ORBCOMM Inc.
Q4 2014 Earnings Call Transcript

Published: 12 Mar 2015

[Operator:]

Good morning, ladies and gentlemen and welcome to ORBCOMM’s fourth quarter and full year 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] A replay of this conference call will be available from approximately 3

[Marc Eisenberg:]

Good morning, and thank you for joining us. With me today is Robert Constantine, 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. During our last call, we said that the fourth quarter would be exciting and it certainly was. In Q4, we had a huge increase in the amounts of hardware deployments. We added a record number of subscribers. We made solid progress on large customers’ rollouts and we finalized two strategic acquisitions that closed just after the New Year. We’ve got a lot to catch up on today. On this call, we’ll focus on Q4, talk about the recent acquisitions, update you on satellite deployment timing, highlight some customer wins and look ahead to 2105 as we continue to see this momentum escalating. So let’s kick it off. Earlier this morning, we issued a press release announcing financial results for the fourth quarter and the full year ended December 31, 2014. I'm pleased to report that we had record high revenues in the quarter. For Q4 of 2014, our total revenues were $29.5 million. Adjusted EBITDA was $5.2 million. Service revenues increased year over year by 3% to $15.2 million. Product sales increased 220% to $14.3 million. Total revenues increased 53% from the same period a year ago. Net loss for the fourth quarter was $5.6 million or a loss of $0.09 a share compared to $0.8 million or $0.02 a share in the same period last year, lower largely due to higher depreciation and ammonization expense of $4.4 million and non-recurring costs consisting of debt refinancing costs of $2.6 million, acquisition related and integration costs of $2.2 million and impairment loss of $0.6 million related to an AIS satellite and an inventory write off of $0.4 million. Robert will break this into more details in a few moments. Our subscriber count grew by 39,000 net subscriber communicators or subs, ending the quarter at $976,000. This does not include the over $250,000 subscribers that came in through the SkyWave and InSync acquisitions that will begin to be tallied in Q1. For the full year of 2014, service revenues increased year over year by 7% to $59.6 million and product sales increased 100% to $36.5 million. Total revenues of $96.2 million increased 30% from the same period a year ago. Net loss for 2014, was $4.7 million or $0.08 a share compared to $4.5 million or $0.10 ashore in 2013, lower largely due to the higher expenses in Q4 I just spoke about. Adjusted EBITDA for 2014 was $17.7 million, compared to $16.7 million in 2013. So let’s take a closer look at Q4. After months and in some cases years, a great deal of development was completed and as a result, we shipped a lot of pent up hardware demand. We shipped about half the product for the major retail fleet we recently announced, and the balance of the remaining units were shipped early in Q1. We also delivered a substantial number of solutions shipment for Doosan and Hub, which lead us to a record breaking number of more than 17,000 wireless hardware devices shipped in Q4. This doubles the number of our best quarter to date. Hardware margins dropped off a bit in Q4 due to large volume orders and from inventory write off of $400,000 on products we took on from the PAR LMS acquisition on a product line that was moved to a StarTrak model which we felt was a better option for customers. We anticipate hardware margins to return to the 25% range. Service revenue grew 7% year over year. However last year, we had a onetime back billing catch up of over $1 million with a large customer. Otherwise, the year over year service revenue growth would have been 9%. We should get back to higher levels of service revenue growth as we had some Q4 timing issues. We completed the manufacturing and shipped the majority of the units we sold very late in the quarter and during the holidays. So although those units shipped, they are added to the subscriber totals that were not installed and able to generate service revenue by the end of the year. Counting the majority of the 17,000 wireless devices shipped in Q4, and adding the uninstalled units from prior quarters as well as January shipments, that’s January 2015, we get to nearly 40,000 devices shipped that have yet to provide service revenue. In mid to late February, we started seeing significant amounts of units being installed and coming online on a daily basis. Service levels were positively affected by the improvement we made to six OG2 satellites, providing the launch of commercial service in mid-September, but the new satellites did not achieve optimal messaging until mid-November. In addition, we experienced an extended slowdown in usage in the last two weeks of the year due to the holidays, making service revenue a bit lethargic in Q4. With the multiple installations starting to support service, the improvements to the constellation and holidays behind us, we expect service revenue to grow in Q1 of 2015 to be in the $24 million range from organic growth, coupled with contributions from SkyWave and InSync. We expect service revenues to continue to accelerate throughout 2015. On the solution side of our business, we finished shipping in January. The over 15,000 units of our newly released dual mode GT1100 trailer tracking solution for a major retail customer. It was quite an achievement by our engineering and operations team in completing such a large order in such a tight timeframe working throughout the holidays. I think this opportunity really puts our company in perspective. With the team we’ve built and attitude through acquisitions, nearly 100 people touch this project across the marketing, sales, engineering, and operations teams, demonstrating ORBCOMM teamwork at it best. Keep in mind that this was a new configuration for GT1100 which leverages our new OG2 satellite modem and Verizon terrestrial service. I'm not aware of another company in the M2M business that could have pulled this off so effectively and efficiently. As I mentioned before, multiple crews were dispatched in February to begin installing these devices as well as the incremental 3,000 units of our intermodal container monitoring solution for Hub Group that shipped in Q4. In addition, we received the go ahead from Hub to start building the next 10,000 intermodal units. We expect to ship these between late Q2 and Q3 of 2015. In Q4 we continued to expand our leadership in the cold chain industry with some big wins with new customers while continuing to deploy with current partners. We closed opportunities with two leading truck companies, Werner Enterprises and Sunstate Carriers. ORBCOMM solution will help Werner and Sunstate ensure the on time delivery and product integrity of their customer’s temperature controlled products such as fresh produce, frozen products and pharmaceuticals, which will have a positive impact on their bottom-line through reduced fuel cost, maintenance and conservation of loads. We also received significant renewal orders from some of our largest customers, including Marten Transport, Prime, CR England, John Christner, [Celadon], Tyson Foods and [KLOS]. Turning to our OEM business, we recently signed a multi-year services agreement with Komatsu, one of the most important heavy equipment customers. As part of this renewed agreement, Komatsu will continue to deploy its KOMTRAX and VHMS on-board machine monitoring and communications systems on their equipment, leveraging ORBCOMM’s satellite network services. ORBCOMM enables Komatsu to track and monitor location, critical operating metrics, productivity and performance of heavy equipment assets, providing significant operating efficiencies through greater visibility and control of their global fleet. Komatsu is the world’s second largest manufacturer and supplier of earth moving equipment and we are extremely excited to extend our 14 year relationship with them, which further solidifies our leadership position in heavy equipment telematics. Our solutions customer [Charex], a large OEM, recently provided a preview of our telematics solutions to many of their regional dealers and we expect them to begin deploying on multiple models of their mining equipment towards the ends of Q2. There is an additional new major OEM relationship, our first in the transportation space for whom we’ve began developments. We expect this to be an impactful global project. It’s a great opportunity that we’ve been working on for well over a year. We expect to release more information on this opportunity soon after our customer announces the product to their dealers and we’ll expand on the information we can deliver on future calls. We anticipate deployments to begin in moderation in Q4 2015 and accelerate throughout 2016. AIS revenue in Q4 reached $1.1 million, increasing 16% over the prior year, as we added new partners and renewed AIS data service agreements for the number of significant current customers. We started providing AIS data services to the New Zealand Custom Service in conjunction with our partner [Corea]. In addition, we also began providing AIS data directly to the US Coast Guard Alaska District 17, as well as the Nigerian Navy and the Argentine Coast Guard. As a reminder, the OG2 satellites provide about eight hours a day of daily AIS coverage. Our second launch should fill out the rest of the day. Let’s transition to our newest areas of business, the two strategic acquisitions that closed in January of 2015. As a reminder, SkyWave Mobile Communications is one of the largest M2M service providers in the satellite industry and the largest M2M service provider on the Inmarsat network. InSync Software is a leading provider of solutions services in RFID technology across multiple vertical markets