ORBCOMM Inc.
Q1 2016 Earnings Call Transcript

Published: 9 May 2016

[Operator:]

Good morning, ladies and gentlemen and welcome to ORBCOMM's First Quarter 2016 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

[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 include 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. Building on the momentum of 2015, it's been an active first quarter for starters our full OG2 constellation is now in service. We closed the number of new opportunities across the business and we are in the process of adding key incremental support from the pending Skygistics acquisition from the continent of Africa. For the agenda on today's call. I will start with an overview of the business, give you more detail on Skygistics, update you on the progress of the OG2 constellation and transition the call through Robert to walk you through the financials and we will wrap up the call with Q&A so let's get started. Earlier this morning we issued a press release announcing financial results for the first quarter ended March 31, 2016. The quarter consisted of total revenues of $43.6 million increasing 3% or $1.2 million over the prior year period and adjusted EBITDA of $10.7 million increasing 18% or $1.7 million over Q1 last year. Breaking this down further, service revenues in the quarter increased year over year by 13% to $26.9 million and product sales increased 10% to $16.6 million. Our subscriber counter subs grew in the quarter by 39,000 net subs taking the page to over 1.6 million subs at the end of March 2016. Overall looking at Q1 service revenues came in better than we had anticipated and hardware shipments came in lower. The hardware shortfall is purely based on timing is approximately $2 million in hardware sales led to two large opportunities distributed through third parties including an OEM and US cellular operator, are now expected to move into the second quarter, making things even a bit more complex than last year's comparisons of approximately $5 million in hardware to one customer that was not expected and did not repeat this year's quarter. Most of the improvements in service revenues are attributed to higher subscriber counts. The increased coverage to new OG2 satellites now in service as well as unanticipated professional service fees of about $300,000. The increases in service combined with improvements in cost controls resulted in significantly improved adjusted EBITDA year-over-year which was consistent with analyst expectations. That being said, with a few million dollars of hardware shifting to Q2, the second quarter being a seasonally strong quarter than Q1 and new satellites driving higher service revenues, Q2 is shaping up to be quite an exciting quarter and we will be disappointed if we didn't have record results across the board with total revenues approaching $50 million. Moving on to the business highlights we received a large number of renewal orders from many of our long standing transportation customers such as Maverick Transportation, John Christner Trucking, Prime, PLM, Freymiller, Midlands Carrier, Winnie Brothers, C&S Wholesale, KLLM, Continental Express, Pepsi mid-America and Tyson. The installations at hubs grew more than 20,000 incremental containers and we shipped them about 17,000 new devices in Q1. Walmart is installed over 15,000 units to date. In addition, we closed a significant number of new opportunities including Brown Integrated Logistics, Arctic Express, Kkolar Transport, Arnold Carriers, and Containers on Wheels, L J Rogers Trucking and Cold liners Express. Many of these opportunities we expect to start shipping in Q2. We continue to expand our geographic presence with opportunities such as Skygistics base outside of Johannesburg, South Africa. Skygistics is a long time distribution partner of ORBCOMM subsidiary SkyWave and is over 40 employees with established sales and distribution network of over 250 customers in 22 nations throughout Africa. We expect Skygistics to generate opportunities for both our connectivity and solutions businesses. Africa is one of the fastest growing IOT markets offering a significant opportunity which we now believe we are well positioned to go after. Sizing Skygistics the business has annualized sales of about $4 million a year with a 50

[Robert Costantini:]

