ORBCOMM Inc.
Q3 2017 Earnings Call Transcript

Published: 2 Nov 2017

[Operator:]

Good morning, ladies and gentlemen and welcome to ORBCOMM’s Third Quarter 2017 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] A replay of this conference will be available from approximately 1

[Michelle Ferris:]

Good morning and thank you for joining us. My name is Michelle Ferris and with me today is Marc Eisenberg, ORBCOMM’s Chief Executive Officer and Robert Costantini, ORBCOMM’s Chief Financial Officer. Before we begin, let me remind you that today’s conference call includes forward-looking statements and that actual results may differ from the expectations reflected in these statements. We encourage you to review our press release and SEC filings for a full discussion of the risks and uncertainties that pertain to these statements. I want to remind you that ORBCOMM assumes no duty to update forward-looking statements. In addition, the financial information we will discuss includes non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures is included in our press release. At this point, I will turn the call over to Marc Eisenberg.

[Marc Eisenberg:]

Thanks, Michelle. The business is continuing to evolve at a rapid pace and we are experiencing accelerated growth again this quarter marked by record high revenues across the board, including an astounding 105,000 devices shipped, which exceeded last year’s third and fourth quarters combined. We will cover this as well as some exciting developments across the business, our status on large deployments, our latest acquisition and the recent developments on our satellite offerings. At that point, I will transition the call to Robert to walk you through the financials and wrap up with Q&A. So, let’s get started. Earlier this morning, we issued a press release announcing financial results for the third quarter ended September 30, 2017. Work on this experiencing unprecedented growth as head into the final quarter of 2017 with Q3 total revenues reaching an all-time high of $69.4 million, a 50% increase over last year. Both service revenues and product sales have again reached historic highs this quarter at $35 million and $34 million respectively. This strong revenue performance was achieved predominantly through organic, but also included some revenue through acquisition. Product sales continued to build momentum and we are seeing faster conversion to the generation of high margin recurring service revenues. Sequentially, service revenues increased $4 million over just last quarter and are up 9% organically over last year. Our subscriber count or subs grew in the quarter by over 70,000 net subs marking our best quarterly number taking the base to almost 1.9 million subs at the end of September 2017, a 12.5% increase over last year. The compression of overall margins continued in Q3 directly tied to the large volume deployments with lower hardware margins at key accounts being shipped faster than planned. This downward pressure is a short-term trend that we will believe will begin to taper off by Q1. Q3 adjusted EBITDA totaled $11.2 million, which was 16.1% of total revenues. Both the sub numbers and the revenues do not include any contribution from Blue Tree as that acquisition closed at the start of the fourth quarter and will have a full effect of Q4 results. I am not sure that Q3 financials reflect our longer term outlook, certainly, while revenues continue to trend significantly higher, margins continued to be weighed down as I mentioned by a few major projects, including a couple of significant transportation deployments as well as one of the largest fleet deployments in the oil and gas industry being done at inthinc. Because we recorded the hardware and installation revenues as well as the corresponding cost upfront, these deployments are negatively affecting margins, but only in the near-term. Another way to look at it is, we invested about $3 million in Q3 as well as another $3 million, some of which fell in Q2 and the rest will fall in Q4 2017 into deployments that will add approximately 120,000 subscribers and over $8 million of annual service revenues going forward. Keep in mind we anticipate an average 8-year life from these deployments. This is certainly a worthwhile investment. Going forward, we have been able to make some design changes that will improve hardware margins of these initiatives starting midway in Q4 and additionally we anticipate shipments to these customers to dissipate in early Q1 and installations to be completed by late Q1. Since hardware margins excluding these deployments were 24 points in Q3 and with the adjustments we have made on the cost of these products underway, we expect a margin recovery in Q1 and to be back to normalized levels in Q2. Let’s move on to our satellite constellation as we mentioned last quarter, our investigative team has been working to determine root cause and associated corrective measures for the 3 OG2 satellites that experienced loss of communication. While we are still making efforts to recover these spacecrafts, at this time we thought it appropriate to take a financial impairment of $31.2 million in Q3. On a positive note, we have not found a systemic flaw in the OG2 constellation and we are not experiencing issues on the other OG2 spacecraft. Our team was able to narrow down these anomalies to the two most likely causes and have developed comprehensive operational procedures and are implementing software enhancements to mitigate these issues from occurring. The resiliency of the entire constellation design and the increased capacity enables us to reposition these satellites in the events of these circumstances, which greatly minimizes the impact on network service. There has been no impact on service revenues. Long-term, the