to the M2M industry. The synergies and strengths gained through these acquisitions significantly expand ORBCOMM’s capabilities and market reach. Both companies are a great match on many levels. We now have one of the largest global distribution networks, the latest and most diverse selection of products, an extremely low cost structure, the widest selection of capabilities, from connectivity, to hardware, to software, supported by one of the largest engineering teams in the commercial M2M industry, allowing us the ability to engage large customers through unparalleled customization and customer support. Drilling down further, the SkyWave acquisition is transformative to our company across multiple fronts. First and foremost, it creates the largest global space based M2M company while furthering ORBCOMM strategy to provide the most complete set of capabilities and options in the industry, adding distribution and geographic reach to strengthen our portfolio. To start, we’ve already combined the ORBCOMM and SkyWave network cell teams that will support the global indirect VAR channel, resulting in over 20 dedicated resources, offering our networks and devices covering six continents. We expect SkyWave’s expansive IDP licensing and relationships in countries like Russia and China to facilitate previously difficult to achieve market access for our OEMs and expand our scope and scale globally. Our complimentary portfolio, which includes SkyWave’s high bandwidth, low-latency satellite products, is starting to drive cross-channel interest for a wide range of applications. SkyWave recently announced they’ve extended our dual-mode hardware portfolio with its new IDP 782 tracking and monitoring device, which allows fleet managers to economically combine both cellular and satellite communications while adding flexible programming and battery backup. This feature-rich device could be used with a variety of assets, including transport vehicles, marine vessels, oil and gas trucks as well as mining equipment. Sizing the SkyWave business, SkyWave’s revenue in 2014 after adjusting for redundancy and StarTrak, was approximately in the low to mid $60 million range and at nearly a 50-50 split between recurring service revenue and hardware sales. They add about 250,000 subscribers to our Q1 subscriber base and typically grow between 7,000 and 10,000 net subscribers per quarter. Similarly, InSync significantly adds to the capabilities we can now offer the M2M industry while broadening our market access to a wider range of industries. Leveraging InSync’s versatile turnkey software applications, our customers can rapidly build and deploy enterprise solutions in markets including transportation and distribution, warehousing, supply chain, yard management and manufacturing. In addition, ORBCOMM will expand InSync’s uniform software platform that currently leverages our RFID, cellular and sensor technologies to include satellite technology. Some of their current customers include Iron Mountain, Dell SonicWALL, Gates Global and Emerson Electric. InSync has a great list of customers and we are confident that in a relatively quick timeframe, ORBCOMM will add significant business. Some of the terrific near term opportunities include, extending our transportation solutions portfolio with their advanced RFID technology, creating visibility from the ports or points of origin throughout the transportation chain, to the warehouse and finally to the end user, enabling us to monitor down to the pallet level. In addition, we intent to create new web based applications, adding vertical markets with InSync’s web platform, which is extremely configurable. InSync adds 35 experienced software engineers in the US and India to the ORBCOMM chain, bringing additional expertise and capabilities, leading to more products, incremental opportunities and faster development cycles. Sizing InSync, we expect that business to contribute an incremental $4 million in revenue this year, which will predominantly be made up of service revenue. Their business is typically compromised of an 80-20 split of service revenues versus hardware sales. We believe InSync will have a slightly positive impact on adjusted EBITDA in 2015, as they contributed positive adjusted EBITDA in 2014. But we will be investing in opportunities and expect InSync to have a more significant impact to adjusted EBITDA starting in 2016. Many of the acquisitions in the past had great technology, but were lacking scale, making it difficult to achieve their objectives. Post-acquisition that’s led us to pull resources out of our core businesses to support them, leaving us shorthanded and in need to catch up. The addition of SkyWave and InSync have helped us right size the company and in some cases, there were even significant areas of overlap. On that note, we’ve moved forward on executing our integration plan, eliminating redundant positions across the three companies. And although it’s difficult, we reduced the combined staff by 39 people or 9% of total headcount by the end of January. Many of the employees added through these acquisitions have taken leadership roles in ORBCOMM. The company is operating at higher levels of efficiency and is motivated to have a great 2015. From a cost synergy standpoint, we have previously guided to about $5 million to $6 million in synergies on our run rate exiting the year and we are on our way to achieving that. Going forward, we expect to add incremental synergies, including reductions in cost of service, efficiencies in manufacturing and revenue opportunities as we begin to cross sell products. We continue to build on our strategic relationship with Inmarsat, putting together the two largest players in satellite M2M Space. The possibilities are tremendous. We are very like-minded in our approach. We share the common goal to take the satellite M2M industry to a place where it’s no longer a communication platform that focuses on applications where terrestrial carriers cannot provide service, but to create a competitive and compelling satellite product offering across the entire global M2M industry. We are continuing to work with Inmarsat to standardize the satellite based M2M products around product formats and protocols, which should lead to higher scale, better price points, faster time to market and more deployments. We are now shipping ORBCOMM OG2 enabled modems in this format in bulk and we will be able to provide the Inmarsat IDP enabled products to developers in just a few weeks, allowing some of our key value added resellers and solutions providers to begin incorporating the technology into the design of their applications. Inmarsat and ORBCOMM have begun co-marketing these products to global OEMs, offering unparalleled global regulatory coverage, ease of programing and installation with solid networks to back it up. Moving along, we recently partnered with Orange, formerly France Telecom, a premier network operator to provide GSM cellular and dual mode communication services to M2M applications in the transportation, distribution, heavy equipment and security markets. We will collaborate with Orange on large, strategic opportunities to jointly deliver dual mode service that provide customers with low cost, flexible and reliable connected service. We now offer the M2M industry’s most diverse and comprehensive satellite and cellular offerings from these three satellite networks and seven tier one cellular operators. Turing to our OG2 network, it's been about six months since we launched OG2 commercial service for both M2M and AIS messaging. Our six OG2 satellites are operating well and are providing significantly enhanced coverage by filling the gaps in the OG1 constellation. The OG2 satellites are currently processing over 35% of our network’s total traffic. Our customers are also benefiting from the lower latency and high refresh rates from AIS service. We are extremely pleased with where we are in the entire OG2 program and expect further progress in the coming months as we lead up to our second and final OG2 mission. Let me update with where we are in the next launch of the remaining 11 OG2 satellites. Sierra Nevada Corporation has hit their stride on Satellite production and we now have four OG2 satellites complete and ready for launch. SNC is on place to complete one additional OG2 satellite every two weeks and expects to have all 11 satellites completed and through system level testing, which includes vibration, thermal, solar array deployments and electromagnetic interference tests by the end of April. One key difference with our mission two launch is that we’ll be using SpaceX’s full thrust Falcon 9 launch vehicle. This upgraded Falcon 9 rocket is designed to improve the reliability and power of the rocket’s thrust capability, which increases the probability of a successful mission. We believe we will be the second or third launch aboard the upgraded Falcon 9, giving SpaceX a launch or two to perfect the upgrades. SpaceX is improving on their ability rapidly launch consecutive missions, recently completing three successful launches in a seven week window. We continue to target this summer for our final OG2 launch and expect to provide a target launch date on our Q1 earnings call in May. Wrapping up, we hope you’re as excited as we are to see many of the projects we’ve been working on starting to bear fruit, much of which can be seen in Q4. As our recent announcements have shown, we by no means intend on slowing down. Between the great business we’ve built and our two latest strategic acquisitions, we have the skill sets, capabilities and distribution channels needed to position us well for great success in 2015 and beyond. New customer wins, launching satellites, enhanced integration, large customer deployments, new products, and vastly improved levels of adjusted EBITDA, are at the top of our list. With that, I'd like to turn the call over Robert to walk you through the financials.

