ORBCOMM Inc.
Q3 2014 Earnings Call Transcript

Published: 10 Nov 2014

[Operator:]

Please standby, we are about to begin. Good morning, ladies and gentlemen. And welcome to ORBCOMM’s Third Quarter 2014 Financial Results Conference Call. Today’s call is being recorded. 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) A replay of this conference call will be available from approximately 3

[Marc Eisenberg:]

Thank you. Good morning and thank you for joining us. 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 include non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures is included in our press release. Another extremely active quarter for ORBCOMM, we have got a lot to talk about on today's call. Some of the items we will cover include, launching commercial service for our inaugural OG2 Mission, closing on a significant amount of financing made up of both debts and equity, the pending acquisition of SkyWave, our largest to-date, closing multiple significant customer opportunities and looking ahead to what could be the most exciting quarter to-date. With that, let’s get started. Earlier this morning, we issued a press release announcing financial results for the third quarter ending September 30, 2014. For Q3 of 2014, our total revenues were $23.1 million and adjusted EBITDA was $3.8 million. Service revenues increased year-over-year by 10% to $15.2 million, product sales increased 34% to $7.9 million. Total revenues increased 17% from the same period a year ago. Net income for the third quarter was breakeven and includes $0.2 million in acquisition-related expenses. Adjusted EBITDA was $3.8 million, $0.5 million lower than the prior year and was way down this quarter, primarily due to some non-recurring costs and cost related to winning some of the big deals we will talk about in today’s call. Our subscriber count grew by 22,000 net subscriber communicators or subs, ending the quarter at 937,000. As we drill into Q3, there were some key factors that affected the financials, some hardware shipments that were on the fence to be shipped in Q3 did slipped most notably from Hub Group. It’s important to know that this business is still ours. In the case of Hub, it took longer than expected for the third-party installer to finalize the installation of the Q2 shipments. In addition, adjusted EBITDA was affected by a number of one-time costs, some associated with the debt raise as we have take some charges in unwinding alternative facilities. There are also significant expenses on the development side that were needed to get some of the larger deals over the line are expected to ship in Q4, as well as cost-related to the delayed OG2 Mission 1 launch that eventually took-off in mid July. Overall, this amounted to approximately $1 million in one-time costs. Looking forward to Q4, we closed on our largest trailer order to-date comprised of 16,000 deployments, made up of both refrigerated and dry van product with the large retailer. Doosan transition from an aftermarket install to a factory install and are expanding their deployments fourfold. And we took a large order from one of the largest refrigerated truck fleets, Prime Incorporated. Assuming we build and ship the orders that are in hand, Q4 should be our strongest revenue quarter to-date. To help size the Q4 opportunity, our best quarter in shipping wireless solutions to-date was Q2, with approximately 8,200 units shipped. In Q4, we anticipate shipping over 20,000 devices, with the majority of them to be activated in early 2015. Turning to our Satellite Network, through great teamwork among Sierra Nevada Corporation, Boeing, and ORBCOMM’s engineering and network operations teams, we successfully completed comprehensive in orbit testing to validate the performance of the satellites. The six satellites have been properly spaced within their orbital planes to provide optimum coverage and fill the gap in our existing OG1 coverage. With the OG2 satellites healthy and performing well, we launched commercial service on September 15th for both M2M and AIS messaging. This is an exciting milestone for ORBCOMM, as well as our customers and partners. And we're very proud of our OG2 luncheon for all their hard work and dedication for making our first OG2 mission a success. The transition to commercial service was seamless for our customers. The OG2 satellites are fully backwards compatible with our existing OG1 network. So our customers did not need to change or upgrade their fielded devices and are now using both generations of satellite to send and receive messages for their applications with our exciting platforms. As we continue to fine tune this spacecraft, we are already seeing further improvements in our networks, performance and availability. The OG2 satellites are now processing over 30% of our networks total M2M traffic, which is up from 20% at the end of September. Overall, we're receiving an average of 10% more data and our test and validation systems in United States are reporting service levels we have not seen in years. We have also seen a jump in message traffic with AIS. ORBCOMM is now collecting over 13 million AIS messages from more than 130,000 unique vessels per day, surpassing all other AIS networks and service quality. With five times the number of satellite passage per day in key regions of the world, along with more frequent refresh rates, unique vessel detection has increased significantly and the average wait and see has been cut in half, a tremendous improvement. This quarter we have started several new large trials with some major maritime authorities, including the U.S. Coast Guard, Alaska District 17 and the Governments of New Zealand. We expect to continue to see strong growth in the AIS business, now that OG2 is here. While we have come a long way with the inaugural launch of OG2, we are now focused on the second launch of the OG2 constellation made up of the last 11 satellites as part of our second mission. We have begun system level testing for the Mission 2 satellites and are targeting to launch for the Q1 to Q2 timeframe. Last Thursday, we announced the acquisition of SkyWave Mobile Communications, one of the largest M2M service providers in the industry and the largest M2M service provider on the Inmarsat satellite network. Based in Ottawa, Canada, SkyWave has more than 250,000 subscribers and 400 channel partners, with estimated 2014 revenues of $62 million and adjusted EBITDA of over $12 million. This acquisition is transformative to our company on so many levels. First and foremost, it creates the larger global space-based M2M company. To be clear, we will have the largest base of subscribers with over 1.2 million, the highest service revenues at nearly $100 million, the most diverse selection of product, the most geographic regulatory