best satellite service we can provide customers is a hybrid approach using multiple networks. When we use our cell phones, we sign up with a single service provider, but in fact we are sometimes roaming on partner networks as well as accessing multiple platforms such as 2G, 3G and LTE to get the best most reliable service. ORBCOMM is planning a similar approach providing a single hardware platform offering the best satellite combination of geographic coverage, the most regulatory authorizations, the fastest service, the largest message payloads. We have made major strides from both a technology and satellite partnership perspective. Our first spin of the dual-mode radiofrequency integrated circuit, or RFIC, which leverages both the Inmarsat L-bands and the OG2 networks looks promising and we are not anticipating the need for second spin. That would enable us to start fielding technology with this RFIC in the second half of 2018. Imagine, future deployments taking advantage of the Inmarsat L-band constellations, lowest latency in the industry combined with ORBCOMM’s VHF network that is superior and supporting applications that do not have direct sightlines delivering the best, most reliable service in the industry at the lowest price points. Competitive networks have risked from single points of failure, have suspect business plans requiring further capital, require clear line of sights and have significant limitations in bandwidth. We have also expanded our offerings with Inmarsat to incorporate their high-bandwidth BGAN services into our products and are collaborating to develop products leveraging our IoT technology at disruptive price points. This will include a new maritime satellite communication device targeted for a number of marine crafts, including pleasure boats and fishing vessels. Customers will have access to speeds up to 144 kilobytes per second, with hardware and airtime and a fraction of the price of competitive networks, with the ability to integrate to either their customized applications or devices built on iOS or Android platforms. We are expecting to begin building BGAN products as early as Q2 2018. Once again with the stabilization of the OG2 satellites and our access to Inmarsat satellites in which they have invested billions of dollars of capital, including both IEP and high-bandwidth BGAN services, we believe our satellite service offerings will be unparalleled in the industry. Let’s move on to our business highlights. Nearly every aspect of the business showed strong growth in Q3. We will start with transportation. We are continuing to execute on large deployments with both J.B. Hunt and AT&T who we partner with in support of the U.S. Postal Service. At the end of Q3, we had shipped over 47,000 systems to J.B. Hunt with over 35,000 installed. We expect to ship about another 30,000 systems in Q4, which would be well on our way to supplying hardware for the vast majority of their fleet this year. Our installation teams are currently installing about 2,000 systems a week and as a result we are continuing to see service revenues build. We are also progressing in our program to the U.S. Postal Service. In Q3, we shipped over 10,000 systems to their third-party haulers. To-date, we have shipped more than 25,000 systems and expect to ship 10,000 more over the next couple of quarters to complete the U.S. Postal Service program. Separate from these large installations, our core business continues to be strong. In Q3, many of our longstanding transportation customers continued to place renewal orders such as Walmart, Prime, Hirschbach, Werner, Covenant, Tyson Foods, FedEx Custom Critical, Wakefern, Myer, C&S Wholesale, Bob Evans Transportation, Allianz, Fastenal and Canadian National Railway. We have also closed an exceedingly high number of new customer opportunities, including Knight Transportation, LTI Trucking Services, Erb Transport, Direct ChassisLink, A&M Cold Storage, Super T Transport, Russo Brothers, The Kenan Advantage Group, [indiscernible] Trucking, Ralph Moyle Inc., Wayne Smith Trucking, and Preferred Meal Systems. It’s certainly been a productive quarter for the transportation group. In October, we completed the acquisition of Blue Tree Systems based in Galway, Ireland along with its subsidiaries in the United States, Germany and France. Blue Tree provides world-class transportation management solutions across multiple classes of assets that include truck cabs, street trucks as well as refrigerated and dry trailers. Their products meet the demands of transportation companies that are looking to maximize their operations and require complete two-way integration with their operating systems adding full visibility across all of their mobile assets in a single platform. Blue Tree has about 37,000 subscribers and serves more than 300 customers in North America, the European Union, United Kingdom, Australia and New Zealand. The acquisition of Blue Tree solidifies ORBCOMM’s transportation portfolio by adding in-cab and small refrigerated vehicle solutions to our industry-leading cargo solutions. Blue Tree’s market leadership also adds strength and distribution in key geographies such as Europe, the Middle East and Africa. Combined with our acquisition of inthinc in June, Blue Tree enables ORBCOMM to offer customers the most complete integrated transportation offering making us the clear leader in commercial transportation IoT solutions. In North America, in-cab telematic solutions, is about an $800 million a year market. There are only a couple of significant players in this space. If we can capture even just a fraction of this business and keep in minds we have a record of winning market share, this will be a major contributor to future growth. Blue Tree in 2017 is about $20 million business with a 70