Thanks, Marc. The financial highlights of the first quarter 2016 include better than anticipated service revenues of almost $27 million and while product sales were lower than expected, we have higher gross profit from product sales of $0.6 million due to significantly higher margins of 31% up from 25% last year. Adjusted EBITDA at $10.7 million was at 18% from a year earlier period and at the 25% adjusted FDA margin. Service revenues were better than expected and at about $27 million up 13% from the prior year period. The growth in service revenues was partially offset by some international customers in struggling economies such as Brazil. AIS revenues now at $1.6 million per quarter are trending over $6 million on an annual run-rate. Service revenues are on track for 2016 expectations including expected head winds experienced in international markets. First quarter product sales at $16.6 million were down over Q1 last year by 10%. Product sales came lower than we were forecasting due to the shipment timing of two specific sales orders of approximately $2 million which we expect will come in Q2. Compared to last year's Q1 that included a large shipment to one customer of approximately $5 million indicating we are now increasing the shipping to a more diverse customer growth. Excluding last year's unusually large order of approximately $5 million product sales would be up about 20% in Q1. More in line with recent trends. Total revenues of $43.6 million were up 3% in Q1 over last year as the increase in service revenues were greater than the decline in product sales. Revenue mix was services revenues of 62% versus 55% and product sales of 38% in the quarter. While there was a slightly negative impact of foreign exchange fluctuations at this quarter, the results were less significance than previous quarters. Net subscribers added were 39,000 for the quarter maintaining the trend over the last several quarters of net subscribers in the high 30,000 unit range. Our total built up subscriber base is over $1.6 million at March 31, a 27% increase over the $1.26 million at the end of March last year. Gross profit of $22.9 million in the first quarter improved by $2.2 million, 11% over the prior year period due to increases in service revenues and higher margin product sales. Service gross margins for the first quarter of 2016 were 66% consistent with expectations and comparable to the previous quarter. Product gross margins for Q1 were 31% higher than our target 25% margins. While product gross margins have started benefitting from the shift to more efficient manufacturing, we are still targeting 25% margins for modelling purposes over the next few quarters as we build our inventory build up to handle the manufacturing transition and to anticipate large order customer discounts. The high margin service revenues in better than expected hardware margins in Q1 contributed to a solid Q1 adjusted EBITDA of $10.7 million growing $1.7 million or 18% over the $9 million in Q1 last year. The adjusted EBITDA margin of 24.6% in Q1 improved from 21.4% in the prior year quarter reflecting our operating leverage. The company had a net loss of $2.1 million in the first quarter of 2016 improving from a net loss of $2.9 million for the same period last year. Notwithstanding higher depreciation and amortization and interest expenses. For Q1 of 2016 the net loss of $2.1 million included depreciation and amortization expense that was higher by $2.5 million. SG&A and product development cost were higher by $664,000 but that also included $200,000 of stock based compensation, and interest expense increased by $457,000. Benefits to the bottom line included lower acquisition related costs by $2.1 million. Depreciation and amortization increased by $2.5 million in the first quarter to $9 million mainly due to a $2 million increase in depreciation from new satellite in service and increase in amortization expense of approximately $0.5 million related to the growth in intangible assets. For the second quarter of 2016, we expect depreciation and amortization expense of approximately $11 million growing about $100,000 in both Q3 and Q4 of 2016. Acquisition related and integration cost was $0.4 million in the first quarter of this year compared to $2.5 million in the same period last year and included cost related to the Skygistics acquisition that is expected to close by the end of May 2016. We should see between $300,000 and $400,000 of acquisition related and integration cost of Q2 for 2016. Interest expense for Q1 was $1.7 million. For the full year 2016 interest expense should be $8 million. Let's look at the balance sheet. Cash, Cash equivalents and restricted cash totaled approximately $22 million at March 31, 2016 compared to $28 million at December 31, a decrease of $6 million. Cash decrease primarily due to capital expenditures of approximately $9.8 million mainly related to $6.6 million for milestone and assurance payments for the OG2 program that fell into January 2016. There were other capital expenditures of about $3.2 million that were split evenly between sustaining CapEx for existing infrastructure and investment CapEx for new products and services. Cash provided from operations was about $3.7 million in Q1. Our total debt outstanding at March 31 remains at a $151 million with an available $10 million undrawn for the revolving credit facility. For Q2 we expect to see total revenues in the range of $47 million to $50 million at 25% adjusted EBITDA margins. For the full year 2016 we are comfortable with the $200 million in total revenues and the 25 point margins for adjusted EBITDA that our analysts are modelling. But again given the predictability of service revenues, the key aspect in achieving those numbers is the ability to ship roughly $85 million to roughly $90 million in annual product sales. Wrapping up we are on track to achieve our plan in 2016 and Q2 is shaping up to be a record quarter. Driven by new customer wins and the deployment of new products coupled with strong execution. This concludes our remarks for this call and we are now happy to take your questions.

[Operator:]

[Operator Instructions] Okay our first question comes from Chris Quilty with Raymond James.

[Chris Quilty:]

Thanks guys, looks life you had some strong subscriber ads in the quarter. can you give us a sense of the breakdown where you are seeing those come from relative to recurring sort of OEM customers and other orders that are coming in and in the course of the quarter from large customers?

[Marc Eisenberg:]

So I guess your question is how many our solutions versus how many our OEMs?

[Chris Quilty:]

That's second part of the questions, first part was more a breakdown of what you see as recurring customer orders from your heavy equipment or others that are doing your regular shipments.

[Marc Eisenberg:]

Yes, I would say 75% of them or may be even 80% of them are recurring from recurring customers and the last 20% or 25% are from new customers.

[Chris Quilty:]

And is that mix changed in the last year?

[Marc Eisenberg:]

Yes, over the last couple of years when we got into that solutions business, we are closing these trucking companies all this time and if you were to go all the way back to 2010 our business was predominantly servicing 10 OEMs and maybe other 15 orders were meaningful and the rest of it were spread amongst much smaller customers.

[Chris Quilty:]

Got you and for the breakdown of solutions versus wholesale?

[Marc Eisenberg:]

Solutions is about a third.

[Chris Quilty:]

Okay. And where do you expect that will end up by the time you get to the end of the year?

[Marc Eisenberg:]

Well, that's a new category that's kicking in. you are getting a ton of terrestrial stuff so I guess we have to come out as wholesale right?

