ORBCOMM Inc.
Q2 2014 Earnings Call Transcript

Published: 7 Aug 2014

[Operator:]

Good day, ladies and gentlemen and welcome to ORBCOMM’s Second Quarter 2014 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (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’m Marc Eisenberg, ORBCOMM’s Chief Executive Officer. And with me today is Robert Costantini, 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 a busy couple of months since our last call. We’ve got a lot to cover today. We’ve launched satellites started some large rollouts, started the integration of a large acquisition, closed some new opportunities, identified others, won some prestigious product awards and through it all we manage to have a pretty good quarter marking multiple highs in many of our financial metrics. On this call I’d like to start with a quick path through the financial summary focused on our new satellites, update you on the business highlights, hand it over to Robert so he can cover the financials in more detail, and lastly, get to your questions. Earlier this morning, we issued a press release announcing financial results for the second quarter ending June 30, 2014. For Q2 of 2014, our total revenues were 24.3 million and adjusted EBITDA was 5.1 million. Service revenues increased year-over-year by 10% to 14.9 million, product sales increased 86% to 9.4 million, total revenues increased 31% from the same period a year ago, net income for the second quarter was 1.4 million or $0.03 a share and includes 0.2 million in acquisition related expenses. Adjusted EBITDA was 5.1 million, 1 million greater than the prior year period. Our subscriber count grew by 27,000 net subscriber communicators or subs ending the quarter at 915,000. A few comments on the quarter; first, I want to reemphasize that we expect an increase in service revenues as our OG2 satellite get places into service, scheduled for mid-September. Until then, gaps in satellite coverage have been slowing service revenue growth; second, the good portion of our hardware shipments went late in the quarter and the associated service revenues and subscriber additions were not included in this quarter, but when they are put into service, it should be good news for the second half of the year. Now on to OG2, I am delighted to get back during this call having these satellites airborne. We launched OG2 Mission 1 at 11.15 AM Eastern Time on July 14th that's [indiscernible] I might add from launch pad 40 at Cape Canaveral Air Force Station in Florida. The weather was picture perfect at launch and was scary a little bit later. It was an incredible experience watching 10 years of work aboard to our Falcon 9 rocket blast off into space. You really have to give SpaceX some credit they absolutely nailed the orbit. Our satellites were put into an inclination within 0.005 degrees of the 47 degree target and the altitude was within a half a kilometer of target. For the techies out there, the apogee target was 720 kilometers and we hit 720.5 the perigee target was 620 kilometers and we hit 619.5 it doesn’t get much better than that. What that means to ORBCOMM is that over 10% of our fuel is reserved to correct any inaccuracies and the insertion and now can be used at a later day should we need to maneuver our spacecraft. It was great day for ORBCOMM and shareholders and customers if you haven’t seen the launch checkout the video link on our OG2 webpage, it’s definitely worth a look. In just 45 minutes after launch we received initial contact from all six satellites at our Gateway Earth Station in Australia and we’re able to verify that all of them had separated and deployed their solar panels and antennas properly. Since then we’ve been performing the initial health checks in a reliably receiving telemetry and commanding the satellites while working through any issues none of which expected to be material. It is important to understand that the payload hardware used for command and telemetry is identical so what is used for them to end services by establishing reliable connectivity to our earth stations we have successfully exercised the antenna filters, payload processors, transmitters and receivers that will be used for both end to end communications and connectivity to our earth stations. Engineering and operations teams from ORBCOMM and our satellite and payload manufacturers Sierra Nevada Corp. SNC and Boeing are well into conducting extensive in-orbit testing IOT from both ORBCOMM’s network control center in Virginia and SNC’s control center in Louisville, Colorado to verify each subsystem is working as designed. This initial part of IOT will focus on the satellite bus to verify proper altitude control, power generation, battery charging and propulsion. To-date we’ve been able to verify that the batteries are charging as expected the solar rays are providing sufficient power throughout the orbits and the altitude control sensors are functioning as expected. We believe all six satellites are healthy and anticipate completing the testing and putting them into service in mid-September. Currently the satellites sharing close proximity to each other, we started performing the first satellite maneuvers to adjust the spacing. Five of the six satellites will remain in a single orbit plane no called plane-k. While the six satellite will be shifting over the coming months to its final orbit 90 degrees from plane-k and will be the first satellite in Plane-L. The five satellites in Plane-K will be equally spaced within their orbits