[Robert Costantini:]

Thank you, Mark. Good morning, everyone. Our third quarter was exceptional for the new highs reached for total revenues, quantitative products shipped and net subscribers. In addition, the acquisition of Blue Tree Systems on October 2 led to the results for Q4. Looking more closely, total revenues were over $69 million, higher than last year, almost 22% higher than last quarter. Both service revenues and product sales reached record levels of $35 million and $34 million respectively. Record service revenues were powered by the growing subscriber base across all our service offerings. Service revenues of $35 million increased 22% or $6.2 million in the third quarter over last year with organic growth over 9%. Sequentially, service revenues were $4 million higher over the second quarter due to the largest subscriber base plus some installation revenues of $2.9 million from the second quarter acquisition of inthinc. Product sales reached an incredible 97% to $34.3 million, the highest quarterly level ever growing $16.9 million over last year. Products shipped at unprecedented levels with 105,000 units delivered in the quarter. Most of the growth was organic with about $2.8 million added from the acquisition of inthinc. Q3 margins were lower from higher installation costs and lower pricing high volume orders that were delivered in record numbers this quarter. Margins will continue to feel the pressure until the bulk of these orders are shipped and installed and we expect to combine this impact to the next quarter or two. Contribution margins for total revenues of 37.6% went lower with a higher mix of lower margin product sales this quarter. In addition, service contribution margins of 61.1%, reflects the push to install these units as quickly as possible for faster conversion to service revenues, lowering margins about 5%. In addition, the quarter included the cost associated with the OG2 investigation along with added platform costs for the new acquisition we saw with the margin an additional 1%. Excluding these items, service contribution margins would be in the normalized range of 66% to 67% and trending higher than last year’s 66.1%. Similar to Q2, the underlying service contribution margin is increasing from scale in other parts of the business in line with our long-term view. Also similar to Q2, product contribution margins of 13.5% in Q3 are lower from the higher percentage of shipments of lower margin product sales and higher production and delivery costs. Excluding these products sales to a few customers, the remaining product sales have 24 point margins. The items that are lowering margins overall are in need to and represents short-term activity costs that we will repeat in Q4 and start to taper off in Q1 next year before normalized margin levels resume. Getting the shipments and installations completed as quickly as possible, it is the goal to start reaping the long-term benefits of higher margin service revenues. Overall, this quarter, adjusted EBITDA totaled $11.2 million lower than last year by about $800,000 or 6.7% with adjusted EBITDA margin of Q3 at 16.1% of total revenues, down from 25.8% in the prior year period. Excluding the impacts on the margins previously discussed, adjusted EBITDA would have been approximately $13.5 million in the quarter. Net subscribers added in Q3 were over 70,000 reflecting the outstanding demand. Our total subscriber base grew to nearly 1.9 million at September 30, a 12.5% increase over the 1.7 million at the end of September last year. In the third quarter of 2017, the company had a net loss of $39.7 million compared to a net loss of $14 million from same period last year. The expanded loss this year over last year was largely due to the $31.2 million satellite impairment loss this quarter. Q3 this year also included higher operating expenses and interest expense versus Q3 of 2016. Operating expenses were up over last year due to the new acquisition, higher depreciation and amortization and acquisition-related and integration costs. Additionally, third quarter operating expenses, including an impairment loss of $31.2 million related to the 3 OG2 satellites had lost communication. The loss of these three satellites is not expected to have a material effect on communication services or revenues. There was no in-orbit insurance coverage for these satellites. Interest expense for Q3 2017 was $5.2 million versus $2.5 million in the prior year, including the amortization of debt fees, reflecting a full quarter of waitlist on the new bond offering in Q2 this year. Acquisition-related and integration costs are $0.8 million relating to the acquisitions of inthinc and Blue Tree that was completed on October 7, 2017. This compares with the $0.2 million in Q3 of 2016. Acquisition-related and integration activities are expected to be about $1.5 million in Q4. Looking at the balance sheet, cash totaled approximately $37.4 million at September 30, 2017 compared to $25 million at December 31, 2016 increasing $12.4 million. On September 30, 2017, $34.5 million of cash was held for acquisition of Blue Tree Systems. Net cash used in operations was $7.2 million reflecting increased working capital, higher receivables from increased product sales, and increased inventories to meet product demand. For the remainder of 2017, we expect to see increases in working capital from higher product sales as well as to support the growth of the new acquisitions. In investing activities, we acquired inthinc for $34.2 million, $34.5 million was earmarked for the Blue Tree acquisition, and $21.4 million was invested in capital expenditures. The capital expenditures of $21.4 million included $3.9 million for the final OG2 milestone payment, $6.1 million of sustaining CapEx and approximately $11.4 million of investment CapEx for new products and services. For the rest of 2017, capital expenditures will run about $6 million in the quarter, with about $1 million for sustaining and $5 million for investment CapEx. Our total debt outstanding at September 30 is $246.3 million net of debt issuance costs. Moving on to Q4 guidance, we expect total revenues to exceed $70 million split relatively evenly between service revenues and product sales. Contribution margins and adjusted EBITDA margin as a percentage of total revenues are expected to start to recover from Q3 levels. For 2018, we are working through our plans as we speak and we will provide more detailed guidance on our next call. So, wrapping up the third quarter of 2017 showed unprecedented growth in revenues, shipment volumes demonstrating our growing momentum in IoT solutions. We deliver and install high volumes of products and solutions, the world class global customers that have been propelling the business to new highs, investing in market leading products and acquiring companies that expands our offerings, are key to our strategy to grow the top line leading to higher profitability. This was highlighted by our recent acquisitions into the fleet management arena, which are expected to contribute significantly in 2018 and beyond. This now concludes our remarks for the call. And we are happy to take your questions.

[Operator:]

[Operator Instructions] And we will take our first question. It comes from Ric Prentiss with Raymond James. Please go ahead.

[Ric Prentiss:]

Thanks. Good morning, guys.

[Marc Eisenberg:]

Good morning.

[Ric Prentiss:]

Thanks. Obviously a lot of moving parts here, lot of running with revenues and units shipped, so that’s good stuff. The focus so on the financial world really is on the margin as you guys have done a good job talking a little bit to it, want to probe a little deeper if I could. Robert, I think you mentioned the OG2 investigation, the M&A had some impacts in the quarter that if you normalized out, service margins have been 66 to 67 can you kind of break those apart for us how much was the OG2 investigation and how much was the M&A?

[RobertCostantini:]

Well, the M&A, both of those things sometimes were little over 1%. So, you could probably say there, a third for the M&A and the rest of it for just what I say the scalability of the platforms that we are adding. So, as we synergize those and we get those higher – to a higher scale levels and they are improving like inthinc is improving everyday as we work on that. That would be roughly the breakdown about 1 point, but the big impact obviously was the installation costs.

[Ric Prentiss:]

Sure, sure. And then as Blue Tree comes in, how should we think about that impacting the numbers both within on revenue and on EBITDA within the quarter?