coverage, the most competitive price points, the deepest team of engineers and the largest global distribution network. To expand on that, the acquisition of SkyWave furthers ORBCOMM strategy to provide the most complete set of capabilities and options in the industry, while adding distribution and geographic reach to strengthen our M2M solutions portfolio. With the addition of SkyWave, ORBCOMM will now one of the largest combined M2M engineering teams in the industry, with approximately 200 engineers and technical experts on staff. We anticipate significant economies of scale and operations and manufacturing. ORBCOMM allows unparalleled global distribution, with the inclusion of Inmarsat support and SkyWave’s complementary distribution channels in South America, Asia and the Middle East. In addition, ORBCOMM will gain access to new markets such as Russia and China, and additional vertical markets such as security and marine. This acquisition also further expands the breadth of ORBCOMM’s solutions portfolio with the addition of SkyWave’s higher bandwidth, low-latency satellite products and services that leverage the IsatDataPro or IDP technology and the Inmarsat constellation. We have been out marketing the IDP solution and have seen a great deal of interest from our OEMs and other customers. SkyWave’s products will be made available through SkyWave’s current channel, ORBCOMM’s distribution channel as well through Inmarsat network of distributors. From a scheduling perspective, the SkyWave acquisition requires approval from the FCC, and we assume a 45 to 60-day turnaround, so a January 1, 2015 target date seems likely. As part of this acquisition, Inmarsat will contribute $7.5 million, extend the terms of SkyWave’s access rights over the Inmarsat constellation, take ownership of SkyWave’s gateway assets located at Inmarsat earth stations and co-own the IDP technology with ORBCOMM. Both companies intent to distribute IDP into the market sharing scale and creating an industry-standard as contemplated in our previously announced Phase 1 collaboration agreement. In addition, we look forward to continuing to build our relationship with Inmarsat, a clear leader in the MSS space. In our solutions business, we closed several large opportunities that further establish us as a leader in the space. We’ve received orders for 16,000 dual-mode refrigerated and dry van products from one of the nation's largest retailers, most of which is expected to ship in Q4. With OG2 now in service, this is our first dual-mode opportunity, utilizing the ORBCOMM OG2 network along with the Verizon network on dry vans and the SkyWave Inmarsat network with Verizon on the refrigerated trailers. This is ideal for the industries where assets often travel in and out of cellular range and require constant coverage. Relatively quickly, ORBCOMM designs and builds our own trailer tracking product, closed on one of the largest fleets in the nation and are in the process of chasing other large orders. ORBCOMM continues to be the industry leader in providing solutions to transportation companies, closing opportunities with two of the largest transportation fleets in the country. We received an order for 2,500 additional cold chain products from Prime Inc, for their new refrigerated trailer builds. Prime is the second-largest refrigerated carrier in North America and has already started taking delivery of the new units and we expect to deliver the final shipments in the first quarter of 2015. The new systems will include ORBCOMM’s highly accurate [FA] (ph) fuel sensor, which will be integrated to ORBCOMM’s powerful fuel analytics platform and Prime’s information systems. This will help Prime achieve better control of fuel costs, optimize fuel savings and enhance operational efficiency. In addition, Swift Transportation, the nation's largest truckload provider placed their first significant offer or order for the RT 6000+ to replace fielded units from one of our competitors. Partnering with companies like Prime and Swift, solidify our market leadership position in the transportation industry. In Q4, our customized Doosan telematic solution went from a dealer option to a standard factory installed, resulting in a four-fold increase since deployments from Q3 to Q4. These units will be deployed in Doosan’s North America, Europe and Asia Pacific locations. In addition, we expect to complete developments and start to deploy products for Terex, for their mining equipment in small quantities in Q1 2015. Looking at just three customers, our new large retailer, Doosan and Hub, we expect to ship more than 20,000 units in Q4 from just 600 units in Q3. Remember, our previous best quarter is a company we are shipping 8,200 wireless devices in Q2. As I said, we expect significant revenue growth in Q4. On the product development side, we continue to develop state-of-the-art products and leverage technological innovation, as an important part of our foundation for growth. We recently launched our new Chassis Tracking Solution, which was designed and engineered specifically to facilitate chassis management. The solution features our GT1100 device, combined with our proximity sensor and custom mounting bracket. This solution provides chassis location and load status, including if the associated container is mounted or unmounted on the chassis, as it moves throughout the supply chain. This information is extremely valuable to chassis owners and operators for enabling increased asset utilization, faster turn times, more accurate billing and enhanced lane and yard planning. With our new chassis solution, we can now track and monitor nearly every type of transport assets from dry van to refrigerated trailers, rail, intermodal containers, gensets and now chassis, making it easy for a company in transportation to control all their assets on a single platform. Wrapping up, we've achieved -- we've accomplished so many things this quarter. We’ve closed on the transformative acquisition of SkyWave, making this one of the largest and most diverse companies in the industry while recapitalizing the company. We made huge strides in the deployment of our new constellation, getting our first launch-up successfully and getting all six satellites and service. We delivered on significant customer wins including one of the nation's largest retailers, as well as two of the country's top transportation companies, Prime and Swift. We converted Doosan, a top 10 heavy equipment OEMs with standard factory install. After years of developing an OG2 modem and intermodal solution or trailer tracking solution and a dual-mode refrigeration solution, we believe they will all ship in volume in Q4. We hope you are as excited as we are. With that, I’d like to turn the call over to Robert to take you through the financials.