provide the optimum coverage and fill the existing gap in the OG1 constellation. Unlike past generations of ORBCOMM satellite sees a pretty advance propulsion systems allowing us to complete the Plane-K spacing in a couple of weeks where it used to take months. Following the bus testing the OG2 team will focus on communications testing to verify proper functioning of the Boeing subscriber payload. As I mentioned earlier the majority of the payload hardware elements have been verified with successful communications to the Earth stations. The additional communication testing will concentrate on the network and subscriber functionality. A portion of this testing will include gradual phasing the satellites into a subscriber mode which will allow the existing (field) [ph] communicators to seamlessly start using the OG2 satellites. Customers will not need any additional upgrades to their communicators or application to take advantage of the additional satellite coverage. Initial results on AIS performance looks good since launch, we have detected a large quantity of AIS messages which shows OG2 to be very promising addition to our existing AIS services. The addition of these satellites will deliver faster service, better coverage at higher latitudes and increased network capacity. Typical message delivery speeds are expected to improve significantly and average delivery times are expected to be less than three minutes. It’s tough to over state the impact on service levels expected from the new satellites. While we have come a long way we’re focused on launching the last 11 satellites as part of our second mission which will enable us to provide new OG2 features and services around the clock and bring AIS ship visibility down from hours to minutes. The support from our customers following the launch from all over the world has been overwhelming and we really appreciate all of the well wishes we’ve received. We look forward to providing our customers with the only fully funded, fully operational second generation satellite network built for the global M2M industry. Before we move on to the business highlights, I’d like to thank SpaceX, FMC, Boeing, Moog and all of our partners who worked on this mission, it was truly a team effort. I’d also like to comment John Stolte our EVP of Technology and Operations, Gene Fuji, Tony and the rest of our outstanding build launch team for all their hard work and dedication for making this mission a success. Of course our network components are not limited to space based assets, we’ve made progress on improving the ground infrastructure as well so we can deliver the best satellite M2M product in the industry. In the Middle East our partner Mahd Telecom based in Muscat, Oman has been granted regulatory approval to provide ORBCOMM service in Oman. This service authorization allows for installation of a new Gateway Earth Station in Oman and completion of the radio spectrum licensing process. This is a major opportunity to improve service levels in the region, this addition of a GES in the Middle East will fill the major gap in Earth Station coverage between ORBCOMM's GES in Italy and the one in Kazakhstan extending our reach into portions of Africa and Central Asia and providing near real time AIS coverage in the Persian Gulf. This also gives satellite access to a new major market for ORBCOMM Solutions. In South America we recently purchased a Gateway Earth Station GES in Rio De Janeiro, Brazil. And this is completing our ownership consolidation of all Western hemisphere GES facilities. Given the Brazilian GES is key location near the cost and between our GES is in [indiscernible] and Argentina it will bring increased efficiencies in service reliability enhancements to our customers throughout the Americas and the Atlantic Ocean. The Oman and Brazil GESs together with our 14 other GES facilities located throughout the world will not only provide links to our OG1 satellites but will enable us to deliver the advance services provided by OG2 services, making ORBCOMM’s end-to-end communications offerings even more efficient, reliable and globally available. On the solution side of the business we’re continuing to see success with our internally developed products like the GT 1100 and the GT 2300, both of which won awards from the M2M Evolution for Asset Tracking Product of the Year and M2M Product of the Year for 2014 respectively. The awards confirm ORBCOMM’s core excellence in product development and engineering and that’s something we’re very proud of. In Q2 we signed our largest GT 1100 win to date with Swing Transport a privately owned logistics company that specializes in the transportation of time sensitive freight in the Southeastern United States. Swing Transport will deploy the GT 1100 solution across their fleet of approximately 1000 drive-in trailers in order to improve their tractor to trailer ratio, streamline operations and better manage their fleets. This year we sold and shipped nearly 1,700 GT 1100s with the majority shipping in Q2. We are seeing increasing demand for ORBCOMM’s products and see the opportunity to close several large deals on the horizon. Our refrigerated business continues to win customers. Just this week we announced another opportunity with North American carrier Decker Truckline who will be using ORBCOMM’s cold chain solution on their fleet of 800 trailers providing command and control of temperature, monitoring fuel management, maintenance and logistics application services. We’re beginning