[RobertCostantini:]

Yes, I will do the EBITDA. I mean, Blue Tree will – in Q4 will probably be neutral to EBITDA the top line, but the margin should be – the margin should be decent in terms of our historical margin. So, I don’t see that suffering from the same scalability issues. We will have some SG&A and some other cost that we need to layer in and that’s why we are signaling right now it will probably be neutral in the quarter.

[Marc Eisenberg:]

And we think it will be accretive next year, but we need to get this thing integrated and there is almost like inthinc, there is a large sales pipeline there. And there were a couple of opportunities we were kind of hoping to get over the line even before this call, but we are really close to some really promising opportunities over there at Blue Tree. What we are hearing in the markets, this integrated solution, putting all the stuff together is the experience that we have had so far is much better than we have even anticipated. From the other – the other business that we are integrating which was inthinc, inthinc just about broke even from an EBITDA perspective in Q3 and that is sooner than we expected and the revenues at inthinc. So, let’s take a look at the $4 million, so we are up $4 million quarter-over-quarter in service revenues and you might say that just between $1 million and $1.1 million was organic and that’s where we have been trending and that’s true. But part of that is inthinc from a run-rate went first of all, you get the benefits of a whole quarter as opposed to just 3 weeks, but inthinc was a $1 million a month contributor in service revenues and by Q3, it had already grown to $1.2 million a month contributor in service revenues. So, there is another 600 grand there in service revenue growth that we got from inthinc, which gee, that’s exciting and it’s coming on really strong.

[Ric Prentiss:]

Okay. And then back to Blue Tree, what do you think the revenue incremental would be in the quarter just when you look at the guidance of over $70 million, how much of that’s coming from Blue Tree?

[Marc Eisenberg:]

They have been trending about $4 million – I am sorry, they have been trending $5 million a quarter and we are going to see if we can push it to $5.5 million that will be more. And we are not seeing – I am sorry, Ric, we think we are going to exceed $70 million, we just don’t know by how much.

[Ric Prentiss:]

Sure. That makes sense. And then back to the salary one, we do get a lot of questions on that, you mentioned that they think they have got it narrowed down to two causes, can you give us any insight as to what those causes are? And then you mentioned that no material effect to the network or the revenues is there any affect to the expense if you have to offload more traffic on to other networks?

[Marc Eisenberg:]

Yes. Well, let’s talk about the satellites that are up there. The first thing that we noticed is we were getting a flash memory corruption. So, on average, about once every couple of months, a single or double bit of flash memory gets corrupted and if it happens with a specific location, it could lead to a loss of contact. And then when you reboot it, you typically get it back. And in those, we don’t believe that it came back from corruption. So, the measure is every 24 hours we checked the flash memory and if there is, we think the corruption before the reboot. So, that one was relatively easy. We are also focused on the payload part stresses. There is a possibility that the payload was through their re-power cycling with increased part stresses. So, we implemented new procedures to power cycling when we reboot to reduce the potential part stress. So, those are the two things that we worked on and we have not experienced another issue with a satellite now. So, these three issues as we mentioned last quarter, they are months old and in the last 6 months, we haven’t experienced anything further. In terms of moving stuff on to other networks, the current 700,000 or 800,000 subscribers that are on the ORBCOMM network between the 12 OG2 spacecraft and the 17 OG1 spacecraft, they are pretty well serviced. And going forward in 2018, we made these investments years ago on this RFIC, but the new deployments in the second half of this year will be sharing both networks. So, the OG2 can help when it will help and the Inmarsat network is sitting there in a fixed position overhead all the time and that is the – that’s the performance levels our customers are looking for. It’s the contracts that we are selling with our OEMs based on both networks. And then the low latency stuff over the last 3 years, predominantly the low latency stuff, the safety stuff in Brazil, Africa is on the SkyWave network, which uses Inmarsat.

[Ric Prentiss:]

Okay, that helps a lot to help understand how the acquisitions are coming. So, it looks like the positioning for 2018 is margin improvement as you get through the installation and shipping of the big orders and then the ramping of service revenue and it should be getting back to that mid to higher safety levels as you get through the M&A?

[Marc Eisenberg:]

Yes, let’s say in the year, we invested that $6 million for 120,000 subs that will generate $8 million in service and probably generate $5 million or $6 million of EBITDA. The value of that to ORBCOMM, if we were to acquire that company, that company that does 120,000 with $9 million in business, the value of that company in the market sues roughly something like $90 million. So, you look at the investment ORBCOMM wanted starting these things often winning this business and $6 million is like, oh, gee, what a great investment. And I think the question that you have is what’s going to stop you from doing it again and how do I model this. And we have invested an awful lot into this hardware and these platforms are now available at lower costs to the customers that are beyond to us and beyond J.B. Hunt and these big deployments that we had and we just don’t see it and the bids that we have in the market right now, we just don’t see that investment needed. So, we think we are going to return to the mid-20s on hardware margins. And Rick, you model us very closely, you pull out these and if we can keep the hardware going at the same volumes as the higher margins from a profitability perspective in 2018 this thing really syncs.

[Ric Prentiss:]

Right. Great, that’s what we are looking for. Thanks Marc. Thanks, Robert.

[Operator:]

We will take our next question from Mike Walkley with Canaccord Genuity. Please go ahead.