[Robert Costantini:]

Thank you, Marc, and good morning everyone. There were a lot of moving parts in Q4 that have had a significant impact on our financials. Several of our growth drivers are starting to create significant improvement in revenue and profit growth. Total revenues of $29.5 million in the fourth quarter of 2014 were well within our guidance range of $28 to $30 million, and increasing 53% over the prior year, driven by record product sales of $14.3 million. This was more than triple the level in the prior year fourth quarter. Service revenues in Q4 were $15.2 million, and up about 3% over the prior year quarter. Network revenues consisting of satellite revenues and AIS, as well as monthly recurring revenues from solutions services were up about 4%, while other service revenues like installation and professional services very typically one time in nature, were down over the prior year period. Growth in service revenues was lower than prior quarters due to a few factors. Some of these factors Marc has mentioned, including the timi5ng of network improvements, slowdown in the holiday traffic and subscriber additions not yet providing service. Additionally, service revenues were lowered by fluctuations in foreign currency exchange rates in Q4 by about $125,000. Service margins for the quarter improved to 65% from 63% in the prior year period. And a record 39,000 subscriber additions were added in Q4 as an additional indicator of strength and future growth in service revenues. This brings our subscriber base to over $976,000 subs at year end. Service revenues for the full year 2014 were $59.7 million, increasing 7% year over year. Service revenues in 2013 benefited from a back billing adjustment to a large OEM. Adjusting for this item, service revenues this year were up about 9%. Product sales for the full year 2014 were $36.5 million and doubled from the prior year as our new product releases or gaining traction in the market. Organic growth was about 41% and the balance was added by Euroscan. Total revenues for 2014 were $96.2 million, increasing 30%. Gross profit in the fourth quarter of $11.9 million increased by $1.6 million or 16%. And for the full year, gross profit of $47.6 million, increased $6.9 million or 17%. Product gross margins were 14% this quarter due to volume discounts on large orders and an inventory write off of $0.4 million related to 2G inventory we deemed obsolete. For the full year, product gross margins were 22%, reflecting good margin stability. Service revenue margins improved as direct costs were down 3% in Q4 and for the full year, direct service costs were up about 3%, reflecting additional cost to operate the companies acquired and we expect this platform to scale. Operating expenses were higher from the employees we added through acquisition and other costs due to the increase in the size of the company such as higher audit fees. Due to expected operating efficiencies, we anticipate that SG&A as a percentage of revenue will be lower in 2015. Operating expenses included an impairment loss of $0.6 million for an AIS micro satellite. Acquisition related and integration costs were $2.2 million in the fourth quarter and more than doubled to $3.8 million for the full year in 2014 and that’s compared to $1.7 million in 2013. Acquisition related and integration costs have dropped significantly in Q1, although we expect some residual cost from the acquisitions that were completed in January 2015. We think this number will be approximately $500,000. Depreciation and amortization increased by $2.6 million in the fourth quarter to $4.4 million for the six OG2 satellites as we start to refresh our constellation. For 2015, we expect depreciation and ammonization in be in the mid to high $20 million range for the combined company. Q4 2014 adjusted EBITDA grew 11% over the prior year to $5.2 million. Adjusted EBITDA for 2014 increased 6% or $17.7 million and that’s a margin of 18% compared to $16.7 million in the prior year. We’ve incurred some expenditures over the last several quarters to pursue strategic opportunities. As I mentioned on prior occasions, these included expenditures related to marketing the OG2 launch, expenses to secure large customer orders and growth opportunities and debt refinancing to lower interest rates and fund the acquisitions. These activities added costs in 2014, reducing short term profitability to capture higher future revenues and we are starting to see that in Q4. Net loss in Q4 2014 was $5.6 million and included significant Q4 expenses, most being non-recurring in nature such as acquisition related and integration costs for SkyWave and InSync acquisitions, impairment charges related to one AIS micro satellite and other intangibles, debt extinguishment cost for refinancing debt and in-orbit insurance for the July 2014 launch. Adding to that were higher depreciation and amortization costs in the quarter and the sum of all these costs aggregated over $8.1 million in Q4, changing net income for the first nine months of the year to a net loss of $4.7 million for the full year 2014. Looking at the balance sheet, cash, cash equivalents, restricted cash, and cash held for acquisition, was about $216 million at December 31, 2014, compared to $43 million at September 30, 2014. That’s an increase of $173 million. We increased our debt outstanding by over $100 million, combined with an equity offering in November, providing net proceeds of $78 million. Cash held for acquisition is $123 million used to complete the SkyWave acquisition in January 2015. Post-acquisition cash balances are over $90 million and ORBCOMM is fully funded with a sizeable buffer for the remaining OG2 launch campaign. The company expects to start generating meaningful free cash flow after the final launch is completed in 2015. The company will then be embarking on a decade-long CapEx holiday. Total debt outstanding was $150 million at year end 2014. The new debt facility lowers our interest rate to 5.75% from 9.5% on the fixed rate notes it replaced. The loan facilities have no scheduled principal amortization over the five-year period, but there’s a sweeping function for excess cash starting in 2016. We’ve made good progress towards capturing the cost synergies at SkyWave and InSync, with integration activities as the main priority to meet our internal synergy plan and integration timeline and 2015 guidance. On our last call we guided to 2015 revenues of $170 million to $190 million and we are increasing our revenue guidance to include InSync and are now projecting total revenues of $174 million to $194 million. We are maintaining our adjusted EBITDA guidance in the $40 million to $45 million range. This concludes our remarks and we are happy now to take your questions.