[Chris Quilty:]

Yes.

[Marc Eisenberg:]

Maybe it's going to end up at like 15% but the numbers are still going to drive higher but we are hoping to get to a much higher subscriber rate to be crossing well into the 50,000 subscribers for the quarter by then.

[Chris Quilty:]

Great and can you give us a little more color on how the 2G changeover is impacting some of your reseller relationships and where that could potentially ramp to?

[Marc Eisenberg:]

Sure, we never had really of an AT&T 2G issue. The only customers that we had that used the 2G network on AT&T was our LMS acquisition. Most of our other guys were using other networks and when we did that acquisition it was over 20,000 subscribers and that has been all the way down, something like 13,000 subscribers last I checked. We are going to need to swap those out over the next 9 months. You compare that with some of our peers out there that need to swap out over a million units, we kind of like throwing all our chip back in the table and re pulling out customers because it feels like our ante is really small so lots of opportunities. But as you look at those subscribers, LMS subscribers, they are reefer subscribers and we have got such a great chair in the reefer business that I am guessing our attention rate is going to be super high.

[Chris Quilty:]

And speaking of reefers can you give us a sense of how your OEM agreement that you signed last year is starting to roll?

[Marc Eisenberg:]

So first of all they are deploying with customers on pilots and there is 5 or 6 different pilots that are out there that we expect to lead to some decent size deals they have not announced it yet to the entire market. They are just quietly piloting with a bunch of end users through specific dealer networks so that is a full go, nothing is really changed though. We still aren't using their name and I imagine the second half of the year they will be in full ramp.

[Chris Quilty:]

Got you and one more question on CIMC, I kind of missed the context of what you were saying in terms of what has deployed and piloted and what they have accepted in terms of hardware at this point?

[Marc Eisenberg:]

They have accepted about a 1000 OG2 modems and about a 100 OGI modems and if you think of the different routes that they run, you can understand why they are interested in both the networks. Based on different regulatory approvals both networks have. 2018, we are going to have a chip where you can roll out on both networks with just one modem. Right now they are interchangeable, you can pop one out and pop the other one in and you typically do that before you deploy and if you are on the run from China to US, because of China you could use the OGI modem and from Europe to the US you could use the OG2 modem. But in 2018 you could just throw it into the pool and you can use one modem, be it anywhere on the planet.

[Chris Quilty:]

Got you and what would be your best or worst case scenario in terms of deployed units with that particular customer this year?

[Marc Eisenberg:]

I would say the worst case this year is in the 1000s depending on how their development goes so they are taking those 1000 units and they are embedding them in their application in plastic and sending them out there and hoping they don't need 2 or 3 spins of that product. If so it could be delayed a little bit. If they hit it right and are out there in large volumes, it could be 1000s of units. If they make this thing standard there's 2.4 million out there so we are anxious to see what the adoption rate is.

[Chris Quilty:]

Great. I will circle back into the queue.

[Marc Eisenberg:]

Thanks, Chris.

[Operator:]

Next from Canaccord Genuity, we will move to Mike Walkley.

[Mike Walkley:]

Thank you. Marc, I wanted to ask a question about food safety monitorization act. Now that they have fought a deadline for compliance combined this reefer and OEM agreement you have talked about, could you maybe talk about your pipeline towards those $300,000 plus reefers. Will they need to be monitored with some type of solution in the next 2 years?

[Marc Eisenberg:]

Yes, it's assuming that this was coming, reefer business picked up significantly last year. We doubled our hardware sales for transportation group last year and it continues to pick up and as you can hear we keep announcing new wins just about every quarter and then at the same time you have got to swap out some of these 2G units. I think we are going a really good job in the US with really large fleets. That is the lion share of our business and this reefer OEM is going to be crucial to get this huge part of the market has 5s and 6s. We are pretty good at 5,000 and 6,000 so even though these 5s and 6s add up to really large numbers so I think that reefer OEM is certainly going to help. If your question was more how much of that is penetrated today, the answer is just a little bit more than a third and there's still an awful lot more to go. That is a piece of it because the numbers that you are quoting is more the union of the truck and the rail. The bigger numbers are the containers that come into the country which is the real theory behind, or strategy behind buying lamb and you can see that the first things we are monitoring are these gensets that we talked about today with those three new customers. And the second step is the shippers, the Maersk's of the world that bring their product on shore. The Maersk is the biggest. There is over 200,000units of Maersk and we are monitoring all of those and that $1 a month that we have explained and we need to get to the other shippers out there. We are piloting with, can't tell you all of them but certainly piloting with a bunch of them and there is an awful lot of upsides there and we hope we win as many as possible and we have got our OEMs to help and we have got our terrestrial providers helping us as well. Sometimes we are bidding direct, sometimes we are bidding through them. But that particular group is incredibly busy though 6,000 subs that we talked about for this year is that group so 6,000 is some decent sized deployment and one of them we will announce shortly and awful lot of 100s and 50s as we get deploying with other guys so that business is promising. If you were to ask me what they did last year in terms of these pilots, WAMs, it was a whole lot closer to 0 then it was at 6,000.