[Marc Eisenberg:]

Hi, Mike.

[Mike Walkley:]

Hi, guys. Just following upon Ric’s questions here. Just wanted to kind of talk through ARPU trends, how you see those progressing over the next several quarters, we saw a nice step up this quarter, obviously, helped with the full quarter of inthinc, but as we layer in Blue Tree as you get the J.B. Hunt deployed, I know you are looking at some of your cross-selling opportunities, how do you see kind of that trajectory of ARPU and then how do you see kind of that sequential growth on organic basis now on your services revenue as you look through the next several quarters?

[Marc Eisenberg:]

So, let’s talk about the short-term and then we will talk about the long-term, right. So, you are bringing on 37,000 Blue Tree subs at roughly $14 ARPUs and the in-cab is much higher and the cargo stuff is much lower, but it trends to $14 as you have got, I don’t know, what are you tracking us at somewhere in the $6 million range, everyone think this differently.

[Mike Walkley:]

Yes, I am using the $6 million range with AIS included.

[Marc Eisenberg:]

Yes. So, if you are in the $6 million range, it’s going to help right. So you should get another little step up in Q4, Q4 while we are going to turn on a lot of subs. So, Blue Tree maybe just a fraction of the subs, subs look really good for Q4, but you can get a lot of cargo ones as well, which may offset it a little bit, but you are not going to get a decline short-term and you are not going to get a decline short-term in ARPUs. In addition to that, the inthinc subs are among the highest ARPUs that we have and we kind of gave you the metrics that we are going to turn on a lot of inthinc subs in Q4 and those inthinc subs each one as you know kind of is the same economics as 8 or 10 cargo subs. So, that should kind of right-size the cargo shipments were offset it nicely. I don’t know if I were you, I would trend ARPUs flat to slightly up in 2018.

[Mike Walkley:]

Flat to slightly up just from the run-rate or on a sequential basis?

[Marc Eisenberg:]

Started out in Q4, because you are going to get help from Blue Tree.

[Mike Walkley:]

Yes, okay.

[Marc Eisenberg:]

And then, I think ARPU is going to be up next year, I do. The only way ARPUs are down next year, Mike, is if we do some crazy number of subscribers, we do 300,000 to 400,000 more net subs in these cargo solutions, but in which case you are fine, because you are not modeling that many.

[Mike Walkley:]

Got it. Understand. It’s still accretive to margins when we add more subs.

[Marc Eisenberg:]

Yes.

[Mike Walkley:]

And just to clarify the margins, thanks for backing it out without the two large installations, particularly J.B. Hunt. Is there anything with the Blue Tree acquisition and just your overall cost of putting together all these platforms that create a lower services gross margin or should we see maybe high 60 still going to 70 as you scale the business longer term?

[Marc Eisenberg:]

Yes, again, next quarter coming up, but we do a pretty quick job trying to get to it. The example I would point out would be where you guys thought we were going to be with SG&A, I said I don’t know how fast I am going to get there and we did pretty well. Yes. So, I would say it should start 2018 is really where I would start looking to get back to those normalized levels.

[Mike Walkley:]

Okay, great. That’s helpful. And then Marc, just wanted to delve in one more time as you look at your pipeline for 2018, you are certainly signaling another strong year in hardware. Can you just walk us through your expectations kind of what you learned from some of these biggest installations as they are still that worry from investors that you could be another big J.B. Hunt for you have a big impact to margins for good long-term business, but can you kind of walk us through your pipeline and your scale and maybe how you avoid a step down in margins like we saw this year?

[Marc Eisenberg:]

Yes. We have done it through product innovation and we have done it from not relying on one or two customers, but building strong core businesses going forward that can eat up these potential hardware shortfalls on just those two customers. And if you look at the companies that we have acquired, inthinc is in the 25 point margin on hardware and Blue Tree is even a little higher. So, they are not going to hurt hardware, they are going to help hardware and they are growing pretty quickly as well. Some of the big stuff we are looking at the margins could fall to the low teens, just on those particular deployments, but there is nothing that we are looking at that currently is negative. So, here is the good part and the bad part of it. Your numbers for next year that we looked at meaning the analyst community in that 250s range without Blue Tree and adding Blue Tree on top of it, we can get there without those types of margins from those healthy margins that we are talking about returning to, we can get there. If the company goes over and above that, if we are talking about the three examples, $300 million or $325 million and something massive comes along that requires another investment, if it makes sense and it models it, we are building a business for the next 10 years, not for the next two quarters, we will do it, now I don’t see it, but we would do it which is slightly this time, we are looking at shareholder value over the next couple of years, not the next quarter or two. We are going to make the right decision long-term for the company every time.

[Mike Walkley:]

Right. And last question for me, Robert, just more housekeeping items, I missed the AIS number, can you give me that? And then with the satellite write-down just for modeling purposes, how should we think about quarterly run-rates for depreciation and then amortization with some of the acquisitions? Thank you.

[Robert Costantini:]

Yes, $2.4 million in the quarter for AIS. So, it’s trending in that $10 million annual rate. Appreciation will come down, because of the impairment by about $1 million per quarter.

[Mike Walkley:]

Okay. And then amortization with some of the acquisitions of that going up?

[Robert Costantini:]

Yes, that’s going to go up slightly, don’t have a number there for you, but it’s a $6 million in Q4 we said. That was CapEx that we were talking about. I think you were asking about amortization, it will be finally up 100,000.