[Operator:]

[Operator Instructions] And we will take our first question from Brian Ruttenbur with CRT Capital.

[Brian Ruttenbur:]

Yes. Thank you very much. First of all, on ARPUs, on the services side, can you go over, if you've mentioned it I missed it in your comments, but why they were down in the quarter sequentially?

[Marc Eisenberg:]

So what happened with service revenues in the quarter is a great number of subs were added toward the end of the quarter and didn't have an opportunity to generate revenue. So you had a bigger numerator and smaller denominator. It just was a little bit with the math. And then the second thing that happened as well is, in Q4 there’s a slowdown in the second half of the quarter as a bunch of our usage based subscribers aren't transmitting, the backhoes aren't working during the holidays.

[Brian Ruttenbur:]

Okay. So it’s a seasonal effect as well as the waiting?

[Marc Eisenberg:]

Yeah.

[Brian Ruttenbur:]

Okay, that makes sense. Question about guidance now, moving on to that. $174 million to $194 million, this would imply that your ARPUs are going to up to on average around seven box. Is that the right ballpark?

[Marc Eisenberg:]

They’re certainly going to go up in the mid-sixes, but hardware is going to go up as well.

[Brian Ruttenbur:]

Great. And then, in terms of gross profit, where do you see gross profit? It should be overall slightly down from 2014 levels, is that right?

[Robert Costantini:]

The percentage?

[Brian Ruttenbur:]

Yes, percentage wise.

[Robert Costantini:]

No. In terms of the mix, we think they should be roughly the same because the mix is going to change, but service margins are going to improve a little bit and we are still targeting around 25 points for hardware margin. So if you blend that in, you’ll get about a level margin percentage.

[Brian Ruttenbur:]

Okay. So it should be 25% hardware and roughly 60%, in the 60s, is that what you said?

[Robert Costantini:]

High 60s, so 67.

[Brian Ruttenbur:]

Okay, very good. And then just going on down through there, trying to understand your other -- you gave us DNA very clearly. Can you give us any specifics on SG&A? You mentioned taking out $5 million to $6 million of synergies. I assume that’s on the SG&A side?

[Robert Costantini:]

Yes. So as a percentage of revenue that’s going to drop. So you are roughly looking at --you are in the neighborhood of $12 million to $13 million a quarter. Call it $50 million for the year.

[Brian Ruttenbur:]

Perfect. Those are my questions. Thank you very much.

[Operator:]

Moving on, we’ll now hear from Rajesh Ghai with Macquarie.

[Rajesh Ghai:]

Thanks. Congratulations on the increased confidence reflected in the higher revenue guidance. I wanted to understand a little bit about the 40,000 devices that Marc, you said were deployed and have not begun service. When do you expect them to begin transmitting data and starting to contribute to service revenue?

[Marc Eisenberg:]

Sure. So, it’s a couple of thousands a month for the large retailer. So those guys are installing about 500 a week on a run rate right now and at the same time Doosan and Hub are installing as well. We are going to catch up relatively quickly. I think what we are experiencing, if you look last year, in Q1 we shipped 3,000 devices. Q2, we shipped 8,000 devices and then by Q4 we are shipping 17,000 devices. So typically those things get into the field between three and six months. As the hardware builds, we are catching up until we get to that run rate where we are installing and adding subscribers at the same rate and I think you’ve seen that in the ARPUs.

[Rajesh Ghai:]

Okay, great. And you also mentioned that you’ve started shipping or you do modems in bulk. When do we expect that to begin to affect ARPU?