[Mike Walkley:]

Great thank you. That's helpful and on the visibility and for the hardware for the 85 million to 90 million, I understand there may be some lumpiness. Could you may be talk about seasonal patterns you are seeing in the business, talking about Q2 being more seasonal and if you can get to that 85 million to 90 million, how much of that is already booked and what's your visibility into that number for the full year?

[Marc Eisenberg:]

Sure, last year in Q1 we did $40 million and Q2 we did $42 million but if you look at that first quarter, $5 million of it was one customer, it was a little bit misleading in that you have shipped 15,000 or 16,000 units over a 3 month period to one customer and they still haven't deployed them all. Because that's where the budget was so this year those customers was shipping on a quarterly basis so you don't get those big gluts but if you back that out last year looked like $37 million in Q1 and $44 million in Q2 so there is a massive difference between Q1 and Q2 already and when you add the $2 million that shipped plus the normal seasonal impact of Q1 and Q2, it's across the board. Our SkyWave business because the buoys typically go out in Q2 instead of Q1, the Japan business where you do a little stock balancing in Q1 and then you start shipping in Q2, it's kind of across the business. In terms of visibility for Q2, if everything were to ship and then I will preface this by saying never is everything shipped, but if everything were to ship, the company would do $51.2 million in Q2 -- if everything were to ship. That being said, like I said, not everything ships which is why we're guiding at that $47 million to $50 million to give us little wiggle room and you continue to have that phenomena where it ships from quarter to quarter. These two particular deals that shifted quarter-over-quarter, we're not concerned about them, but they're the two deals that we don't have the same control over that we typically do. So one of them is through a terrestrial operator. You go and you build them a portal, it's labeled this terrestrial operator, its framework is ORBCOMM, it's labeled theirs and they've got a customer that was basically closed, but we've got these two behemoth companies working back and forth on a contract. A product is already built, you could see it in our inventory and literally you've got two who were sending documents back and forth and that was the bigger delay of the two. And then the other was one of the Reefer OEMs that was having a similar battle. Nothing has changed. We have done this before. If you remember in Q3 of 2014, we said, hey, we've got an issue getting some of our units shipped because it's closing the fourth quarter. And we went from I think $23 million that quarter to $29 million the next quarter.

[Robert Costantini:]

Yes, monster Q4.

[Marc Eisenberg:]

Yes, monster Q4. That's just what happens. Do you remember the last thing I said on the last quarter was, I think we're going to do our 85-90 business, just don't hold me to a quarter because the demand looks really strong, I just don't know when it's going to ship.

[Mike Walkley:]

Okay, that's helpful. And then just from the AIS business, is it still something you expect start growing a couple of hundred thousand per quarter? Maybe you can talk about cut some more opportunity that that's still the case?

[Marc Eisenberg:]

Sure. AIS continues to grow pretty well. We did a $1.6 million quarter over a $1.1 million last year. There is a pipeline to an awful lot of opportunities, especially since OG2 launched. There was a press release that came out just before we went live from Exactor [ph], one of our competitors on the Canadian opportunity and the space agency. It looks like that deal has been bifurcated where it used to be like one big buy that was ordered through Canada and then shipped to multiple different countries. Now, it looks like Canada has become a relatively small deal. So we're out there chasing all of the these other countries there and I think we're making progress there. In terms of our competition, we haven't done an announcement yet, but geez, we've been doing really good recruiting some of their customers. So expect some more data on that relatively shortly.

[Mike Walkley:]

Great, thank you. I'll just ask one more question and pass it on. Robert, more for the model. Services, gross margin over time, you said they stay in the mid-60s or you think it will grow higher as you start to add more revenue to the business. And then also just on the balance sheet, the $21 million, is this kind of a low mark for 2016 or are there other uses of cash anticipated this year and finally, can you walk us through future CapEx expectations and maybe repayment of the debt? Thanks.

[Robert Costantini:]

Yes, service revenues are performing pretty well and I expect that 66 plus point margins are going to creep up a little bit as we get towards the latter half of the year. On the balance sheet, you kind of look at this being the low point on the cash position, but we're going to take that cash and continue to roll it down into new opportunities. If you look at what we talked about in terms of the CapEx spend this quarter, backing out that carry over from last year to six million which we highlighted on our last call, you really had a couple of million and it was split evenly between what we said were sustaining and that's numbers intact with our previous guidance in somewhere around five or six and we're running a little bit lower than that. But then the opportunities that present themselves continue to build products and services were going to be focused on investing there. So as far as the full-year number, again, it will be still in that $5 million to $6 million of sustaining CapEx. That's sort of guaranteed, but there are a lot of investment opportunities. I would say you probably should look north of $10 million for -- I want to say non-satellite CapEx for 2016. If you roll that all together, it could be $15 million to $20 million because of the $6 million that carried over. Anyway, that's our thinking on it. Every project that we invest in has to go through a rigorous return on investment calculation and that's how we're looking at it. I think I got that whole question. Right?