[Mike Walkley:]

Great. Thank you.

[Operator:]

Our next question will come from Andrew Degasperi with Macquarie. Please go ahead.

[Andrew Degasperi:]

Thanks and good morning. First, maybe can you expand on that BGAN and Inmarsat deal and can you maybe quantify how big that opportunity is in the leisure of fishing fleet? And then secondly, you have made quite a few acquisitions so far this year, just curious to know what do you see yourself doing strategy wise at this point? Is it do you see additional acquisitions coming in the near-term or do you think you are likely to absorb and centrally integrate them properly? Thanks.

[Marc Eisenberg:]

Sure. Let’s start with the acquisition one and then we will talk about BGAN. From an acquisition perspective, Blue Tree and inthinc served asset classes that we think we need. So, Andrew, it’s my belief and maybe yours, but certainly everyone in the room, I am sitting in that these integrated offerings make the entire ORBCOMM business better. So, in other words, our reaper business got better when we added dry vans. And if you look at like what we did on the dry vans, I don’t know the exact number, but maybe we went half, but if we bid on the dry van business that also has reapers, we think we win 80% or 90% of those, because it’s an integrated offering and it just makes the whole business better. And we have been adding containers and we have been – that was a build and a little bit of buy we have on sea containers and we have been adding all of these assets to build these fully integrated offerings and then inthinc, which added fleet vehicles and Blue Tree that adds the in-cab aspect to our cargo assets, we thought long-term that is where customers want to, if they wanted one integrated offering, they didn’t want to deal with 5 vendors, they just wanted to work, they wanted all the integration, they didn’t want 10 IT teams in there integrating to their platforms and that is what the business needed. So, we fill those holes in the markets. And right now, at least on the transportation side, as we check off every assets that our customers are looking us to support, we are nearly there. So, there is no half due buy from a strategic perspective that we are looking at right now and I think the company continued to be – can continue to be entrepreneurial when looking at acquisitions. I think if you are expecting one in the next quarter or two, you are not going to see it, I don’t think so. I think we bought two big ones. We are so thrilled with how they are being integrated. I mean, inthinc is doing so well and growing so quickly. And the Blue Tree is half in Ireland and half in the U.S. we are working to get that integrated. We have got lots of opportunities that we are closing in on. We have got 20 new products coming into the market in the next couple of quarters. We are bidding on. When we finished hub, we are like now we have got J.B. Hunt and that’s even bigger and how do you replace that, there is 8 more of those that we are working on. So, there is lots of opportunity to close and the company is just busy. So busy, that we are going to focus on closing what’s on the table as opposed to focusing on M&A in the next couple of quarters, if something super entrepreneurial comes up that makes sense for our shareholders, we will look at it, I don’t know, but I am not saying we are throwing up, but the mouth is full right with the M&A that we did. So, that’s given the two, the way I see it. The BGAN thing, while this is exciting right. So, it started out as like an M2M ground-based thing and it turned into a marine thing and that the mining guys they don’t want thousand by packages, packets, they want to open up the channel and send megabytes or gigabytes of data and these machines have awful bigger packets and we were losing market share in some of these larger machines. I am going to get to marine in a second, but so we go and we go down this BGAN route to develop solutions that support that and it’s comical. So, we are fighting 4.8 with 144, I mean this thing is cool and we are going to be fielding these units and have started out as like a mining equipment thing. And then as we build it and it’s using all the same components that are in IEP. So, as we start building it, what we are saying to the Inmarsat marine guys, we think there is a product there. It’s not the product that goes on the Maersk steamships, but your product for some of these small vessels where some of the other guys and you know who they are winning share, we are selling units out there that are 3,000, 4,000, 5,000, 6,000, 7,000 and $80 a month solutions and they are being incredibly successful and with ORBCOMM’s scale, we want a retail product out there in the market sub $1,000 and no one has ever seen that before. And how many of these ships are there? Tens of thousands of them and they are being poorly served and we think there is a market there. We think the service at the 144 is going to be just awesome and better than they have ever seen. You could do data, you could do voice over IP, really cool and typical to ORBCOMM instead of forcing it to use hardware, ORBCOMM wants you to use your iPad, in iOS or Android as opposed to buying the sophisticated units, just use your laptop. So, really cool supermarket, it’s going to be multiples of what ORBCOMM ARPUs are and we have been kind of working at this quietly for the last year and a half. And the goal is in April launch date, it may slip to May, but it’s not going to be December.

[Andrew Degasperi:]

Got it. And just a follow-up to that, I mean, obviously, I would see some equipment benefit, but would you share on the services, airtime side too?

[Marc Eisenberg:]

Yes, the airtime should be closer to an inthinc sub and then to in a cargo sub.

[Andrew Degasperi:]

Got it. Thank you.

[Operator:]

[Operator Instructions] We will move next to Mike Malouf with Craig-Hallum Capital Group. Go ahead.

[Mike Malouf:]

Great. Good morning, guys. Just a quick follow-up on the product revenue next year, obviously we are up well over 50% in product revenue this calendar year. And as you look into next year, I would have thought that you would see some pullback there, but you are sort of saying that we are going to maintain this high level. With some of these very large deployments driving this year, are you saying that basically you are going to be a sort of a much more singles and doubles this following calendar year to make up that call it $115 million or so, $110 million, $115 million revenue or do you foresee some big deployments sort of driving the 2018 as well?