[Marc Eisenberg:]

So first they’ll affect subs and then they’ll affect ARPU. I think ARPUs in the satellite network in general will go up as --they’re going up a little bit. It’s tough to see in Q4 because the subscribers are higher and you have that flow down in the back half. But they’ve already built in the gap and we are starting to see higher ARPUs for OG2 in general and we’ll also – as the second part of OG2 launches, we’ll be able to sell different types of devices that are greater usage, which will lead to higher ARPU as well. And then depending on how you figure out ARPU, I don’t know if you are adding AIS in there or not in the service revenues, but AIS is picking up just where we told you it would, right? We said it’s a $3 million to $4 million business, or $4 million business and then when you get the satellites up there, it’s like a $6 million to $7 million, or $6 million, $7 million or $8 million business and it’s continued to tick up and then it’s a $10 million to $15 million business fully launched. Those service revenues will click in as well. To keep on your ARPU point and to kind of follow up on Brian’s questions before, what are we seeing this year and as you back into it, what’s going to happen with ARPUs, you’re going to have from the SkyWave addition and the InSync addition, we are going to do something like $24 million. Heck, I’m two weeks into March, so I’ve got a good feeling for where we are going to end up. But $24 million and you’re going to end the quarter in rates pretty close near that $1.2 million to $1.3 million range, right smack in the middle and that’s new ARPUs. That is your starting point and then from there, it’s going to go up as we install more devices. It’s going to go up as we add more services and it’s going to go up as AIS grows.

[Rajesh Ghai:]

That's great, very helpful. On the full year guidance, you raised revenue number but didn't raise the EBITDA range. I know you provided some explanation for that, but could you give us a little bit more color as to why you expect the EBITDA leverage to come next year rather than this year?

[Marc Eisenberg:]

That is the InSync acquisition. Really what we’ve done is we’ve maintained our guidance. We haven’t really grown our guidance and if you read Robert’s exact words it’s we are raising our guidance to include InSync. We said it’s $170 million to $190 million and now we are saying InSync is about $4 million, so we are raising it $174 million to $194 million. And then when we talked about InSync’s EBITDA, the idea with InSync, InSync is a positive EBITDA company and it will probably contribute very slightly this year but that’s not why we bought it. We bought it to create a bunch of different application and to get us into new vertical markets. We are investing in it a little bit. We are being a little shy in saying that it's going to generate X amount of EBITDA because if the right opportunity comes, maybe we’ll spend more money and invest in a little more. We’ve kept the EBITDA the same and raised the revenues.

[Rajesh Ghai:]

My last question around the gross margins for the hardware side. You mentioned volume shipments impacting pricing. So going forward in Q1, obviously you have a few volume shipments in Q1 too. What is the confidence that you can revert back to the 25% range in that?

[Marc Eisenberg:]

We’ll be in the low to mid-20s. It’s going to come up. There’s a couple of things. I'm going to keep jumping on here Raj, but there’s a couple of things that happens in Q4. The first thing that happens is some of the smaller deployments that kicked off in Q4 were first builds, so the margins are – the margins are impacted from first builds. Like Hub Group was a 3,000 unit order. The next build is a 10,000 unit order so we are going to get scale there. The second thing that happened and this affected your EBITDA number. If your adjusted EBITDA number -- it's down to 5.2 because there’s $400,000 that we wrote off of inventory. We don’t think we are writing off any more inventory unless there’s something I'm not aware of in Q1. So it's going to go up a couple of points just from that.

[Rajesh Ghai:]

Great. Thank you so much.

[Operator:]

Next we’ll hear from Mike Malouf with Craig-Hallum Capital Group

[Ross Licero:]

Hi. Thanks for taking my question. This is actually Ross on for Mike. I just had a couple questions. Can you give us more color on AIS satellite impairment that went down? Was that from one of the new ones or was that --?

[Marc Eisenberg:]

No, definitely not one of the new ones.

[Robert Costantini:]

It was one of the micro satellites that we launched several years ago.

[Marc Eisenberg:]

Two satellites were launched a few years ago as a stop gap. So the problem that we had was we got into the AIS service with Quick Launch. The Quick Launch satellites were pulled out of service. We needed to sustain our customers so we take two micro sats, throw them up there in order to keep connectivity and keep delivering the product until the OG2 satellites get launched. Maybe we Forrest Gumped our way through this a little bit, but the first of them was pulled out of service right after the OG2 satellite launched. There was never a disruption of service and it was replaced by six brand new sparkling OG2 satellites.

[Ross Licero:]

Okay, Fantastic. There are no more micro satellites out there?

[Marc Eisenberg:]

One more.

[Robert Costantini:]

There’s one.

[Ross Licero:]

There is one more? And would that have any impact on service if that went down?

[Robert Costantini:]

No.

[Marc Eisenberg:]

Any satellite that you have is impacting service a little bit, but we are hoping this one it was launched six months later than the first one. So if it lasts another six months it will come out of service just as the rest of OG2 launches.

[Ross Licero:]

Okay. Great.

[Robert Costantini:]

But we are not anticipating any impact on those.

[Marc Eisenberg:]

Yeah. We are not changing our guidance.

[Ross Licero:]

Great. And then just trying to drill down into this ARPU again. If you look at year over year comparisons and you remove, you just assume that no satellites were added during this quarter, ARPUs are still trending down a little bit. Can you maybe give us a little more color on what’s going on there?

[Marc Eisenberg:]

Take the 40,000 subscribers and add let’s say $8 ARPUs because they are solution subscribers and multiply that by three for the quarter. You’re right where you’re supposed to be.

[Ross Licero:]

Okay. So I guess removing the impact from all of those, right? If you just assume no satellites added during the quarter, I think you get somewhere around the $5 ARPU range down from $5.30 last year in the fourth quarter?

[Robert Costantini:]

It’s just the seasonal thing that was impacting. There’s a bunch of moving parts. Again they don't all amount to a trend, but you've got a couple of pieces that are employed there. So you have some sales allowances. There are a couple other adjustments that you are making that are impacting service revenues, but those are -- again we are not seeing like any trend happening. At this point ARPUs in our estimation is on the plateau for it to continue to increase as we move into 2015.