to deploy GT 2300 units per Hub in larger quantities. We shipped 2,000 units to Hub in late Q2, they are on target to install these units this month at their Chicago and Atlanta locations and we’re building an additional 2,500 GT 2300 to ship in Q3 and Q4. We expect to deliver another 20,000 units to Hub starting in 2015. We’re also pleased to report that Doosan’s customized telematics management system core TMS was launched in North America on July 1st. We expect that our new telematic device will be installed on nearly all new Doosan wheel loader and activator machines in North America. In addition these times European team official launched first solution just a few days ago. We plan to continue adding new features to the Doosan solution adding additional models of their machines and investigating retrofit options as well. For example over the coming months we’re planning to launch our solution with their articulated some truck division. Hub and Doosan were the biggest opportunities we announced in 2013 now in 2014 we’re closing in on multiple new opportunities that we expect to make an impact in 2015. Let’s talk about our most recent OEM win. We’ve kicked off a partnership with Terex an industry leader in heavy equipment with their mining equipment division. At the Hillhead 2014, a mining and quarrying show they were exhibiting and demonstrating heavy machinery from the Terex Finlay and Powerscreen Divisions equipped with the ORBCOMM solutions. ORBCOMM is customizing the web portal for Terex based on a robust lead edge platform. We will provide Terex and their customers with critical asset data such as location engine hours, utilization and fuel levels as well as monitoring tonnage levels and engine fault codes or other alerts that are generated during the machine’s operation. This opportunity with an industry leader like Terex really puts our strategy and perspective. This solution will leverage our dual mode service, utilizing our new OG2 satellites, our Tier One terrestrial partnerships and our hardware and Web portal which have been dramatically upgraded since our MobileNet acquisition. The team of technical resources of ORBCOMM working on this and other projects now totals over 100 people and is one of the largest teams in the M2M industry. At ORBCOMM we give our customers the most options and the most comprehensive service offerings. The partnership with Terex salivates that ORBCOMM is the undisputed leader in provider telematic solutions to the heavy equipment industry. At present we are closing in on multiple incremental opportunities and expect to announce several of them by the end of the year. Transitioning to the international business front, Euroscan had a successful first quarter and we continue to see solid sales of their temperature recording products in both Europe and the U.S. We are pleased that how well the business is performing and with the quality and efficiency of their operations. We have already started integrating Euroscan’s development and support teams within ORBCOMM’s organizational structure. Adding our expertise and ability to support their customers across multiple countries, languages and cultures will be key to growing ORBCOMM solution’s business internationally. We’re also beginning to see Euroscan’s global network of dealers pursue new sales opportunities in France, Spain, Brazil, and Australia, further expanding our distribution channels globally. We continue making progress towards new distribution models with some of our Tier One terrestrial partners ORBCOMM has been chosen by Verizon to be a vertical solutions provider which allows Verizon to market our M2M solutions to their extensive customer base. As we’ve mentioned last quarter Verizon has already certified both our dry van and cold chain products for use in the Verizon network so we are in good position to kick this project off. We’re also announcing a partnership with T-Mobile who is about to begin co-marketing our solutions. Our alliances with these Tier One carriers further expand our distribution channels in the M2M industry while empowering the carriers to seamlessly deploy our M2M solutions in their key vertical markets. Our AIS business continued to grow in Q2 with revenues exceeding 1 million for the quarter tracking to an annual run rate of over 4 million. This quarter ORBCOMM issued multiple new customer licenses and license renewals and we now have over 500 end users. Groups including several far navies and maritime authorities were among the new licenses issued directly and others through ORBCOMM’s value added reseller channel. We expect enhanced OG2 coverage in a resulting increased ship visibility to have a large impact on our AIS business over the next year. Overall we feel our business is well positioned for both near term and long term growth. The successful launch of our first OG2 million should be a catalyst for future growth while sustaining our current service and base of subscribers for years to come. Our current solutions deployments are picking up pace and some new opportunities are expected to close shortly. For the rest of the year we believe that new level of hardware sales is sustainable but can fluctuate a bit quarter to quarter depending on how large shipments breakout. We expect service revenues to increase towards the tail end of Q3 and to have the full effects of the OG2 mission one in Q4. There is a lot to look forward to. With that I would like to turn the call over to Robert to take you through the financials.

