customers and they do a very good job. One of the cool things about our solution for Doosan is, it wasn't built by an OEM and OEMs have specific things that they are looking to get out of this product. Basically what an OEM wants out of the product is they want to fix it before the unit breaks. The things are sending diagnostic reports over the year. You get these indicators, you get someone out there, you keep the thing fielded and that is key to the OEMs. But the MobileNet solution was built for fleet owners as well. So there is some log in screens that this thing has, where not only does the OEM get what they are looking forward out of it, the dealer gets what they are looking at it, and then the fleet owner gets with they are looking at it. This is really cool screen that's on there where they can actually mirror the dashboard that is sitting on the units. So if you're a rental company, and you haven't seen the unit for months, you actually see what the operator sees by looking at the dashboard. That's one cool feature. The other cool feature from a hardware perspective is, it works on other vendors. So it's not specific to a specific OEM, it works across all the OEMs. So if you've got a fleet that's a predominantly Doosan and you've got 20% something else or a mixture something else, these will work. So that's another great feature. Noel Atkinson - Loewen, Ondaatje, McCutcheon So then, in terms of your GT units, especially the ones for containers, do you see those being tracking of the containers at sea and at on land or do you see it primarily in the movements before or after they are on a ship?

[Marc Eisenberg:]

The dual-mode ones, as long as you're in an area that sees a satellite, it will work on a ship. But if you're not seeing the satellites, it won't work on that ship and that's kind of the new thing about ORBCOMM being in the AIS business. For able to know the ship that have this containers on, you can monitor it onto the ship. You can convert to AIS. AIS gives you readings every 15 minutes, comes off to ship and then it's just picks up from there. It's a piece of the business that no one else can do better than us. Noel Atkinson - Loewen, Ondaatje, McCutcheon And then my last question. So in terms of CapEx, you guys were not that heavy in CapEx in the quarter and given that the launches are now looking Q4, even maybe Q1, can you give us some sense of now how you expect the CapEx to occur for the rest of the year?

[Robert Costantini:]

So the payment that we made was in the quarter, it was related to the launch that were, kind of, fully situated on the launch side, just a little bit left for a that piece, but respecting the timeline, to get to a launch we'll probably be looking at like $30 million for the rest of this year, then with respect to next year, mostly towards the end of the year in Q3 and Q4, you're probably looking at $55 million. Noel Atkinson - Loewen, Ondaatje, McCutcheon So here is another question. If you look on one website, Spaceflight, now that, sort of, does this ongoing tracking of expected launches and they have been showing for a little while now that you guys were looking to be moving into the Q4 range. But they're also showing that you guys may actually be having your next launch pretty closely thereafter. So you guys are expecting that your next launch would then happen sometime in the second half of 2014.

[Marc Eisenberg:]

We've got an assembly line going and it doesn't stop at eight satellites. The assembly line is going straight through to 17. So as soon as we're comfortable with the performance of the first ones and if there is some tweaks, we get those done, we want to launch the second one as soon as possible.

[Robert Costantini:]

And then that would just accelerate the payments that I was talking about. I mean, I thought you were thinking more mostly for modeling as we normally used a six or nine months centers, but as Marc pointed out, it's right. So depending on how quick that is, that 2014 payment will be accelerated. Keep in mind we have a $72 million left on the contracts for SpaceX and SNC, so we have that cash on the balance sheet, and we should be able to just continue to meet the timeline as those satellites become available.

[Operator:]

Our next question is from the line of Mike Malouf with Craig-Hallum Capital Group.

[Mike Malouf:]

I wanted to talk Robert, maybe you can address this. I have asked this on the call a couple of quarters ago with regards to, sort of, potential margins. And I am just wondering how you feel about potential margins on an EBITDA basis, if we get up to eventually up to, say, the $100 million run rate. I think you had said close to 50%. Does that still hold true with some of the acquisitions you have done? I'm just trying to get a sense of where we can get to?

[Robert Costantini:]

I'm not sure, I said at $100 million, what you would just say, $100 million of at 30% I mean, somewhere around the 40% rate, I'd say that level. But we still see very high margins on the service side. Our service margins have really not moved that all, around 60%. We expect those to continue to go higher as you get scale on the satellite side. So that would be an inflection point for OG2, so we see they can continue to rise. And I think when before we started moving into the full solutions business, we were probably showing EBITDA margins in the high 20s, 27% or 28% somewhere in that range. So we know that that difference is definitely scalable. So we still see those as being in play. I mean the hardware component does add a lot of gross profit, but those margins are lower. So I'd say we can still see those high EBITDA margins in the business and we're not backing off from the scalability or the operating leverage.

[Mike Malouf:]

And then, you've had really demonstrated, at least, it's starting to look pretty dramatic success with the MobileNet and GlobalTrak acquisitions. Marc, maybe if you could comment a little bit on how the pipeline, do you have like a pipeline of acquisitions? Are you seeing the steady flow? What's the opportunity for acquisitions for you as you look forward over the next year or so?

[Marc Eisenberg:]

We are always looking, but we're in a point here where, as we're looking there is also some pretty large scale opportunities that we're trying to close at the same time, and when we purchased MobileNet and GlobalTrak, we said to ourselves, do this makes perfect sense? We've got all these engineers and we can add these businesses and they are going to add scale and everything just works. And when we brought MobileNet and GlobalTrak, they didn't add scale, they took scale. The opportunities there were so much bigger than we have thought and we are expecting multiples of service, that should take a company like MobileNet with five people and all of a sudden they are taking 17 StarTrak engineers to get these products out there. And we're just gasping for a little bit of air to catch up with that get these products out there. But a good part of that is just about complete. There were six separate things that we were looking to get done for this call, because we wanted to explain it on this call. And of these six deals, we got one done and announced. The other ones are still coming over the next quarter. And we just got to get those off the table and then I think we are still looking to grow from there. There are still holes in our distribution, where there were products that we think match and could be sold and we're certainly looking.