[Mike Walkley:]

Yes. The only part is just your debt, do you think it would be paying that down to the source of cash this year?

[Robert Costantini:]

It could. I don't think we're going to have any requirements or ratios -- not coverage ratios, but are multiple of debt to adjusted [indiscernible] is operating at levels and could come down to a point where we're operating below any required payback. But we'll look at that opportunity as well towards the end of the year. Right now we have a lot in front of us and we want to get through at least another quarter. I can give you a little bit more color on this as we head into the summer.

[Mike Walkley:]

Great. Thank you.

[Robert Costantini:]

Sure.

[Operator:]

And next question comes from Rajesh Ghai with Macquarie.

[Rajesh Ghai:]

Yes, thanks. I had a question on the hardware sales. Obviously you're very strong in 2015. It's a question that you probably answered a lot. Are all the hardware sales eventually going to convert to service revenue? That's the first part. And secondly, if you look at the sale that you had in 2015, how much of that is still in backlog in terms of revenue?

[Marc Eisenberg:]

Well, let me answer the first one. The overwhelming majority of our hardware sells convert to revenues or they're replacing a unit that supplies service revenues. So either it's a new customer or sometimes, there's a new unit in the fleet and you swap it out, there are two exceptions. The first exception is a clear exception where Euroscan has a recorder business. Geez, maybe it's 10% or 9% of our hardware revenues which had the availability to supply service, but the majority of them don't, but we're moving in that direction. The second one which is a little misleading because it does supply service is we've got this Booey [ph] business where we supply to various companies -- maybe over somewhere between 30,000 and 50,000 Booeys a year, depending on the year and your supplying hardware to them, it generates service, but the hardware needs to be swapped out like every 9-16 months. It's like recurring hardware with constant service and that business is just a little bigger, but it does supply service, but I'm trying to get to what you actually are meaning and supposed to what you're asking. What was the second part of your question?

[Rajesh Ghai:]

How much of the hardware sales hasn't still converted? How much of the backlog in terms of part of the revenue that start to show those revenue?

[Marc Eisenberg:]

It's been running up like a good 50,000-unit number. We haven't been reporting on it now because it hasn't changed. I just think that's the run rate. There's always going to be 50,000 units out there that are coming into service because geez, we're shipping about 50,000 units a quarter.

[Rajesh Ghai:]

Yes. In terms of your earlier response to a question, but you expect 2016 were about one-third solutions sales. How much of your pipeline, the span of time, subscriber that likely to come on one of your OG2 constellation versus your MVNO versus Inverstat [ph]?

[Marc Eisenberg:]

We're talking about subs, not revenue. Right?

[Rajesh Ghai:]

Yes, subs.

[Marc Eisenberg:]

Because it seems like from a revenue perspective, like 80% or 85% of our service revenues before the year begins and that's the subscriber base. In terms of new subscriber -- your question was how much is solutions and how much is...

[Robert Costantini:]

Versus SkyWave and OG2.

[Marc Eisenberg:]

So SkyWave just does about half of our hardware unit deployments, but since it's purely a modem, it is not half of the hardware sales. It's a lower ASP and then on the solutions side, solution hardware, can be anywhere from a few hundred dollars for trailer tracking, all the way up to $1,000 for a dual-mode Reefer unit. I'm guessing the average solution sale is somewhere, it's a high $500s.

[Rajesh Ghai:]

Okay. My last question for Robert. You mentioned that you said for molding purposes on the hardware gross margin we should look at 25% of number, did you overachieve on that number for the past five quarters and you've mentioned that you are looking at shifting and manufacturing to lower cost locations. I'm just wondering if that lower number just because you want to potentially use the price of the tool going forward to that [ph] or you are like more conservative. What's kind of…

[Robert Costantini:]

The thought process behind it is number one, getting through the transition at the manufacturing. So we built up inventory, we put it on our balance sheet at a different price point. As we are fully transition, as we talked about over the next couple of quarters, we'll see those opportunities emerge and then of course the other thing is absent this quarter was this large customer type discount pricing where they bring very large volumes. So as we get through at least the next quarter, a lot better visibility on this, but that was our thinking. We want to get through the manufacturer and we want to be completely cut over. We'll see what those price points look like and then decide what the opportunities are. I'm going to say at least for another quarter. I said two quarters in my comments, but at least for another quarter we should look at it like that.

[Rajesh Ghai:]

All right. That's really helpful. Thank you.

[Operator:]

Okay. Next from Craig-Hallum Capital Group, we have Mike Malouf.