[Robert Costantini:]

Thank you Mark. In the second quarter of 2014 ORBCOMM posted record revenues of 24.3 million increasing 31% over the prior year from double-digit growth in service revenues and double-digit growth in products sales. We had a solidly profitable second quarter with adjusted EBITDA of 5.1 million a net income of 1.4 million or $0.03 per share. Net income includes acquisition related costs in the quarter of 0.2 million and 0.4 million in taxes mostly for international operation. We’re going into Q3 with significant momentum. The successful launch of six OG2 satellites, increasing deployments of previously announced deals, newly announced customer wins and the smooth integration of Euroscan has increased our confidence in the business. Adjusted EBITDA was 5.1 million and increased 24% over the prior year period. Adjusted EBITDA margin this year in Q2 was about 21% and in line with our outlook. For the rest of the year we expect that adjusted EBITDA margins in the low to mid 20% range benefiting from improved operating leverage. Service revenue for the quarter was 14.9 million, that was up 1.4 million or 10% year-over-year benefiting from increases in our core network revenues including AIS and from increases from solutions services. We continue to add subscribers to the network particularly our OEM customers. Further we expect higher ARPU and increased service revenues once this accelerates and out to service. And we’re encouraged by the strong interest from customers and OEMs in particular regarding future OG2 services. Gross margin on service revenues were 69% this quarter and were higher than prior year and sequentially. We expect to continue to see service gross margins in the mid-to-high 60% range. Product sales were also high in the second quarter increasing 86% year-over-year to 9.4 million compared to 5 million in the second quarter of 2013. The quarterly year-over-year increase in product sales was driven by custom deployments in refer and dry van solutions notably the Hub Group. And from robust sales in Europe from our new Europe acquisition Euroscan. The 86% increase was thought even more impressive because in the prior there was a large sale of product to the Middle East support of the defense logistics agency and that didn’t repeat this year. There is strong interest and momentum building for the several new products we introduced in 2013. We believe the GT 1100 and the GT 2300 that we built for Hub will continue to drive growth in product sales and we have several new products in the pipeline as well. Gross margins on product sales were approximately 30% and were higher than prior year and sequentially. We’re selling higher margin products and have strong market dynamics in Europe. But we are also trying to scale up manufacturing to achieve better economies and overcome some manufacturing ramp up cost. We see these ramp up cost is temporary for a few quarters and with our higher product flow these will level off. Direct cost in operating expenses for the second quarter of 2014 were 22.5 million compared to 17 million during the same period in 2013. Direct cost exclusive of depreciation and amortization increased year-over-year due to increases in service revenues and product sales as well as the cost to operate the companies acquired. Gross profit increased by 3.1 million or about 31% to 13.1 million in the second quarter compared to 10 million in the prior year quarter due to increases in both service revenues and product sales. Operating expenses were higher primarily due to operating costs from the acquisitions including additional employees, two new locations in Europe and higher depreciation and amortization from acquired intangible assets. Higher operating expenses also reflect marketing and travel costs in the second quarter in anticipation of the OG2 launch. We also continued to make investments in additional talent, mostly to pursue new opportunities that are expected to lead the future growth in revenues. Excluding the staff we acquired to our Euroscan acquisition our headcount has increased by about 6% as we pursue the incredible number of opportunities available to us. Depreciation and amortization increased by over 800,000 in second quarter to 2.2 million and we expect this number to be driven higher by approximately 1.8 million per quarter in Q4, mostly from our six OG2 satellites expected to be out into service sometime in Q3. Q3 will include a lesser amount due to the in orbit testing period before the assets are in service. The six OG2 satellites and launch costs represent approximately 70 million in asset value that would be depreciated over 10 years for accounting purposes. Overall depreciation and amortization in Q3 should be around 2.6 million and about 4 million in the immediate quarter until we launch the remaining satellites. Cash, cash equivalents and restricted cash is 50.9 million at June 30, 2014 and that’s compared to 76.9 million at March 31st of 2014 and decreasing $26 million is largely due to milestone payments and insurance expense related to the OG2 launch. As of June 30, 2014 total equities are approximately $235 million. As we look ahead we expect an uptick in revenues in Q3, depending on the timing of product shipments as well as growth in our organic business from service revenues once our six satellites are put in service and through increases in customer deployments. We expect cost of service to be in the low to mid $5 million range, we see SG&A being in the mid $7 million range excluding stock based compensation, which also runs about $800,000 per quarter and product development is expected to be in the range of around $800,000 per quarter. So wrapping up ORBCOMM’s second quarter results reflect the many strategic initiatives the Company has undertaken over the past few years. In short it all seems to be coming together and it is being translated into strong growth in revenues, subscribers and profitability. We expect a further pickup in revenues, profitability and margins once our six satellites are put in service towards the end of the Q3. Sales of the products we developed in 2013 are gaining traction as evidenced by our recent customer wins with Sling and Decker along with large deployments which are ramping up. There are a lot of irons in the fire here at ORBCOMM so stay tuned. With that we’d be happy to take your questions.