[Marc Eisenberg:]

And we are already giving you a pretty clear look at where we think Q1 is going to come and you can see there’s a pretty good rise now in our ARPUs. We are 11 weeks into a 13 week order.

[Ross Licero:]

Okay. Great. Thanks. Just a housekeeping question on DNA. You said high 20s or mid to high 20s?

[Robert Costantini:]

No. I’d go mid to high 20s. Again launch timing is going to impact that. That's just assuming we stay on schedule as we have been describing it.

[Ross Licero:]

Okay, great. Thanks.

[Operator:]

Moving on we’ll take the question from Chris Quilty with Raymond James

[Chris Quilty:]

Thanks. I really don't want to ask another ARPU question, but Robert, just with the acquisition of InSync, you've got a different profile in terms of software revenue. How does that get booked in the service revenue and is it going to have a positive or does it have a downward impact on ARPU because of some of the RFID stuff that’s being stuck in there?

[Robert Costantini:]

It’s more like a software as a model.

[Marc Eisenberg:]

So there’s a couple components of InSync, which is why we are a little fuzzy in the numbers because we are figuring it out ourselves. So InSync has a couple hundred thousand RFID tags that are part of their software and clearly we are not going to throw those into the subscriber number. They’ve got a few thousands cellular ones which are typically collection devices or single pallet tracking device that these things report to and those probably will go into our subscriber base. I'm imagining net-net it should increase ARPUs.

[Chris Quilty:]

Okay and shifting gears, cost energies, I’m trying to think back to when we did the capital raise and if I remember correctly, at that point you were talking about $2 million to $4 million of cost savings? So if you are exiting the year at I think you said five to six, is that an improvement over what you had previously guided?

[Robert Costantini:]

No. I think we were trying to get our hands around the business at that point. There was -- again we’re gaining visibility every day. I would say we were also at that point talking about existing the year at 5 to 6. I think from our perspective, it just gives us more confidence in the numbers that we have in there.

[Marc Eisenberg:]

So I think the five to six is probably right and there’s a little bit of upside depending on the timing of moving manufacturing and some of the things that we’ve planned for them. And if that’s a different question I'd be thrilled to answer it, but the headcount was reduced pretty quickly, so quicker than we had planned. 39 heads and it feels like everyone at ORBCOMM all in somewhere around $100,000. You are already like a few million in the first quarter of the year.

[Robert Costantini:]

As we go through the year, Chris, we’ll be providing some visibility on that.

[Chris Quilty:]

Now that you've had a couple of months to get under the covers, what have you found in there, either positive or negative in cost or product or customer synergies?

[Marc Eisenberg:]

Sure. Let’s just start with the people. The people in Canada are just -- that we picked up in Ottawa are just phenomenal, thrilled to be ORBCOMM employees, picking up projects all over the place. A bunch of them are leading ORBCOMM groups now. The gentleman that was responsible for the SkyWave network is now responsible for the SkyWave and the ORBCOMM network. The person responsible for marketing is now responsibility for marketing the entire ORBCOMM Company. We’ve picked up some phenomenal people there and that part, I can’t imagine that it could have gone better. In terms of the cost or the financial aspect of it, I think going in, we thought, we weren’t quite sure as we, you know who the management is, but as you acquire the company, you are learning the next levels. And when we did have to reduce headcount and keep in mind, this is a much bigger reduction that ORBCOMM has ever had, 39 employees. Three years ago we had 100. We ended up losing more people on the ORBCOMM side than we did on the SkyWave side. We like Canada. We like Ottawa. We like the way the costs are up there. The costs have even helped us a little bit with the reduction of the Canadian dollar and there is opportunities there as well. On the manufacturing side, there’s two things that just kind of we are dead focused on that we are just looking at and it’s just a timing issue in terms of that $5 million to $6 million and when it hits. We are going to, 100% we are going to move of their production and combine it with ORBCOMM production. We are just in the process of figuring out does that mean where we manufacture today in the southern United States, or do we move to Mexico, or where do we move that? But there are millions of dollars of impact there. It’s not a question of if, it’s a question of when. And then on top of the question of when, how much of that do you keep as margin and how much of that do you change the product to end users so that you can increase sales and get more recurring revenue. Then on top of that, there is this project that has been kicked off with Inmarsat where we’re taking the RF section of the IDP modems and also work on the big end modems and we are going to take over 600 components and we’ll bring it down to one chipset. And again, a massive reduction in cost. The project is already a year old. I don’t know if it’s going to show up towards the end of this year or the beginning of 2016, but again massive reductions in the cost of the products that we are able to build for them. Jeez, we haven’t even talked about the service revenues that we are able to sell to each other and they’re starting to look at moving our hardware and you’ve got all that on top of it. So it’s so many projects and so much opportunity here. I’m pretty sure this was a pretty great acquisition for us.

[Chris Quilty:]

Great. Final question, Robert, just a quick hit here, foreign exchange, good? Bad?

[Robert Costantini:]

I’m sorry, say it again?

[Marc Eisenberg:]

Foreign exchange.

[Robert Costantini:]

What’s the good and the bad? I think for foreign exchange we are comfortable where we are with our guidance in terms of current levels. We think, as Marc mentioned, there’s some natural hedge built in with the Canadian currency at SkyWave. But we are perfectly comfortable at the current levels and we are going to keep an eye at it as it goes forward and see where we end up.

[Marc Eisenberg:]

I think it’s more of a little bit of a pain on revenues than on EBITDA. The revenues you’ve got the reduction going backward. Forgetting this year we’ve modeled pretty well, but going backward, Euroscan is in Euros and the Japanese business is in Yens and it’s 20, low 20%. If that goes down 20% then it’s 20% of 20% or 4% of your business. On a going forward basis, there is a little more risk there in terms of revenues if it were to go below par for the Euro or something like that, but less of a risk on the cost because SkyWave bills in US dollars, but their costs are almost 50% in Canadian dollars.

[Chris Quilty:]

Great. Thank you.

[Operator:]

Moving on, we’ll hear from Mike Latimore with Northland Capital.