[Mike Malouf:]

Great. Thanks, guys. Marc, I was wondering if you could just give us a little bit of an update on the lay of the land potential acquisitions, how you sort of see that rolling out over the next couple of years and in particular, how pricing for these acquisitions are looking? Are you seeing stable prices, or rising prices? Just get a sense of how creative that can end up being for you?

[Marc Eisenberg:]

Sure. First, let me say keeping in mind this is coming from a guy that did 11 of them, but we really don't have an acquisition strategy -- we've got a growth strategy. When you're eying a specific geographic market, or a capability, or you're looking for specific vertical market, what we typically do is we look at what the opportunities are to acquire, we look at what it takes to build, and we look at what it takes to partner, we model it out and with an acquisition like Skygistics, it was so obvious. You're paying $4 million for four million of revenue and you're getting 40 bodies on the grounds in Africa and you've already got distribution in 22 countries. Like, All right, how long would it take for us to build that and how long will it take for it to turn profitable? You're like, Geez, it would probably take $10 million and it will probably take four years and then you look at this and you're like, Wow! We could pay $4 million and maybe earn $1 million of EBITDA next year. Geez, it just makes perfect sense. But I get the feeling that's not what you're asking. There are certainly more people looking at IoT than ever before, which has its positives and its negatives. Every company that we speak to, whether it's the Lockheivs [ph], or the AT&Ts, or the UTCs, or the Ingersol Rands, every single one of these guys now have an IoT strategy. There's an IoT strategy everywhere and in some cases they're looking at the same opportunities we are and in some cases they're looking to build their own products. In some cases they're looking for someone like ORBCOMM to build it for them, but they're nosing around in the market. The IoT market in 2010, it felt like greenfield. It was ORBCOMM and no one else. There were a couple little private equity guys out there and you were able to go and do an acquisition. The Startrak acquisition stopped the value because it was a break-even company, but it was like $15 million in revenues and I think we ended up paying $60 million or one times revenue and we saw three million of synergies there, so we were able to buy it like five times post-synergies. We were able to continue to do that for smaller deals for a while and then it got more competitive on larger deals. You look at some of the deals like ABRY partners just did in the MVNO space and they're paying 15, or 16, or 17 times EBITDA. That seems a little rich of our blood. You look at the deals for thing works and the deals they got on there, forget about 15 or 16 times EBITDA, they're trading multiples of revenues with those numbers, that has gotten astounding. Lately, it may have from a private equity standpoint slowed down a little because the debt markets are not as open for them as they once were. So I'm just backing out there a little bit. I think the ORBCOMM place that we can play really well, and be competitive and do well is in that $5 million to $50 million range. The larger guys are a little more competitive and believe it or not, the larger guys trade it much, much larger values than the smaller guys. That's where we've been. It has never been our strategy to buy subscribers, it's been our strategy to obtain technology and then turn that technology into our subscribers adding the ORBCOMM secret sauce to it and adding our balance sheet. The secret was buying a mobile net for $5 million with 2,000 subs and turning it into $2,000 a quarter. That's where we're special or what we did with LMS where they had 10,000 or 12,000 subscribers and then you go and you close hub for 28,000 subscribers, or you're close Startrak that had roughly 20,000 subscribers or so, and then you do a Walmart deal for 17,000 subscribers. I think that's where we get our value.

[Mike Malouf:]

Great. Thanks for the color on that. I appreciate that.

[Marc Eisenberg:]

Sure.

[Operator:]

Next we have Howard Smith with First Analysis.

[Howard Smith:]

Yes, good morning. I want to follow up on a couple of statements in your prepared remarks. First of all, if I heard right, I thought you said you were about 15% more message traffic since the 11 OG2 constellations were put in service. I want to confirm that and also, how do we think about that type of growth in message traffic, becoming a tail win for overall services revenue growth? I know it's not dollar-for-dollar message-for-message, but how do we think about that more broadly?

[Marc Eisenberg:]

From a message traffic perspective -- and I'll let Robert talk about the financial part of it -- from a message traffic standpoint, sure enough it's 15%. We exit the year, the ORBCOMM network is doing about a million messages a day and if you look yesterday, it's probably 1,150,000. It's real round numbers easy to figure out. And not only are the messages up, but the byte totals are up. If you convert that to bytes, that's up about 17%. So, you heard right.

[Robert Costantini:]

Yes and interestingly when we looked at the service numbers, in March they were up significantly, about 100,000 over January which was the best baseline month to compare it to -- service days and whatnot. Clearly, we're seeing service revenues in March, up nicely from January on usage-base customers. Other customers are benefiting from better network performance, but they're not all usage-based invoicing. IAS has improved as well. That's the number we have right now, so we're one month into it more or less or two, so about $100,000 more in service revenue shifts from that.

[Marc Eisenberg:]

In a month.

[Robert Costantini:]

In a month. Per month, yes.