[Robert Costantini:]

Thank you, Marc. In the third quarter of 2014, ORBCOMM posted revenues of $23.1 million, increasing 17% over the prior year, driven by double-digit growth in both service revenues and product sales. Adjusted EBITDA of $3.8 million and breakeven net income were affected by numerous activities in Q3. These included closing the debt refinancing, OG2 launch-related activity costs and executing on significant customer opportunities, some of which are shipping in large quantities in Q4. This led to some non-recurring cost of lower or adjusted EBITDA and net income in Q3. Net income by breakeven also includes acquisition-related costs in the quarter of $0.2 million and $0.1 million in taxes, mostly for international operations. We've been extremely active at ORBCOMM over the last few months with activities that culminated in our SkyWave announcement last week, the debt and equity financings, which I will speak more about a little later on this call. Q4 is expected to be a great quarter and best ever for shipments of products or solution services. Our customer order backlog combined with the six OG2 satellites that were put into service mid-September should drive higher revenues in Q4. Adjusted EBITDA was $3.8 million and decreased $0.5 million over the prior year period. Lower adjusted EBITDA versus the prior year period was mostly due to non-recurring one-time costs in Q3 this year. Adjusted EBITDA margin in Q3 2014 is about 16%, but excluding the non-recurring one-time costs, we believe it would be more in line with expectations. Service revenues for the quarter were $15.2 million, up $1.4 million, a 10% year-over-year, benefiting from increases in our core network revenues, including AIS and from increases in solution services. We continue to add subscribers to the network and expect higher ARPU and increased service revenues now that the six satellites are put in service. The interests from customers and OEMs for our future OG2 services remain strong. Gross margins on service revenues were 65% this quarter and were higher than prior year. For Q4, we expect to see service gross margins in the mid 60% range, way down slightly by the in-orbit insurance expense for the six OG2 satellites of approximately $125,000. Product sales were also higher than prior year in the third quarter, increasing 34% year-over-year to $7.9 million, compared to $5.9 million in the third quarter of 2013. They would have been higher had Hub Group shipment not moved into the fourth quarter. We thought there was a good chance that we would ship in Q3, but the push was not entirely unexpected. The quarterly year-over-year increase in product sales was driven by customer deployments and solutions. Excluding a large sale product last year in Q3 of 2013 to the Middle East in support of the Defense Logistics Agency, year-over-year comparisons would have been even higher. Our product portfolio is providing the market with very attractive offerings and we expect them to continue to do well in Q4 and in 2015. Significant investments in product development over the past two years are beginning to pay off. Demand for the several new products are gaining momentum, as evidenced by our recent customer win with one of the nation's largest retailers that Mark mentioned earlier. Gross margins on product sales were approximately 30% in the quarter and above our targeted 25% and they can be influenced by order sizing. Direct costs and operating expenses for the third quarter of 2014 were $23.1 million, compared to $18.5 million during the same period of 2013. Direct costs exclusive of depreciation and amortization increased year-over-year due to increases in service revenues and product sales, as well as costs to operate the companies acquired. Gross profit increased by $1.8 million, or about 17.4%, to $12.3 million in the third quarter, compared to $10.5 million for 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 acquired business units, including additional employees and two new locations in Europe. Higher depreciation and amortization in the quarter is from acquired intangible asset, plus the six OG2 satellites that were put into service mid-September. Higher operating expenses also reflect some nonrecurring one-time costs, including costs associated with refinancing long-term debt, additional costs due to our July satellite launch, and costs associated with winning significant deals, as well as the preparation for large scale Q4 deployments. Depreciation and amortization increased by $900,000 in the third quarter to $2.5 million and includes the half month of depreciation related to the six OG2 satellites that were put into service mid-September. As I mentioned on the last call, the six OG2 satellites and launch costs represent approximately $70 million in asset value that will be depreciated over 10-year life for accounting purposes. Q4 will have a full quarter of depreciation on the six satellites and we expect depreciation and amortization to be about $4 million in Q4. Cash, cash equivalents and restricted cash is $42.7 million at September 30, 2014, and that's compared to $50.9 million at June 30, 2014, decreasing $8.2 million largely due to capital expenditures related to OG2 and offset by cash provided by operating activities. Also not reflected in our September 30, 2014, cash balances are the proceeds from Macquarie debt refinancing that funded on October 10th and the equity offering on November 7, which I will discuss in more detail. On September 30th, ORBCOMM entered into a multi-facility credit agreement with Macquarie Group providing up to $160 million. As part of the credit agreement, ORBCOMM has borrowed $70 million under the initial term loan facility and $10 million under revolving credit facility with funding occurring on October 10. The agreement has acquisition term loan facilities of up to $80 million for potential growth opportunities, including up to $70 million to refinance the SkyWave acquisition or to finance the SkyWave acquisition. The initial term loan was used to repay in full AIG’s $45 million, 9.5% fixed rate senior secured notes. The loan facilities have no scheduled principal amortization until the five-year maturity date, but there is a sweeping function based on excess cash. The loans carrying interest rate of LIBOR with the floor of 100 basis point, plus a margin of 4.75%. On a pro forma basis the current debt on our balance sheet is $80 million and will rise to $150 million at the closing of the SkyWave transaction. By significantly lowering our interest rate from the derisking of the business with the first launch of OG2 satellite, we’re able to increase our borrowings and keep that service at reasonable levels. On November 7, 2014, ORBCOMM priced an underwritten registered public offering of over 12.8 million shares of its common stock, plus potential for an additional 15% at the underwriter's option, at a price of $5.60 per share. The offering was all primary shares and we expect to use the net proceeds to acquire SkyWave. I would like to take a few minutes to discuss the SkyWave acquisition that we recently announced. SkyWave is the largest M2M service provider on the Inmarsat global L-band satellite network with more than 250,000 subscribers and 400 channel partners. SkyWave’s expected 2014 revenues are over $62 million and adjusted EBITDA of over $12 million. The revenue mix is split evenly between service revenues and product sales. They have service revenue gross margins in the 50% to 60% range and generate about 20 to 30 point margins on product sales. Adjusted EBITDA margins are approximately 20% for the nine months ended September 30, 2014. The transaction requires SEC approval and we expect the transaction to close in early January. ORBCOMM will be paying $130 million for the acquisition but will receive $7.5 million from Inmarsat under a separate agreement providing Inmarsat with certain SkyWave assets and co-ownership of the IDP technology. The acquisition is highly accretive on an adjusted EBITDA multiple basis and represents a transaction multiple of nine times on a pre-synergy estimated 2015 adjusted EBITDA and is even better including expected synergies. The consideration comprised of 100% cash without any earn-out potential. We're financing the transaction with the $70 million term loan under our newly completed credit facility and the remainder with the equity offering net proceeds we just mentioned. The acquisition of SkyWave further ORBCOMM’s strategies while making us the largest space-based M2M company. There is very little channel conflict or overlapping regarding the topline revenues and we see opportunities to scale the business when combined with ORBCOMM to achieve significant cost synergies to increase the margins for the whole organization. This will be a transformative acquisition for ORBCOMM. As we look ahead to Q4 for ORBCOMM, we expect to see record quarterly revenues in the range of $28 million to $30 million. Pursuing this SkyWave transaction closes on January 1, 2015, on a combined basis we are projecting total revenues in the $170 million to $190 million range and adjusted EBITDA in the $40 million to $45 million range for the full year 2015. So wrapping up, it’s been an extremely active few months at ORBCOMM with the announcement of a transformative acquisition in SkyWave, the debt and equity financings, winning new deals and executing on large scale customer opportunities. With low profitability was drag down in the quarter due to some nonrecurring costs related to these activities, both Q4 and 2015 are shaping up really well. We expect a record quarter in revenues driven by improved service with the help of six OG2 satellites that were put into service in September and record product shipments for our solution services. Sales of the products we developed in 2013 continue to gain traction as evidenced by our recent wins including one of the nation's largest retail fleets and two of the nation's largest transportation companies. It’s an exciting time to be at ORBCOMM, as we continue to execute on these great opportunities available to us. We are now happy to take your questions.