[Mike Latimore:]

Great. Thanks. Just on the revenue guidance, the sort of $20 million range in there, what kind of gets you to the upper end of that range versus bottom? And I guess is it mostly sort of hardware related?

[Marc Eisenberg:]

Yeah, it’s hardware related. We are going to go into this quarter we are thinking around $24 million. It’s going to creep up quarter over quarter to be in the mid-100s. And then the rest just depends on shipments. It’s almost like Q4, right? So Q4 was 29.5 and we are sitting there guiding you, guessing the amount of units that get built and shipped in the quarter and it ends up being half and half. And so we hit it just right, but had the quarter ended two weeks later, we would have probably did $100 million. So it’s purely just the timing of hardware shipments.

[Mike Latimore:]

What are you generally thinking about in terms of the product service mix this year?

[Robert Costantini:]

It will be 50-40.

[Mike Latimore:]

60-60 product?

[Marc Eisenberg:]

No, no.

[Robert Costantini:]

50 service.

[Mike Latimore:]

Got it. And then, I guess getting back into this, what does that imply for sort of organic service growth for the year then?

[Marc Eisenberg:]

Let's go backwards, right? SkyWave is 50/50 hardware service on $60 million or so. So you can get a feel for what they're adding. Then you add InSync which is, we are telling you is $4 million, which is about $3 million of service revenues and then everything left is organic.

[Mike Latimore:]

And then how many -- I think it’s still pretty minor, but how many of your subs are taking both cellular and satellite at this point through the combined offerings?

[Marc Eisenberg:]

Pre Q4, very few. Mostly it’s Doosan and a lot of our re-sellers out there, even though they’ve got dual mode applications, they’re not necessarily buying both aspects of it from us. Typically for satellite mode they’re buying from us, but not always the terrestrial. And then in Q4, a boom of our 39,000 subs probably 15,000, 16,000 of them are dual mode. So we probably quadrupled the dual mode subs in one quarter.

[Mike Latimore:]

Yes, okay. And then just last, the price of oil has come down. Has that sort of had any impact in any of your sectors related to energy or heavy equipment?

[Marc Eisenberg:]

It affects you in both directions, right? I think we are kind of neutral on it, which is why you don’t hear us whining about it on this call. But the heavy equipment, I think some of the guys have reported reductions, but it’s typically the earth moving stuff. The stuff that is down typically tends to be the more drilling stuff. And so we are not experiencing much there, but I’ll tell you, we love, love anything that puts cash in the hands of truckers. It’s good for the SkyWave business. It’s good for the Reefer business and you can see our transportation business is just taking off. I’m just loving the look and feel of the more diversified ORBCOMM business.

[Operator:]

We’ll take our next question from Mike Walkley with Canaccord Genuity.

[Sid Sinha:]

Hi, this is Sid on for Mike. Thanks for taking my question and congratulations in the SkyWave and InSync acquisition. Robert, a quick one on the revenue synergies from SkyWave. It seems like the integration is going on plan, but just want to make sure, you still don’t have any revenue synergies from the acquisition baked into the guidance, right?

[Robert Costantini:]

We're still sorting that out. It's going to say some time to get the products through the channels and get them configured. We were sort of holding that off. So that was not really baked into the guidance.

[Marc Eisenberg:]

From my experience, this stuff starts off slow and it builds up steam. So the first thing that we want SkyWave to work on is getting Komatsu to start rolling out in China, because we’ve got a big glaring hole. We don’t have service there, someone like Komatsu. I’m not saying Komatsu. But you go, they test, they need to get licensed and then they can roll out and typically it’s six and nine months later. That stuff takes time. And then the other part of the business is us giving them our hardware deployments or our hardware configurations and having them market. That always starts off with -- whether it’s us or them, it starts with five, it moves to 50, and then it moves to 1,000. There’s some timing there which is why it’s not in the guidance. We are sure we are going to get it. We are just struggling to put a date on it.

[Sid Sinha:]

Fair enough. Significant hardware shipments during Q4. Marc, on a high level, can you just give us an update on how far along are you in deployment with some of the larger managed services deals done so far, the Doosans, Ryders and Hub type of deals? Is it mostly hardware shipments right now that get turned on in 2015 or are they already contributing to the services business in a reasonable way?

[Marc Eisenberg:]

Right. Well, there is no one answer, so I’m going to split that up into a couple of answers. So in terms of Hub, they have installed roughly 5,000 -- let me think about that. So we’ve shipped them roughly 8,000 units. They’ve installed roughly 5,000 units. The other 3,000, it’s like 5 a day per installer and there is seven installers out there and it’s just math until they catch up, which is why they gave us the order for the next 10,000. So 28,000 unit fleet. We’ve shipped about 8,000. 20,000 pieces of hardware are yet to ship and we are typically 3,000 units behind them, between what’s installed and what’s not. On Doosan, Doosan is a little clear. Doosan doesn’t have like a fleet size. Doosan is an OEM. So Doosan was a couple of thousand a year. It’s going to many thousands per year, high single digit thousands per year and will grow if they sell excavators or backhoes or whatever they do. And as they sell one, within 60 to 90 days, it gets sold to the end user and it begins to start providing service and that should happen in perpetuity. The one that’s --- the other one is the retailer where we’ve shipped over 15,000 units. What happens with this particular thing is that particular customer had budget left over at the end of the year and wanted to spend it by January 30th. We end up building them something like eight months’ worth of inventory that they’re going to install a couple thousand a month for the next eight months and by the third or fourth quarter, they’ll be out of inventory.

[Sid Sinha:]

Great. Thanks for the great color. And then just one last one on the Reefer business and the continued success in orders there from some of the larger fleets. What's your outlook for this business in 2015 and any updates in the Food Safety Modernization Act and the impact of that on the cold chain business?