[Operator:]

(Operator Instructions) And we’ll take our first question from Mike Walkley with Canaccord Genuity. Please go ahead.

[Sid Sinha:]

Hi this is Sid on for Mike Walkley. Marc just a quick question on the heavy equipment win at Terex. Could you may be elaborate more on this win perhaps and in terms of what the roll out timing is and what the unit potential could be?

[Marc Eisenberg:]

Sure. We’ve been secretly working on this one for quite some time. We’ve been in development with them for months now. So the rollout timing is as early as Q1 2015 which is lightning fast because some of these OEM deals take years to execute. So the first thing we’re doing with Terex is their mining equipment. Terex is a huge opportunity. The mining is a subset of the bigger Terex and it tends to be the large more data intensive equipments. It’s in the 100 or hundreds per month range in terms of where we can grow from there and then if we can expand within Terex it’s in the thousands.

[Sid Sinha:]

Okay, great. And then on the continuing momentum with new customers in the cold chain business, now as you look into the second half of this year, do you see the pace of engagement with customer increasing specially with larger feed operators? Have their on perhaps by the [SSME Act] and color on this on the trails or customer engagements?

[Marc Eisenberg:]

Absolutely if you look at the customers that we have now. I mean it’s an incredible number. I think we’ve got nine of the 11 biggest cold chain shippers in the United States. We’ve done really well there cementing that business. And kind of the next two phases for us is; A, how do we take it internationally, because predominantly most of our deployments have been in the United States; and B, how do we get to smaller fleets. We’re great at 5,000, but how do we get to 500 or get to 50. And the acquisition of Euroscan was dead focused on taking market in the United States and expanding it’s even a bigger market in Europe and then the second portion of that is how do we get to the smaller fleets and that’s kind of where we’re leveraging our relationships with Verizon and T-Mobile and those guys. And it’s also why our staff has been rising a little bit. The smaller deals still need support just like the larger deals and we needed to put some staff on internally to answer the calls, handle customer service and start shipping. So we’ve been quietly working on expanding this for quite some time. I think you’ve been seeing the costs and now it’s time for us to show you the revenues.

[Sid Sinha:]

And just a couple of logistical question, but congratulations on the OG1 mission launch by the way and for the second set of OG2 satellites is that still a 2014 event or does that get pushed off into early 2015?

[Marc Eisenberg:]

The answer is we’re not sure. It could be a Q4 events or it could be a Q1 events. It’s kind of right there on the cost. If you look at these OG2 satellites, what we’ve done so far is we’ve tested out the bus and we’ve tested out some of the features on the payload. Notably, the connectivity to the earth stations because we need that to get the command and control of the satellites and the next phase is testing the payloads that’s talked to the communicators. The good news is that’s the exact same technology. So we assume it’s going well but before I give you an exact date let’s get these guys in service and make sure they’re performing as expected.

[Sid Sinha:]

Sure. That makes complete sense. And then just one last one for Robert. I don’t know if I missed this but Robert did you guide to the third quarter revenues at all or no?

[Robert Costantini:]

Yes, we weren't -- again that’s going to depend a lot on product, the timing of product shipment. So, we haven't -- we think we can sustain these levels of our revenue growth that we got in Q2 not growth but rather revenue levels. But we’re going to just stop short of guiding to the national number.