[Marc Eisenberg:]

So, we see a lot right. So, number one, we see new acquisitions that are either taking off from very low foundations of hardware. We see 7 or 8 opportunities, I don’t know that we are going to close them all and I don’t know the rate that they are going to deploy just like the rate for J.B. Hunt was going to deploy last year. We see more singles and doubles. I mean, did you hear how many deals we closed in those singles and doubles in transportation this quarter. I mean, you have never heard me real off 10 of them before and we have got new products. We have got BGAN coming out. We have got products we are hoping to get on Amazon from a retail perspective. At the end of this month, we have got 20 new products coming out. We have thrown everything at it. We have thrown tens of millions of dollars in development. We have thrown tens of millions of dollars in acquisition. Our sales teams are out there closing more big deals. There is a ton of activity in the reaper container space. After Maersk, we closed Crowley and we closed TOTE, but there is 4 or 5 that are out there looking that we hope to follow on to. I don’t think everything is going to close. I mean, if everything closes, I mean, next year gets crazy. If we were to close it all and install it 1 year, I mean you wouldn’t be talking 300 million, you would be talking a lot more, but we are throwing a lot at it hoping we get a good portion of it to keep the hardware on track. But if we can keep the hardware on track but do it at 8 or 9 points higher in margins and then they have increased the service revenues to be low 60s that you guys – I am sorry, that’s EBITDA increase EBITDA to the low 60s that you guys are pointing to by increasing service revenues another 10% or 15% year-over-year. We think this plan comes together and are really super nice.

[Mike Malouf:]

Great. Thanks for the color. Appreciate it.

[Operator:]

Our next question will come from David Gearhart with First Analysis. Please go ahead.

[David Gearhart:]

Hi, good morning. Thank you for taking my questions. My first question is I think you kind of touched on it a little bit with the BGAN offering at a 1,000 a unit and higher ARPU. I wanted to ask a little bit about how AIS and I think it’s somewhat of a related product just given the maritime focus, but wondered if you can give us an update on the AIS offering?

[Marc Eisenberg:]

Sure. So, when we did the [indiscernible], we started off by building roughly 700 or 800 first run units to begin and we have sold everyone we had. So, now we are taking what we have learned, we are refining it. We think that’s going to be thousands of units next year, not tens of thousands, but thousands and the ARPUs there are more likely to change.

[David Gearhart:]

You said mid-teens?

[Marc Eisenberg:]

Mid-teens.

[David Gearhart:]

Okay. And then a while ago, you gave targeted levels for adjusted EBITDA at $300 million and $500 million, I guess it was 35 to 38 and 41 to 43, when you layer on the acquisitions and the growth, you are going to be a lot closer to 300 next year, but it looks like the adjusted EBITDA it’s going to be short of those target. So, I was wondering if you could adjust our – readjust our expectations or your targets on revenue at those levels and where adjusted EBITDA will be or when you would expect to hit the adjusted EBITDA margins if it’s at a higher revenue level which it seems to be?

[Robert Costantini:]

Yes. So, those models that were done were presuming a certain revenue mix between service and hardware plus those organic growth……

[Marc Eisenberg:]

And the date was out, because it was all organic growth as opposed to getting there 1.5 year or 2 years sooner with the acquisitions.

[Robert Costantini:]

And if you just look at the existing platform growth, then you are seeing your high 60 point margins moving up maybe right into the 70 point range, which would be necessary to see this scalability. So, we do have platforms that are scaling that way, but as we keep on adding platforms, if it makes sense for us to keep on adding platforms and we tried to bring them up for scale, that’s going to change that dynamic. You can see on the SG&A below the lineup, ex-cost, I think our modeling is still pretty much in check there. So I would say the big difference, the big difference in terms of what those expectations would be – would just be the mix of the top line between the two components and then how many platforms you really have to run to get there.

[David Gearhart:]

Okay. And then I am just wondering if you could give us a quick update on Brazil and the dynamics there and how it looks from a trajectory perspective just given some of the headwinds that you have seen in the past and the improvement, how is it progressing at this point?

[Marc Eisenberg:]

The Brazil from a hardware perspective and new deployments, at one point, you had gotten to nearly zero. So, we are enjoying the benefits of a bounce this year. It is nowhere near the levels where they were in ‘14 and ‘15, but we are shipping thousands of units into Brazil and the SkyWave Group is having a really good year, I am just wondering every aspect of ORBCOMM is up, we went looked at it during our board meeting, every business unit is up and SkyWave is out there leading the charge. SkyWave is shipping tens of thousands of assets and the SkyWave network actually is out casing the ORBCOMM network in sales and subscribers pretty handily right now.

[David Gearhart:]

Okay. And the last one from me, just going back to the OG2 network and your ability to offload either leveraging SkyWave on Inmarsat or Inmarsat since the RFIC is going to be available second half of ‘18 for commercial service. If you need to use Inmarsat, are you just using your Inmarsat modem in your hardware and are you dropping it down to a comparable latency to what OG2 is in order to maintain the price points just kind of want a little more color there?

[Marc Eisenberg:]

So, once you build the RFIC, the new thing is in ORBCOMM modem, a SkyWave modem or a dual-mode modem is the same modem.

[David Gearhart:]

But up until that point?

[Marc Eisenberg:]

Up until that point you have got 29 satellites.