[Marc Eisenberg:]

Sure. So in terms of the Reefer business, we are the who-is-who of the top 25 fleets in the country. There’s no doubt about it. If you look at -- the majority of them are using ORBCOMM and they’re rolling it out across their entire fleets or they’re already rolled out across their fleets. And then we continue to sell them hardware as they upgrade their physical Reefers out in the fields, their trailers, which leads us to, gee, when you’ve got all the big guys, how do you grow? So this year we are very focused on selling to smaller fleets, where we’ve got a very small amount of penetration, but where 75% of the Reefers are. And then we are also very focused this year in taking that product international. But we are doing a very good job of going into those Reefer customers and selling them other stuff. What else does CR England own? They’ve got trailers. What else does J.B. Hunt own and these other guys? So we are doing well at selling them the other products within that industry. And then on top of that, on the Reefer side, we are great in truck. We are great in rail and we haven’t scratched the surface on containers and that’s coming. On the FSMA stuff, or the Food Safety Modernizations Act, so InSync is part of the thinking because the Food Safety Modernization’s Act doesn’t just say, tell me or give me a pipeline of what my units are doing when they’re on the road. That’s not what it says. What it says is, tell me what this banana temperature is from the time it leaves Honduras and the time it gets to the supermarket. And we are a component to that, granted a very dominant component for a particular aspect of it, but not the whole part of it. And part of the thinking around InSync is now you could start monitoring temperature on these things by the pallet throughout the entire transportation cycle and how much of a bigger bite of the FSMA apple can we take a bite of. And that we are working on. And then we have with our transportation company that I’ve hinted at on this call, we’ve got some surprises for you. There is some other areas that we can pick up. You are just going to have to give me another quarter to talk about it. I think FSMA is moving along and I think you are going to see significant adoption towards the latter half of this year to the point where some of the dealers are already starting to buy our Euroscan recorder products because they don’t want to put a new unit out there and have to alter it 12 months from now. It’s coming.

[Sid Sinha:]

Great. Thank you.

[Operator:]

Moving on, we’ll hear from Howard Smith with First Analysis.

[Howard Smith:]

Yes. Good morning. Thank you for squeezing me in here. A question on the OG2 deployment. You said you were still getting increased throughput through November. At this point are the six existing satellites kind of at full capacity?

[Marc Eisenberg:]

Capacity? Oh no

[Howard Smith:]

No, I’m sorry. Not capacity but full ability to take and receive messages?

[Marc Eisenberg:]

They’re are 90% plus at their capability, but you know a satellite company you’re never at your full capability. We upload code to OG1 to this day. I think what I can say every safely is we are fulfilling the demand to speak to the satellites at very quick rates to the point where the customers are extremely happy when those satellites are overhead. I think I could say that.

[Howard Smith:]

That's the follow up I have. Kind of the post-holiday period where you saw the slowdown. Now that you are seeing more run rate transaction volume and messaging volume, are you seeing the pickup that you had anticipated from the increased coverage of these six or maybe you can just talk qualitatively about what you are seeing in terms of apples to apples messaging from the existing base?

[Marc Eisenberg:]

We see that we are getting about 8% more messages through than we were. That is just from the hole in the sky. The amount of transmissions has picked up that we’ve been able to receive. You had, even though it's receiving 35% of the messages, they’re 8% incremental messages because some of them when those satellites were overhead, we’d just pull the message and deliver it later. It wasn’t demand that wasn’t fulfilled. What it showed up as was latency. We are seeing 8% more messaging. Some of these people were on a per-byte basis and that is the increases that we are seeing. Some of them were on firm and fixed contracts such as paid per unit and in that case we just have happier customers I guess of that.

[Howard Smith:]

Great. That's exactly the color I was looking for. Last quick one on Komatsu, congratulations on renewing that long standing relationship. In terms of the incremental on that, I think of it as you continue to sell the hardware as you have been and just each month as the install base grows you pick up a little more services from the renewals. That's the right way to think about it?

[Marc Eisenberg:]

No hardware with Komatsu. So a company called Quake builds their hardware and they package it into a telematics stocks that I believe Komatsu builds itself. But for Komatsu, when they get a – when they build a new subscriber almost like the same way I described Doosan, we get a new sub. And some of the older subs come off and that’s our churn and then the new subs go on and thankfully they are adding more subs than they are taking off. So Komatsu is a growing customer.

[Howard Smith:]

Great. Thank you much.

[Operator:]

Our next question comes from Anthony Cambeiro with Anthology Capital

[Anthony Cambeiro:]

Hi guys. My question is on Euroscan and to what extent you’ve been able to convert their customer base into subscriber service revenues? Thanks.

[Marc Eisenberg:]

Euroscan is certainly selling more wireless devices than they were. I couldn’t tell you it's 100%, but the number of subscribers that they’re selling is increasing, specifically their division. Ameriscan is -- you could see the numbers in our 39,000. A good portion of them are added from that, but that being said, they are still integrating our products and some of the effects of Euroscan, that is the one piece of the business that is struggling with the forex. But Euroscan was absolutely key in closing this transportation OEM customer because there is a European flavor to it. I think it's trickling up, but it’s going to get substantially better throughout 2015.

[Anthony Cambeiro:]

Just a follow up on that. Is there the opportunity for their install base, which I know the install bridge is hardware related install base, going back to that install base and flipping and converting these guys into a subscription service type model? And if so, how big is that or their install base if it did convert into a service mode, how big would that opportunity be?

[Marc Eisenberg:]

So their install base is a couple of hundred thousand units, like between 2 and 250. That’s the opportunity and I'm guessing just the European part of Euroscan is in the 10,000 range for subs off the top of my head.

[Anthony Cambeiro:]

Great. Thank you.

[Operator:]

[Operator instruction]. Next we’ll hear from John Bronzo with Nudge Capital

[John Bronzo:]

Hi guys. Congratulations on the quarter. A quick question for you. Do your numbers for 2015 include enhanced service from the second round of OG2 satellites?

[Marc Eisenberg:]

They do not and if we did, it's extremely limited because you go into the year knowing the one thing you can’t control is the launch timing. The first launch is there because it launched last year. The second launch is not.

[John Bronzo:]

Right. Okay. Thanks.

[Operator:]

[Operator instruction]. There are no further question in the queue. I'll turn the conference back over to Marc Eisenberg for any additional or closing remarks.

[Marc Eisenberg:]

Thank you so much for dialing into our call and providing us the opportunity to answer your questions. We look forward to speaking to you again in just about eight weeks and continue to update you on our progress across the many fronts we’ve discussed today. Thanks.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. We thank you very much for your participation.