[Marc Eisenberg:]

If you look at like the Hub thing and because -- it’s like scheduled to ship like the last week of third quarter which means it could ship into the fourth quarter and it’s 2,500 units and it’s a big sale and we had 2,000 units in Q2 and it’s tough to guide not knowing which quarter it’s going to fall into. And then there is other stuff that tend to ship towards the end of the quarter. So I don’t think it’s going to be a reduction from Q2 to Q3 but how big the increase is we just need to see where these things fall.

[Robert Costantini:]

I mean the business is there it’s just a matter of executing these deployments.

[Sid Sinha:]

Right. It’s more a question of timing than anything. And then just in terms of the overall 2014 revenue then, are we still comfortable with the 100 million number or…

[Robert Costantini:]

Yes I'd like to see the impact of the new satellites, it’s certainly a key factor the things that we just talked about with the product shipments. If we don't, it will be close, and I think certainly on a run rate basis we’ll be above that level.

[Operator:]

And we’ll go next to Rajesh Ghai with Macquarie. Please go ahead. Your line is open.

[Rajesh Ghai:]

Can you give us an idea of how many of your current subscriber base has upgraded their modems, so that they can utilize higher data rates possible with OG2. In other words I am trying to understand is that once we passed the middle of September and OG2 satellite commissioned. Do we see an increase in ARPU from customers that are likely to come on after that or how much of the increase in ARPU could potentially come from the current subscriber base?

[Robert Costantini:]

Sure. So let me answer that in two ways. One is the OG2 services and the other is the OG2 impact on OG1 customers. So let’s start with the latter. There will be an increase. I think last quarter we guided to $2 million to $4 million that could be like from filling the hole in the sky. The OG2 satellites are 100% backward compatible and there is absolutely nothing that those customers have to do on their fielded equipment to -- or application. These satellites, they are up there and the minute they’re put into service they will seamlessly start connecting with our base of 700 and some thousand communicators that use our satellite network up there. So we said 2 million to 4 million could be bigger, I don’t think it’s going to be smaller. And gee have we launched on May 10 like we were hoping to we’d be giving the throughput numbers and give you a feeling for what that number is going to be. But without the subscriber payloads I can’t quite tell you what it is but it’s going to be impactful and we put on tens of thousands of subscribers the last couple of quarters and seen very small amounts of revenue growth because the demand builds up when that hole in the sky is there. And the weakest part of the network will soon become the strongest part of the network. And it will have a material impact, we’re just unable to completely size it. So for now if I were you, I'd continue to model that 2 million to 4 million. In the out years going to the OG2 services which is a completely different discussion, we started shipping OG2 modems over like the last 90 days. And what that means is you start up by shipping a bunch of development kits and we’ve sent tens of development kits out there, so people can start building their applications using the advance service. But you won’t see much of an impact on the incremental services the larger bandwidth or stuff like that until the full constellation is launched. And that is six, seven months away and by the time people start building units, we’ll see a material impact towards the end of 2015.

[Rajesh Ghai:]

And you had a very strong performance on gross margins both services as well as product. Can you talk about sustainability or margins on both lines going forward? And do you expect the services gross margin to improve once OG2 satellites come on and you potentially see higher ARPU in Q4?

[Robert Costantini:]

Yes I think in my comments I mentioned that we should be in the same range for service revenues. Product sales gain also are looking supportable with the higher margin products we're and certainly the market dynamics we see in Europe. So yes, so I think those margins are sustainable and we will see higher increases in service revenue margins when OG2 kicks in. Even as Mark pointed out as the higher revenues come through with OG2 as they even benefit the OG1 compatible modems that are already in the field that will increase ARPUs. So we’re feeling pretty confident on all those fronts.

[Marc Eisenberg:]

Another thing that hurt a little bit in Q2, Robert mentions it in his presentation. These new products the GT 2300s and GT 1100s, lot of demand for them. But the first build of these, in some cases the costs were 30% higher than where we would expect them to be once it’s a sustainable product.

[Robert Costantini:]

You got to get [indiscernible] up and running. You got get past some additional start-up costs to ramp up the lines.

[Marc Eisenberg:]

And a lot of that showed in Q2, especially on the GT 1100s, the first build was 1,500 and we shift 1,700.

[Rajesh Ghai:]

So then the start-up cost aside, where do you expect gross margins on the product line to end up? Would they be in the 35% range or could that be in the same 33% range?