[Mike Malouf:]

And then just a final question on AIS. I think I missed exactly what it was in the quarter. Can you give me that again?

[Robert Costantini:]

Just over a $700,000.

[Operator:]

Our next question is from the line of Howard Rosencrans with Value Advisory.

[Howard Rosencrans:]

In terms of your ARPU, where do you see that going after you get the next constellation launched or at least half thereof?

[Robert Costantini:]

So certainly the higher feature set and the higher bandwidth, the new future set of OG2, should benefit ARPUs on the network side. Right now, I'd say they'd be flat until that time or slightly down. So if your question is, what's going to happen to ARPUs at the OG2 launch? We expect them to rise certainly on the network side.

[Marc Eisenberg:]

I think there's couple of things that we're looking at in terms of ARPUs. We are fielding a 14 year old network and there is new features and higher bandwidth and everything that's coming, and kind of, what's emboldening us is not only do you have the better, higher bandwidth solutions coming, but we're also growing faster in our solutions business or we're expecting to grow faster in our solutions business than we are in our core business. And the solutions business has higher ARPUs. But the solutions business, we are in the process of developing some of these opportunities and we are not like an off-the-shelf, kind of, company in the M2M business. The M2M business, you've got some guys that you take a box off the shelf, you ship it, they activate it online and that's their business. And that's not where ORBCOMM sits. ORBCOMM sits in this highly-customizable, big deployment type of deals, which take more time and as those deals close we expect ARPUs to raise.

[Howard Rosencrans:]

Second question, regarding your hardware sales, which were certainly up very nicely Q-to-Q, do you consider that a barometer of future demand? Just to clarify it, most of the hardware you are selling, is that's forward compatible and will work really well with OG2 and also on the working assumption it works as well or better than other products on OG1?

[Marc Eisenberg:]

Absolutely, I mean, first of all, OG2 is backward compatible. Every unit out there will work better with the OG1 stuff. So in terms of all the stuff that's been shipped in our base, those products are just going to work better with newer satellites. The stuff that we're fielding now specifically from Japan is mostly OG1 stuff that will be backward compatible to OG2. The stuff that we're shipping in our end solutions business and the stuff that we are developing is developed to basically swap out, that you could put OG2 modems based in it. There is not OG2 modems in there now because the OG2 modem isn't complete yet. But we have no issue with them being forward compatible. To answer your other question do we think where do we see hardware going? We see Q3 being similar to Q2. Q4, you've got the DLA there that gets complete, so maybe there will be a slight drop in Q4. And then I think in Q1 of next year, I think you're up to the races. I think our expectation is that hardware significantly goes up next year. And it needs to, because hardware is the first part of getting the service revenues. It's what you need to get that fielded.

[Operator:]

Our next question is from the line of Richard Donnelly with Longport Partners.

[Richard Donnelly:]

I am confused about the end-to-end telematics solution you announced and how it either complements or competes with the telematics solutions you have announced in the past for Sumitomo and Kubota. Are they competitive products? Are they complementary? Are they totally different? If they are using Sumitomo, does that mean they don't use you? Could you just talk about all of that?

[Robert Costantini:]

Most OEMs in heavy equipment have their own telematics platform, specifically the ones that are multi-billion dollars. They have their own telematics platform. And it's not like the Doosan one will be fielded on a Sumitomo, that's not the way it works. Sumitomo fields their homegrown solution that uses our service and Doosan uses our solution that's end-to-end and also uses our service, but uses our platform as well. And they are out there in the fields, selling backhoes and our little portion of that backhoe is certainly an enabler. So we see that, but we don't see much conflict at all. When we bought MobileNet, the theory was there, that's right. The theory was, there's 30 guys out there in the OEM marketplace in heavy equipments that do over $1 billion a year in sales. And some of the bigger guys, I mean, Cat's the biggest guy out there and Komatsu is the second biggest guy out there. Those guys have no issue putting tens of millions of dollars around an application, and building it up and customizing it for them. Sales may do a great job. But at the bottom of that range, you've got a bunch of guys that don't have the scale to put as much into it to have that competitive product. And ORBCOMM thought was, gee, to help these guys get into the market and to put them a two instead of a three year development cycle, something more like a six month development cycle. We would buy MobileNet and we'd have this complete end-to-end solution and we would get them into the business and that was the theory. Doosan was bit surprise because they are a whole lot closer to the top of the chart than they aren't to the bottom of the chart. They are pretty big. But they did their analysis as to homegrown versus our solution and it made economical sense or economic sense and that's what they went with.

[Operator:]

Mr. Eisenberg, there are no further questions at this time. I will turn the floor back to you for any closing remarks.

[Marc Eisenberg:]

Great. In summary we've had a great first half of 2013. ORBCOMM is in an exciting inflection point. Over the next few quarters, we're focused on upgrading the constellation. We are rolling out the new services and deploying the near-term products and key customer opportunities as ORBCOMM evolves from a pure satellite telecommunication's provider into the full-service M2M solutions provider. Thank you all for joining us today and for your questions. We look forward to speaking to you again next quarter.