[Operator:]

(Operator Instructions) And we will take our first question today from Mike Walkley with Canaccord Genuity.

[Marc Eisenberg:]

Good morning, Mike.

[Sid Sinha:]

Hi, this is Sid actually and congratulations on the pending SkyWave acquisition. Mark perhaps in the high level, could you talk about some of the revenue synergies that you could derive from this acquisition. Now in terms of your OG2 satellite network in products versus what SkyWave Inmarsat products bring in your geographical footprint versus SkyWave? And then Robert could you talk about some of the cost synergies that you've baked into your $40 million to $45 million adjusted EBITDA guidance range for 2015?

[Marc Eisenberg:]

Sure. Starting with the topline, the topline synergies aren’t built into next year’s guidance. So they’re upside because they are a little tougher to time. But when you look at these top line synergies, I mean, first and foremost when you overlay the two networks, you get the largest combination of regulatory approvals out there globally. And even satellite companies talk about -- when they talk about coverage, they typical talk about technical coverage. But alongside technical coverage, you need regulatory approvals in almost every country that you sell into. And if you go to our investor deck, you can see the overlay of the two geographies, adding Russia, adding China and by far you’ve got the best coverage out there. And our OEMs are already looking at using this SkyWave device in places like Russia and China and none of the American guys that I’m aware of, have coverage in places like China. But in China like I’ve heard of their business is -- I’m sorry, in the heavy equipment business, a third of their business is in places like China. So all sorts of opportunities to increase the footprints. And we’ve quietly behind the scenes been working on interchangeable modems that work on the ORBCOMM network but modems that work over the SkyWave network with the exact same footprint, the power environment, almost the exact things that you can make them interchangeable and move out the different ones in the different geographies. On top of that, there is so many topline synergies. These guys mostly sell into troughs. And we mostly sell into transportation assets. So why aren’t their trucks selling our refurb products or drive-in products. They absolutely should because when it comes to distribution, we don’t have our footprints in all in those businesses. If you look at their strengths, their strengths are selling in South America, selling in the Middle East, places that ORBCOMM doesn’t have footprints at all. ORBCOMM strength is predominantly in North America and Europe and in Japan. So these footprints overlap that we can sell each others’ products. You get the matching geographies. I think over the years there is a lot of topline synergies there.

[Robert Costantini:]

On the cost side, we think we can eventually get these numbers up to may be $5 million to $6 million a year but for 2015 we’re sort of estimating $2 million to $4 million. These are going to come across the whole organizations as we combine scale for the businesses. I mean, $2 million to $4 million is just couple of points of topline revenue in terms of cost. So you know as we start scaling purchasing and manufacturing, we’re going to take a total look at the use of third-party consultants across both our organization where they are filling in operations because there's a lot of overlap in terms of what they do and what we do and then just generally redundant operation. So those are broad categories but as we dive in, we think that's where it’s going to come from.

[Sid Sinha:]

Thanks. Very helpful. And then just moving on to the Doosan contract, is that contract moving to factory installations versus dealer options in the path? Marc, I think you shared some metrics about what this does to potential size of the contract or perhaps based on deployment, could you share some additional color on that?