[Howard Smith:]

Per month? Okay. And then my other is kind of your comments on the MVNO, my impression was historically when you started this, it was more to support some of your solutions customers coming on that maybe want a terrestrial in addition to, or instead of a satellite network, it sounds like you're going after that more pure non-solution-based customers. Is that a change of focus because you see the opportunity, or maybe you can just talk a little more to the strategy there?

[Robert Costantini:]

Sure. The portal was built to sell dual-mode to our OEMs. In a perfect world, you want the throughput of terrestrial especially as it goes toward LGE, but manage that with the insurance policy of having satellite when you're either over the oceans, or in tough areas, or roaming into areas that your cellular partner doesn't roam. That was the purpose of building the portal and we spent years perfecting that portal and as we looked at what the other MVNOs are doing, literally there's that day where we're like, Oh, my god, ours is so much better than theirs. There's this massive roll up in the MVNO space and we saw an opportunity, A, for the dual-mode customers; but B, since you've already invested in all of the infrastructure with almost no incremental cost, Geez, is this a business that we should be in as well? I can't tell you that the company is changing focus, that we're moving our sales staff and saying, All right, forget about Komatsu. This week you're selling an MVNO. But there is a segregated staff that has seven or eight folks that work off to the side selling this service. We're astounding ourselves. I think the exact number, the last time I've spoken to those guys which is a couple of weeks ago -- we signed 21 contracts this year -- and just for laughs I'm like, how many did you sell last year? How many new customers did you get for this? Because it wasn't really publicized. It was just something that we did, Here is a favor for customers. Buy cellular only. And we did four. Some of these 20 are $50 a month and some of them are $500 and some of them could be thousands a month. You're just kind of taking the deals we have in the pipeline. I'm like, Okay, show me what this looks like over the course of the year. And they model it out for me and get to a number that's so large that I'm comfortable guiding you to a 50,000 run rate, knowing what I typically do to discount those numbers. It's funny, the biggest VAR we have by far on that cellular business is Startrak. Startrak does tons of subscribers -- really, really large. You built it, it supports them, why can't we support everyone else? That business is really taking off.

[Howard Smith:]

That's great. I really appreciate that color. Very interesting. Thanks.

[Marc Eisenberg:]

Sure.

[Operator:]

All right. Next, we have Daniel Amir from Ladenburg.

[Marc Eisenberg:]

Hey, Dan.

[Daniel Amir:]

Hey, thanks a lot. Congratulations on a good quarter here. I got a couple of questions -- first of all, your product sales guidance $85 million to $90 million for the year. I'm just interesting getting the idea how the linearity of that might be and how good visibility, at what level confidence do you have versus the low-end of that guidance versus the high-end of that guidance? And then I have one follow up. Thanks.

[Robert Costantini:]

Yes. Well, I think the low-end of the guidance and the high-end of the guidance for the year, that $200 million is the same guidance. The question is really the share between the service revenues and the hardware revenues. But we do about $14 million or $15 million a year of just repeat business on the hardware side selling our Booeys and selling everything else to the same customers, and then the business above that is usually the upside or the new deals that Chris Quilty was kind of pointing towards. We have closed a massive amount of deal as we kind of told you where those new deals are coming form. Remember last quarter we said that we sign this -- I don't remember the exact number -- 10-15 customers that we expected to deploy 30,000 units over the next couple of quarters and some of them slipping into next year, that is a portion of the growth, but since we made that statement -- and keep in mind we reported six to eight weeks ago, we've added five or six more to that number so it continues to grow. I think our service revenues are secure. I think IAS is rolling along. We've certainly got a road to get to that $85 million to $90 million of hardware. It's just a timing issue. We don't see our momentum slowing down and I think everything that we see points to one really, really nice Q2 that's going to get us on that run rate that's going to make you feel real comfortable.

[Daniel Amir:]

Okay, great. Just a follow up -- you've talked about the Mexico facility and the potential cost savings. Any way to quantify that or get an idea whether this is going to be significant in terms of margins improvement and is it a one or two-quarter thing or is over a multiple-quarters thing?

[Robert Costantini:]

We've always targeted around $500,000 per quarter in terms of the lower cost that would roll into cogs as a result of that transition. Getting that will shift as the sizes -- it could grow, it could shrink a little bit depending on the size of the products coming out of there -- but we have that expectation starting really in Q3 as we fully transition, but that should continue and there's no reason why it wouldn't continue because we're increasing our ramp which will lower our overheads, which will allow us to continue to do that. Now if that opportunity presents itself as we think it will, then we have more options in terms of pricing and large deal discounts and things like that where we can still maintain margins, yet get after larger segments of the market.