[Robert Costantini:]

I think it’s safe to let’s target in the 30% range because the deal sizes as they get larger we’re going to want to -- price those deals appropriately. So I don’t see us grabbing margin at the expanse of the larger deal sizes.

[Rajesh Ghai:]

Then my final question is on the competitive landscape. Have you seen any changes recently from other satellite providers or from other competitors? I guess Iridium wanted [indiscernible] imply somewhere in the heavy equipment space. How you see any changes in the landscape [indiscernible]? Thank you.

[Marc Eisenberg:]

Nothing new to report ORBCOMM really needs to learn to set its sights higher than guys like Iridium. Iridium does 45,000 communicators in a communicator adds in a year which a third of which are the long as which are people trackers that are almost like spot unit so if you kind of take a look at that 30,000 that’s such a small piece of the M2M market you look at some of the terrestrial guys that are turning on million units. And that’s really where ORBCOMM is setting its focus. You’ve got Iridium with all their claims and they talk about 300 resellers ORBCOMM shift 8,000 pieces of our own equipment just from our own VAR last quarter which is more than all of their 300 combined. So I think we’ve got to grow up and get bigger than Iridium.

[Operator:]

And we’ll take the next question from Jim McIlree with Chardan Capital. Please go ahead.

[Jim McIlree:]

Thank you. Good morning. I am having a little bit of difficulty reconciling the language that you used to describe the next couple of quarters and reaching that 100 million in revenues for the year. It kind of sounded like you think that product revenues are flattening out at current levels for the rest of the year and that you get the increase in service levels in Q4. But if that’s the case it seems like it’d be a stretch to get to that 100 million. What am I missing in there?

[Marc Eisenberg:]

We don’t think hardware is flattening, we think it’s slightly rising.

[Jim McIlree:]

Okay. So when you said sustainable you mean that you’re going to grow from here, it’s not going to stay at these current levels?

[Marc Eisenberg:]

When I said that, I am thinking new models last quarter at 4 million and this quarter we did 8.6 million. So the statement was is that a blip or is that really the business, and the point was it’s really the business.

[Jim McIlree:]

Okay, great. And just…

[Robert Constantini:]

You’ll have to grow to get to that number. I mean again and -- but just looking one quarter out it could be a timing impact. But the business is there like we were saying, it's just going to be the timing of those shipments.

[Jim McIlree:]

Understood, okay. And so Q3 you do have the Hub deployment and you’re going to start shipping to Doosan as well. Is that correct?

[Marc Eisenberg:]

We started shipping to Doosan in the North America toward the beginning of Q2 when we shipped to Europe and likely the last week or two of Q2. So, that one is you got like a half quarter effect from that.

[Jim McIlree:]

Okay. And are there any -- what other major deployments you have beginning in Q3?

[Marc Eisenberg:]

There are a number of refrigerated deployments some of which from deals that we’ve already announced and some from companies that we haven’t made public. But you’ve got guys like Swift and Prime and other guys that -- and Martin, that are deploying at pretty large levels.

[Jim McIlree:]

Okay, great. And just a couple of clarifications, Robert you said headcount was up 6% and was that ex-Euroscan and was that year-over-year or quarter to quarter?

[Robert Constantini:]

Yes. That was year-over-year, so that ex-Euroscan, yes.

[Jim McIlree:]

And when you talked about SG&A I think you said mid-7s plus 800 and stock comp. Is that right?

[Robert Constantini:]

Yes. I mean because I know you guys are going to adjust that out I just wanted to size that for you so people don’t get too far ahead. It’s not all in SG&A but it’s allocated among the cost lines depending where the employees sit. But excluding that that’s what that number should be. I want to say maybe half. I can get back to you on the allocation of that. I don’t recall what it is.

[Jim McIlree:]

Okay. But ex this stock comp its mid-7, not low 7?

[Robert Constantini:]

Yes, I would say mid-7.

[Operator:]

Thank you. And next we’ll go to Mike Malouf with Craig-Hallum Capital Group. Please go ahead.

[Mike Malouf:]

I am wondering if you could just move to AIS and we haven’t really talked a lot about that, and can you talk a little bit about how big you think this market can be? I know that few years ago when we were talking about it could be multiples of where it is right now. And I am just wondering have you resized the market given your experience? Do you really need OG2 to take into that next level? How big the opportunity is that for you?