[Marc Eisenberg:]

Yeah, they went from 100 units a quarter to couple 1000 a quarter. So it’s just so typical to what ORBCOMM does and it kind of shows why this whole industry needs scale and that you buy MobileNet. And MobileNet, it took them years to get to a base of 3000 subscribers and then you that had five employees, I think we bought it for $5 million. And then you know, ORBCOMM puts its engineering support behind it and we create a customized platform for Doosan and they were kind of (indiscernible) with Doosan on the aftermarket side. But once we kind of added the support to that business, its going to go from mid hundreds of units to low thousands of units on a quarterly basis. And then when you put the money into the investments into these products, all of a sudden there is other guys that you can sell it to. So you invest in Doosan and then all of a sudden, there is a Terex. And I think this is something that you’ve seen from us over the last couple of years, where you saying the topline is going there and we understand that they’re scaling the business, where is it. And last year, we invest in intermodal product, we invest in a heavy equipment product, we invest in a trailer product, we invest in an OG2 modem and there’s millions of dollars that go into investing in these products. And just now in Q4, you are feeling a big trailer order. And we expect the hub to ship the intermodal products. And of the 20,000 devices for those three customers, 17,500 of them use our new OG2 modem. And that’s something that we invested in last year. So I think it’s a -- we're just about there. It’s pretty exciting.

[Sid Sinha:]

Okay. Great. And just looking at some of your recent large contracts, 15,000-unit win with a large national retailer on the Terex contract. It seems like they are going into deployment factor than some of your larger contracts in the past. Is that a fair assessment and are these larger customers now getting more comfortable getting into faster deployments in your exciting de-pipeline I guess?

[Marc Eisenberg:]

Absolutely. The reasons Terex can go faster is number one, because we took our time announcing it. That seems faster than it is but we put two years in to Doosan. And then once you have that Doosan product built, it’s only a quarter or two to customize it for Terex. So it’s quicker. And on the retailer, what happens there is, we spent the last year and a half building a trailer tracking product to go along with our refurb product. And over the last three quarters, we start building 500 a quarter and then 1500 quarter and it’s been kind of creeping up. But what’s happening while we’re creeping up is we've got units out there that have been out there performing really, really well for nine months that gives the bigger guys this great sense of comfort and deploying in large numbers in some of these platforms. So yeah, but it’s definitely speeding up.

[Sid Sinha:]

Okay. Great. And just one last one from me and I’ll pass the line. So just a follow-up to the last question, if that’s the case of these larger deployments speeding up and with SkyWave coming into the model with a 50% hardware to services mix. How should we think about the -- for the combined companies of hardware to services mix in 2015?

[Robert Costantini:]

The mix, we’re like 70-30 or 50-50. So it’s probably 60-40. It would be 60-40.

[Sid Sinha:]

60-40. All right. Thank you for taking my question.

[Marc Eisenberg:]

Okay.

[Operator:]

And we’ll take our next question from Rajesh Ghai with Macquarie.

[Rajesh Ghai:]

Hi. Good morning. Thanks for taking my question. You’ve seen a very high volume of hardware shipments in the past three quarters -- in the last three quarters of 2014. How much incremental service revenue should we expect from these shipments once the service is activated? And are these going to be an OG2 and how much higher ARPU do you expect from these shipments? Thank you.

[Marc Eisenberg:]

Yeah. So hardware shipments are going up. And it’s funny, we didn’t set out to get into the hardware business but we just can’t figure out how to transmit without it. And if you look at the customization that we put into our hardware, we find ourselves in a position that we build around hardware. That being said, we average over 25 point margins. I think this quarter was 30 point margins on hardware and the hardware business continues to grow. The last three quarters, Q2, you had a lot of hub; in Q3, you had a lot of refurb; in Q4, you are going to have a lot of everything. I would say, you’ve seen maybe in terms of even Q2, you’ve only seen about a third to half of those units go on the network so far. Q3, you probably haven't even scratched the surface are seeing barely any of it than in Q4. We kind of guided that those service revenues coming across the first half of 2015. So you really haven't seen the full effect of the ARPU is going up but each one of those we expect to start putting on service revenues. Historically, the ARPUs on those units, on our solutions business are in the mid teens because of the next year with the trailer stuff is a little lower than the refurb stuff, and the refurb stuff is about the same as the heavy equipment deployments. In Q4, those deployments will be drag down a little bit but still high single digits and we will still have a positive effect on ARPU.

[Rajesh Ghai:]

Great. You mentioned in your press release that 30% of the traffic is now traversing the OG2 mission satellites. Is it mainly traffic that was traversing previously in your older constellation that’s now has been transferred over to the OG2 satellites or is this incremental revenue? And this -- and in general for new activations on OG2, are you’re seeing higher ARPU than what you saw under your older constellation?

[Marc Eisenberg:]

Yes. So you have the bunch of questions there. So in terms of OG1, that 30% -- what we’re seeing 10% more throughput. So this 10% more messages than they were. So they definitely picking up messages that weren't seen before. And the reason its not 30% more is some of these applications, what happens with the messages, when it doesn’t receive the satellite, it holds onto it, then it tries again later and then you eventually do complete the message with some of the older units out there. And so what the customers experiences, something that used to take as much as 45 minutes boom over some that’s taken three minutes. So you’re seeing a little bit of everything. So it is taking traffic from the other satellites, throughput as a whole is certainly going up. We are seeing a bump in revenues, couple hundred thousand a quarter from filling the gap in the sky but there is two stages here. We fill the gap in the sky because we needed to. And then on top of that over the last six or seven weeks, we made some pretty cool software upgrades, which drastically improve the service on these, which is why we previously said, 20% of the traffic and now it’s up to 30% of traffic. So we keep making them better, was few hundred gram per quarter. We made the changes to the software, it grew a little bit and then it can even grow from there when the other 11 get launched.