[Marc Eisenberg:]

I think it comes in two stages, from a run rate also. I think we just talked about the SkyWave product and it's roughly 50% of the unit count. That one was significant. It was just being manufactured in Singapore and its being moved to Mexico and literally the cost per unit is $50 lower than it was. Multiply that, times the 20,000-25,000 units that we sell every quarter, that's just simple math. Robert states a good point. If I could take some of that savings, pass it onto a customer to get higher service revenues, I will, we will, but there's got to be more volume there in order to do that. You should be okay from a margin perspective. And then the second thing I talked about in my script was the next thing that moves is our transportation products and our transportation products which is the other half of our business. It's like a $20 or $30 savings on a per unit basis. I think that's going to be completely transitioned by Q3 and you'll start seeing those savings in Q4 because as we're kind of seeing on our balance sheet now, inventories are up a little bit, it certainly was up a lot from Q3 to Q4 and then just up slightly from Q4 to Q1, that is us derisking the plan where if there's an issue on the manufacturing line, we have the ability to stock some inventory and iron out all the bugs -- it turns out there was no bugs so we just have to sell through that inventory and you're only seeing half of the margins in Q1. So you'll see a little bit more in Q2, it will flatten up in Q2, Q3, we'll start seeing the impact of the transportation, but you'll really see the full effect of that in Q4 and then next you're off to the races.

[Daniel Amir:]

Okay, great. Thanks a lot.

[Marc Eisenberg:]

Okay, Dan.

[Operator:]

All right. Next we'll move to Mike Latimore with Northland Capital Markets.

[Mike Latimore:]

Great. Thanks. Just on the CapEx, I think you said $15 million to $20 million this year. Is that what we should think about going on the annual data looking forward?

[Robert Costantini:]

That's a great question. There is a lot of opportunity, so it's hard to really look out. I think that's a good comfortable number in terms of the service platform pipeline. I think it would be at the high end now as we move into 2017.

[Mike Latimore:]

Okay, I got it. And what's sort of service revenue number for the second quarter?

[Robert Costantini:]

Well...

[Marc Eisenberg:]

27 to 28.

[Robert Costantini:]

Yes.

[Mike Latimore:]

Okay. Just on the two deals that moved into the second quarter, it sounds like That's just more of a contractual timing as opposed to any delay in project, that sort of thing?

[Marc Eisenberg:]

Yes. Like I said, it literally was an expanded contract negotiation between -- the bigger one is between one of the terrestrial guys and an end user. I could say the end user was one of our shipping companies. It's just timing what happens to us every four or five quarters.

[Mike Latimore:]

Yes. And just to clarify a comment you made earlier, Marc, you said you're thinking getting from 39,000 subs up to 50,000 by year-end. I think you said that a big chunk of that increase comes from the MVNO. Is that that you're saying?

[Marc Eisenberg:]

Some of it does. Yes. Keep in mind that we're going to get to a 50,000 run rate. We're probably on a 20,000 run rate now, so kind of moving up in that direction. But yes, that's going to help get us over 50,000.

[Mike Latimore:]

Okay. Thanks.

[Marc Eisenberg:]

And I don't think I said 50,000, I said north of 50,000. Right?

[Mike Latimore:]

Yes. Correct. Thanks.

[Marc Eisenberg:]

Sure.

[Operator:]

All right. Now we'll move back and take follow-up question from Chris Quilty with Raymond James.

[Chris Quilty:]

Yes, just one follow-up on the hardware aspect of the business. Clearly you've got good products and you're seeing the pricing come down, but from a competitive basis, when you're out there going head-to-head with competitors, is the hardware one of the larger issues that the customers are looking at? Or is it more the solutions, or the monthly cost of the solutions? How do those three elements balance out?

[Marc Eisenberg:]

They certainly balance out. They're looking at a total cost of ownership across everything that they're buying and that's the secret sauce here. If you look at what we built, we're hitting price points that no one else could hit because our cost are lower, because we build everything internally. I would say the total cost is important and I think you're going to see more and more, some of that total cost kind of shifting to a monthly basis and we're already doing a little bit of that. The rail company that I talked about in my script, it's got more to do with an OGi modem, but we're charging them a monthly fee including the hardware and it's just the total cost of ownership. But some of the things -- the operators completely monitor the screen. There's screen, they've got a fleet of containers and how well can they save load, save fuel -- they don't look at the components. I don't know that they care. They don't care which guy built their hardware or what satellite company that they're getting the connectivity from. They're worried that it's reliable and that if it's price points. So reliability, price, functionality and the fact that we build everything internally means everything just works, the components work. When you start building these a la carte solutions where you're buying a little bit of stuff from everywhere, you get it out in the field and sometimes you can struggle because the jigsaw puzzle pieces don't quite fit.

[Chris Quilty:]

Great. Keep up the good work.

[Marc Eisenberg:]

Thanks, Chris.

[Robert Costantini:]

Thanks.

[Operator:]

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

[Marc Eisenberg:]

Great. Thank you for your questions and for participating on the call. We look forward to speaking to you again on August. Bye.

[Operator:]

Ladies and gentlemen, that does conclude today's conference. Thanks for your participation.