[Marc Eisenberg:]

That is the one business that we have been incredibly consistent with our guidance. We’ve said that you should mention that in this quarter we said with the two satellites that we have up there today we think it’s probably a $4 million business in this quarter we got to a $4 million run rate. And it could jump a couple million when we get the first launch in place but overall we think it’s a $10 million to $15 million business fully deployed. And funny thing five years later we still say the same thing.

[Operator:]

(Operator Instructions) And we’ll go next to Chris Quilty with Raymond James. Please go ahead.

[Chris Quilty:]

Robert wanted to follow up on the cost item, you had mentioned the cost of service I think staying around the 5 million level. And wanted to check is that for third quarter is that sort of a steady run rate? And the reason I ask is sometimes you have…

[Robert Costantini:]

I am just looking at one quarter. As we start moving forward, I want to give you guys something to work with.

[Chris Quilty:]

Got you. Because once the satellites are placed in service there is going to be some cost that have been capitalized that should start to flow through?

[Robert Costantini:]

Yes, that’s right.

[Chris Quilty:]

And you will still be capitalizing 100% of your interest, because you got still the satellites under construction?

[Robert Costantini:]

Until those satellites are deployed that’s our outlook on it right now.

[Chris Quilty:]

And you’ve got a 100 people working on hardware but you got kind of a low level of R&D or product development work that you’re doing. Do you have other major new projects that you’re working on and if so are you spending enough in order to get products to market?

[Marc Eisenberg:]

Some of it doesn’t show up in R&D because they’re working on current -- upgrading current operations. Some of it shows up a little bit in CapEx.

[Robert Costantini:]

Yes, some of its going to be -- on product development, some of it will -- a lot of these guys wear a variety of hits on their cost being charged here and some of its being capitalized on those other projects. So yes, that’s what happening.

[Chris Quilty:]

And can you comment on -- also Robert on the balance of the CapEx spending that you have done through the end of the year?

[Robert Costantini:]

Again as Mark pointed out the actual launch could shift, so if want to let’s say look at it over let’s say in the next three quarters of a period. The committed CapEx around the OG2 launch would be roughly another $62 million. So with cash on our balance sheet and cash flow from operations over the next several quarters that’s how we’ll cover that requirement, and then per say we have -- we like to remind people that we have the ability to put a revolver in place on top of our senior secured notes. So we could use that for working capital. We’re confident that we’re going to get there and again it’s -- I am going to start to look out -- looking at it very closely and we’re starting to look out like three quarters at a time now as opposed to just what’s in ’14 and what’s going in ’15 because we really don’t know.

[Chris Quilty:]

And are you still looking at potential acquisitions? Are there good tuck ins out there?

[Marc Eisenberg:]

Yes we’re always in the hunt.

[Chris Quilty:]

And final question, can you give us a sense of the deployments, let’s a year out where you’ve got OG2 in operation. You’ve got some of the larger solutions deals deployed. What sort of an order of magnitude movement do you expect in the ARPU? Are we talking tens of cents or eventually do you think there is dollars of upside in the ARPU, and maybe I should say not a year but maybe a year or two years.

[Marc Eisenberg:]

So our network business is running at something like $4 to $5 ARPUs and its roughly 75% or 80% of our business and it’s been growing at 10%. And we think that our solutions business which has something more like $15 ARPUs is going to grow at a rate closer to 35%. So as you model that out it should mean something a pretty meaningful move in ARPUs over time.

[Chris Quilty:]

You said ARPU of around 15?

[Robert Costantini:]

Yes.

[Operator:]

(Operator Instructions). And it appears we have no further questions at this time. So I’ll turn the program back over to our presenters for any additional remarks.

[Marc Eisenberg:]

Thank you. Between this successful launch of our first mission of the OG2 constellation the kickoff of large scale deployments. New opportunities closed during the process of getting close, there is a lot to look forward to ORBCOMM. We appreciate taking your support and your patience getting through these transformative events. Please visit our Web site where there is some good backgrounds and many of the things we’ve talked about today. As always we look forward to speaking to you again next quarter.

[Operator:]

This concludes today’s program. Thank you for your participation. You may disconnect at any time.