[Rajesh Ghai:]

Great. Congratulation. Thank you.

[Marc Eisenberg:]

Thanks.

[Operator:]

And we’ll take our next question from Brian Ruttenbur with CRT Capital.

[Brian Ruttenbur:]

Thanks very much. Couple of questions about the guidance that you gave, the $170 million to $190 million of revenue and adjusted EBITDA $40 million to $45 million. Are there -- I assume there is going to be some charges and financing fees and other things like that and our advisory fees in the first quarter, maybe even second quarter. Can you give us a scale of those fees? Just trying to understand the actual EBITDA versus the adjusted.

[Robert Costantini:]

Yeah. So all those cost, probably an acquisition related and they could be as high as $3 million to $4 million, let’s called $3.5 million.

[Marc Eisenberg:]

But they’re not in the adjusted EBITDA calculation because it’s adjusted out.

[Robert Costantini:]

Yeah.

[Brian Ruttenbur:]

Yeah. I was just trying to get down to the EBITDA. Okay. Perfect. The D&A, depreciation, amortization, you gave us fourth quarter of $4 million. Can you give us first and second quarter as we get OG2 in there and SkyWave?

[Robert Costantini:]

Yeah. So first going to go to like 46 and 56, assuming we get the launch -- we keep to the launch schedule that we are anticipated.

[Brian Ruttenbur:]

Okay. And as I’m doing back of the envelope type calculations in the model, trying to make projections into ’15? We're still having on a GAAP basis negative earnings in 2015, does that seem right? I just want to make sure I’m shaking out even with the strong adjusted EBITDA?

[Robert Costantini:]

Yeah. And there’s going to be a lot of depreciation area.

[Brian Ruttenbur:]

Yeah. That’s on capital.

[Marc Eisenberg:]

Depends on the launch date.

[Brian Ruttenbur:]

Perfect. And any update on launch date?

[Marc Eisenberg:]

Yeah. We’re looking, still pushing for Q1, but could potentially flip into Q2. What we are -- once the first satellites were launched, we kind of took our time to make sure that they were working well and that they were long like assets that we’re going to get up there, put it through that, and now full scale manufacturing, so that we can get that next launch up as quick as possible.

[Brian Ruttenbur:]

Okay. Then last question, just trying to understand overlap with SkyWave? How much of your business is overlap right now with that?

[Marc Eisenberg:]

From the topline, almost zero.

[Brian Ruttenbur:]

Okay.

[Marc Eisenberg:]

Almost zero, it’s uncanny, I mean, they’ve a higher bandwidth products. They distribute in places that we’re not there, they are selling to security, marine, we selling to cargo and heavy equipment. I mean, the only overlap that we see and we’ve already hold it out, there’s a little bit of inter-company and that’s star track by some maritime from them. So when we say $62 million, it’s really $64 million and we’re pulling two out.

[Brian Ruttenbur:]

Perfect. Thank you very much.

[Operator:]

And we’ll take our next question from Mike Malouf with Craig-Hallum Capital Group.

[Mike Malouf:]

Great. Thanks for taking my questions.

[Marc Eisenberg:]

Hi, Mike.

[Mike Malouf:]

I wonder if you could talk just a little bit more color on AIS revenue. Did you give that to us for this quarter and if not, could you?

[Robert Costantini:]

Yeah. Just over a $1 million.

[Marc Eisenberg:]

Yeah. Just over a $1 million.

[Mike Malouf:]

Okay. And I thought that might start accelerating, I think in May you had sort of commented that it would be up into that $6 million to $7 million annual pace? Is that -- are you seeing that just a little bit delayed or are seeing that start to ramp here now with the increase in traffic?

[Marc Eisenberg:]

What happened was full launch was delayed, so the satellites weren’t put into service until the last two weeks of Q3. So you didn’t get a whole lot of benefit in those two weeks. But, I think, we’re going to get to that $6 million on a run rate some time in the middle of 2015 and then, I think, once we launch, we’re year or two away from $10 million to $15 million. It’s funny. That has been the most consistent story.

[Mike Malouf:]

Okay. And then when you talk about the five-year growth plan, you sort of put out in the 8-K. Can you talk a little bit about the 20% topline growth for service revenue? Is that coming from really the synergy between the two companies SkyWave and yourself or are you seeing that independent of that, just with regards to the OG2 complete launch?

[Robert Costantini:]

Yeah. So they’ll be -- it's going to come from a variety of our places. Certainly the OG2 increase in AIS and distributing -- having part of distribution capability plus both platforms, so that’s where that would come from.

[Mike Malouf:]

Okay.

[Marc Eisenberg:]

There is some significant synergies there, Mike. I mean, imagine of all our OEMs get 20% or 25% bigger in a couple years, because we get them deployed on, in geographies that we don’t have and on some of the bigger equipments, the mining equipment and stuff like that. We can send them many, many kilobytes of data over the air. We don’t have access to that as well. And so, I think, our companies are both growing at pretty good rates, but I think with the collaboration of both, it should pick up even more.

[Mike Malouf:]

And other countries that you are not in that the SkyWave has access to? Are you able to piggy back at all on those agreements?

[Marc Eisenberg:]

Yeah. We hope so. I mean that’s part of the beauty of the collaboration with Inmarsat, they are licensed, more than anyone I am aware of. So there is some pretty close collaboration there and we have access to their distributors that in some cases they help them obtain those licensing and hopefully, we can piggy on, you are absolutely right.