[David Gearhart:]

Okay.

[Marc Eisenberg:]

We are going to have – we have 29 satellites and we think we are going to have satellites for the next 15 years. And then if we see a need that where we need to launch more satellites, satellites to replenish this constellation. It’s not another $200 million, maybe do another $4 million to $6 million and it’s $40 million or $30 million. So, we are working through what the next generation needs to do and we are watching really closely how these fixes have worked on the current OG2 spacecraft and so far knock on wood, everything is going real well. But there is so many choices going forward, but the 29 spacecraft is delivering pretty damn good service today.

[David Gearhart:]

Okay. That’s it from me. Thank you.

[Operator:]

Our next question will come from Mike Latimore with Northland Capital Markets. Please go ahead.

[Mike Latimore:]

Thanks a lot. You had mentioned right into the fourth quarter, you start to see some EBITDA margin improvement, I guess can you put a little bit more of a range around that potentially?

[Marc Eisenberg:]

It’s just going to be – it’s going to be fractions of a point moving in the right direction where you are probably going to see something between the 16% and 17% range for Q4.

[Mike Latimore:]

Okay.

[Marc Eisenberg:]

Still want to get out ahead of ourselves until we can get the integration of Blue Tree under – under our belt. So, that’s’ the sort of unknown at this point.

[Mike Latimore:]

Yes, excellent. And then obviously you guys announced a number of deals in the third quarter, how many subs are sort of embedded in the deals you won in the third quarter?

[Marc Eisenberg:]

Boy, there is lots of deals in the third quarter, but let’s just say we think fourth quarter will make a decent improvement on 70,000 subs. Keeping in mind, we went from – we were doing high 30s a year ago to low 40s at the beginning of the year, 70 this quarter. And I think we are going to be north of 70, I don’t know if it’s 75, 80 or 100, but there is lots of subs coming this quarter.

[Mike Latimore:]

Got it. And then you mentioned there are other maybe 7 or 8 very large deals in the pipeline, I guess just given normal sales cycles and those sort of things will the prospects in making decisions the next 6 months let’s say on some of those?

[Marc Eisenberg:]

Yes, when you are bidding on 10 deals you win 3 you lose 3 and 4 push, something like that.

[Mike Latimore:]

And just last on, I know you haven’t really finalized the plan for ‘18, but any color on just CapEx, is it similar to this year up, down?

[Marc Eisenberg:]

Yes, with the exception obviously the final OG2, the final OG2 payment. So, you are looking in the $20 million range.

[Mike Latimore:]

Okay, great. Thanks a lot.

[Operator:]

And our next question will come from Chris Quilty with Quilty Analytics. Please go ahead sir.

[Chris Quilty:]

Just following on that last question, Robert, how much of that $20 million would be the sort of growth CapEx?

[Robert Costantini:]

$14 million, I would want to say if there is right now we are trending on sustaining a little bit higher than I thought we would be at, it would be just like 5 to 6 this year, we are like in 6 to 7 in the expense of things around that, that will be related to the investigation that was helping the other satellites. So that will come off. So, I think $14 million would be in the gross arena.

[Chris Quilty:]

Okay. And do you think that sort of $14 million a year with a pipeline of things that you have is something that you are going to end up spending every year for the next couple of years?

[Marc Eisenberg:]

Assuming no further acquisitions that require more investment and more products, yes.

[Robert Costantini:]

And a lot of amazing opportunities.

[Chris Quilty:]

Got it. So, shifted to the BGAN, I mean, the BGAN product has been around for 10 years, it hasn’t actually been kind of a world killer for most of the vendors out there. Is your edge on it simply about the price points that you are hitting? And the second question if you are going after the maritime market, that’s a pretty balkanized new market, how do you go to market to actually reach the customers?

[Marc Eisenberg:]

Yes. First of all, I mean to say that BGAN hasn’t been successful. I mean, it’s – BGAN itself is 4x the size of ORBCOMM. So that maybe relative to something else you are looking at, but these are pretty full satellites. The advantage that we have is purely price and Inmarsat doesn’t chase small boats that are – they don’t really chase small boats, because they don’t hit price points and those are the markets that we are chasing just leveraging the technology that we have. I think it will be more of a retail looking offering. It will go through the West Marines and the other guys out there that the only way to fall to find lots of small craft as opposed to what the current Inmarsat business, which is a finite amount of large craft.

[Chris Quilty:]

Got it. And just a final question on the product path with Inmarsat, does the new RFIC integrate the new I6 satellites and what does that bring you in terms of capability?

[Marc Eisenberg:]

We are learning that. So, ORBCOMM has been invited to the Inmarsat team designing not the satellites, but the protocol on those satellites. So, both teams are working together on that. The first thing that I6 gives you is some crazy number like 20 more years of life. So, that’s pretty exciting. And we will see what we could do around speeds and power and efficiencies in terms of generating more traffic through one of their mass spectrum.

[Chris Quilty:]

So faster speeds, bigger packets and same coverage?

[Marc Eisenberg:]

Definitely. So, the augmentation to their coverage is the OG2, which will get you north of that 65 degrees.

[Chris Quilty:]

Great. Thanks, guys.

[Marc Eisenberg:]

Thanks Chris.

[Operator:]

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

[Marc Eisenberg:]

So, thank you so much for your questions and participating in our call. We look forward to speak to you again when we report our Q4 and full year 2017 results in the first quarter.