[Mike Malouf:]

Thanks a lot.

[Marc Eisenberg:]

Sure.

[Operator:]

And we will take our next question from Chris Quilty with Raymond James.

[Chris Quilty:]

Hi, everyone. My question for you, I guess, just first for Robert, that insurance settlement or insurance costs you mentioned, is that a run rate $125,000 per quarter that we should plug into our adjusted EBITDA?

[Robert Costantini:]

Yeah. The max total is like $450,000. So it’s just over the one year period. So it ends over the launch one-year, July to July.

[Chris Quilty:]

Got you. Second question, when we are modeling out for the post-combination period with SkyWave, looks like we are going to see 250,000 subs come on to the network. And if I did the math right, it’s a higher ARPU more like $10 to $11 a month. So overall everything should blend in something like a $7 ARPU. And then the question is, what should we expect for their run rate net adds on an annual basis, either historic or if you want to give it, what do you think it might be with some of the synergies on a go-forward basis?

[Robert Costantini:]

So typically they grow their subscribers on a net basis between 10% and 15% a year. And your 250 number is accurate, it’s actually a little bit higher but back to the Star Trek story there is like 10,000 subs that are eliminated via inter-company.

[Operator:]

And we will take our next question from Jeff Rudner with UBS.

[Jeff Rudner:]

Good morning, gentlemen. And thank you very much for taking my question. First congratulations on a very, very nice quarter and certainly the acquisition of SkyWave. A number of my questions have been answered, but one or which still remain. The revenue and EBITDA figures you gave for next year, can you break out the legacy ORBCOMM figures from the SkyWave figures?

[Robert Costantini:]

We are hesitant to do that because we put both in and then we discounted them together. So it’s not difficult -- it's not easy to break down the net number.

[Jeff Rudner:]

Okay, but the 170 to 190 revenue and 40 to 45 EBITDA are reasonable figures to be using for next year?

[Robert Costantini:]

Yeah. I mean, they are tracking the topline of the both companies, certain natural growth or historical growth over the last couple years and the margins are within the range where we should be able to scale.

[Jeff Rudner:]

Okay. And after the underwriting of Friday, the share count outstanding should be something close to $70 million?

[Robert Costantini:]

Yeah, some thing.

[Jeff Rudner:]

Okay. Plus if they exercise the option which I assume they will.

[Robert Costantini:]

Yes.

[Jeff Rudner:]

Right. Okay. And last question going back to the launch of the remaining 11 OG2 satellites. I know with the first six the hang-up was with SpaceX not being able to give us a launch time. I got the impression from you Mark that part of the -- the launch is still scheduled for sometime in December according to the website. So obviously you said the first quarter hopefully but may be the second quarter. Is the pushback due to the fact that we don’t have all 11 OG2 satellites ready to go, or they are ready to go and are just waiting for a timing slot from SpaceX?

[Marc Eisenberg:]

The December number was not coming from us.

[Jeff Rudner:]

Right.

[Marc Eisenberg:]

I think the last couple of quarters we've been pointing people to a Q1 launch date. So I don’t want you to feel like there is some change there, there is not. It’s been consistent, but when the satellites launched, we just wanted to freeze the production…

[Jeff Rudner:]

Right.

[Marc Eisenberg:]

Take a look at the performance. Just make sure the satellite is like a kid right, you just want it to be healthy.

[Jeff Rudner:]

Right.

[Marc Eisenberg:]

And so we just took a couple of weeks. There were some software issues where there were a number retries on the birds and we’ve worked through those. And we are extremely happy with how they are performing right now. So we are in a mad rush to get them launched again.

[Jeff Rudner:]

Okay. But again are the remaining 11 satellites ready to go now? Or is it -- are they still being worked on to get them to peak performance and maybe they won’t be ready to be launched until the first quarter?

[Marc Eisenberg:]

They are in a process of final assembly.

[Jeff Rudner:]

Okay, great. Thank you very much and again congratulations.

[Marc Eisenberg:]

Thanks.

[Operator:]

(Operator Instructions) We will go next to Jim McIlree with Chardan Capital.

[Jim McIlree:]

Yeah, thanks. And good morning.

[Marc Eisenberg:]

Thank you.

[Jim McIlree:]

Can you tell us what the past three years of SkyWave growth has been in hardware and software or hardware and services?

[Marc Eisenberg:]

I know the topline’s been about 10% over the last three years in that range. I don't have the breakout at my finger tip in the...

[Jim McIlree:]

Okay. So essentially you're looking for the future growth to be similar to what it’s been historically. Is that fair enough?

[Marc Eisenberg:]

Just for 2015, I mean, we are diving in and then we’re trying…

[Jim McIlree:]

Yeah.

[Marc Eisenberg:]

Those revenue synergies are little harder time to time. So you have to get in and start talking to customers and think where the opportunities are, but yeah we are…

[Jim McIlree:]

Right. Okay.

[Marc Eisenberg:]

Go crazy here.

[Jim McIlree:]

And then both of you have mentioned in your prepared remarks that you are going to ship and kept saying you are going to ship 20,000 Units in Q4. I'm assuming that you're not going to get sales for all of those 20,000 units. Is that correct?

[Marc Eisenberg:]

No, we don’t want to confuse people in the difference between our sub counts and our ship counts. So when we say this quarter we did 22,000 subs that includes the solution stuff that got turned on. It’s our OEM business, it’s a lot of different things. So when we say we are going to ship 20,000 subs, we are talking about hardware devices. So the sub count should be rising of news unit that were turning on. The other reason we say that we are shipping is because the timing as to when they get turned, some of our stuff gets turned on when we shipped and some of our stuff gets turned on when it gets associated at the trailer or at the piece of heavy equipment. So we’re just kind of cautioning you that even though you shipped 20,000, those subs don’t show up on the first day.

[Jim McIlree:]

But the sales of those hardware units will show up in Q4.

[Marc Eisenberg:]

We shipped -- the sales of the hardware shows up that day.

[Jim McIlree:]

Okay. All right. I guess the distinction that you are making, that’s great. Thank you. And I think everything else I had was answered previously. Thank you.

[Marc Eisenberg:]

Awesome, Jim. Thanks.

[Operator:]

And we take a follow-up question from Chris Quilty with Raymond James.

[Chris Quilty:]

Thank guys. Sorry about the time I got cut off. Just as a follow-up on the quarter and as subscribers, can you give us a sense for in Q3 and what you expect in Q4 in terms of the next traditional versus solutions type sales.

[Marc Eisenberg:]

So we do on our satellite network, either somewhere in the high teens or about -- somewhere in the high teens of subscribers per quarter. And then the solutions subs, kind pick it up from there and they could be anywhere from a 2,000 or 2002, many thousands depending on when they get associated.

[Chris Quilty:]

Got it. And if I’m correct, SkyWave does not have a substantial solutions business. And can you talk about the opportunity to maybe grow their solutions?

[Marc Eisenberg:]

One of the reasons that we love the SkyWave transaction is boy -- it does add bench strength to what ORBCOMM does. If you look back almost every acquisition that we have ever done as an added resources to ORBCOMM, its taken resources and then we kind of struggle to catch-up and add engineers and you’ve been seeing a lot of that lately. This is the first one that kind of gets us to that level where ORBCOMM’s got the right amount of engineering and then you can start seeing such scale in the business. What SkyWave does today is they self service and they sell this applications that you can add on. So it is not like a solution from a hardware perspective, but it is a solution from a web perspective.

[Chris Quilty:]

Got you. And can you talk about when you expect to sees the benefits of the OG2 network, in terms of some of the new services that network will enable? I'm assuming you're not offering some of your high gain, large bandwidth type solutions at present but you will launch those new services when all the satellites are in orbit?

[Marc Eisenberg:]

Yeah. We expect to launch those services in the back half of 2015 after those other satellites. Otherwise, you’d only have visibility to those services eight hours a day. And we need to get as many OG2 modems that can take advantage of those services out there as possible. And we really just started shipping OG2 modems in bulk over the last couple weeks

[Chris Quilty:]

Okay. And is it fair to assume you’re developing a modem specifically for some of the security type applications, you’ve talked about that new network will enable?

[Marc Eisenberg:]

We are. So there is two parallel ones, one on our network and one on the SkyWave network, so absolutely. We are so excited in that in preparation for OG2, we are going to ship 17,500 devices hopefully in Q4, if not, we’ll finish the rest up in Q1 but it gives you a feel for some of the demand that’s out there.

[Chris Quilty:]

Got it. And final question. If you can just perhaps explain the difference between the Inmarsat related M2M solutions, you’ve been developing relative to the IDP solution that SkyWave offers both in terms of price point for those solutions, as what was perhaps the different application maybe capabilities?

[Marc Eisenberg:]

Sure. If you want, I can even kind of give you a little bit of history of it. So when ORBCOMM and Inmarsat get together to develop standardization and scale across the industry, which is something that satellite businesses is lacking, right. I mean, every one of us, we do our own thing. What we set out to do was to mimic the ORBCOMM network over the Inmarsat network. And as you know, the Inmarsat network wants to open up a challenge and sends lots and lots of data. And we realized that it was nearly impossible to do without SkyWave, because SkyWave really develops that packetized solution that takes those open channels from Inmarsat and converts them into these small packets. So our products with Inmarsat, really is working over IDP. And so what SkyWave does is they’ve got a real-time solution. It’s like 15 seconds, it’s better than anyone in the industry. It’s four times faster than the other large MSS networks. So you’ve got something that’s very, very quick and you also have something that goes up to like, 10-kilobytes before you have to close down the channel. And because it’s so feature-rich, the hardware on the SkyWave stuff tends to be hundreds of dollars as supposed to what we were looking to build, which is like a, close to like a $100. So what we do is we build a smaller hardware device that works over IDP. That takes those 10-kilobytes and brings it down all the way to 300 bytes. And by opening up the channel for such a smaller period of time, you don’t need as much gain and you can work with a much simpler antenna, which drastically keeps it quick but keeps the costs out of the network. So what we are going to end up with SkyWave is a high bandwidth product, a low bandwidth product, but of them 90 some odd percent of the latency in under 15 seconds.

[Chris Quilty:]

Very good stuff. With all that going forward.

[Marc Eisenberg:]

I appreciate. Thanks Chris. You got your voice back. Congrats.

[Operator:]

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

[Marc Eisenberg:]

Thank you. Thank you for listening on our Q3 call. We’ve got so many exciting opportunities underway. Between the transformation acquisition of SkyWave, a new constellation and huge customer wins across the business, it’s tough not to the excited. If you are interested in more detail, you can go to on our website at www.orbcomm.com and see our products, our press releases, our SEC disclosures, as well as our latest investor deck covering SkyWave and the acquisition. As always, we look forward to speaking to you again next quarter.

[Operator:]

And that does conclude today’s conference. Thank you for your participation.