ORBCOMM Inc.
Q3 2016 Earnings Call Transcript

Published: 2 Nov 2016

[Operator:]

Good morning, ladies and gentlemen, and welcome to ORBCOMM’s Third 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 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’ll turn the call over to Marc Eisenberg.

[Marc Eisenberg:]

Thanks, Michelle. There were a lot of moving parts in the third quarter leading to mixed results. Service revenues saw one of the largest organic quarter-over-quarter increases at $1.2 million, while hardware revenues were light. The lower hardware revenues were mostly attributed to logistics issues coupled with shipments from OEM distribution partners that pushed. I’ll take you through that in detail shortly, but as we say every quarter, our hardware revenues can be lumpy. To be clear, I do not believe we are seeing a change in demands or slowing market for our products, quite the contrary. In Q3, we've closed a number of opportunities and are in the process of closing some of the largest to date, while making progress on over 100 different engineering projects that position us well in the future. On this call, I’ll provide an overview of the business, update you on some recent developments, and then transition to Robert to review our financial results in more detail, and wrap up the call with Q&A. Earlier this morning, we issued a press release announcing financial results for the third quarter ended September 30, 2016. The quarter consisted of total revenues of $46.3 million, slightly up from prior year, service revenues came in up 15% or $3.8 million over the prior year to $28.8 million, and adjusted EBITDA of $12 million increased 8.5% or $0.9 million over last year. Our subscriber counts or subs grew in the quarter by 37,000 net subs taking the base to $1.69 million at the end of September 2016. Service revenues increased approximately $1.2 million over the last quarter. Again marking one of our largest organic quarterly increases to date led by growth to nearly all of our business units. Most of the softness in Brazil and other foreign markets seems to have hit bottom and much of this should be comped out over the next couple of quarters. In addition, opportunities such as Hub Group are almost fully deployed and are now nearing their optimal service levels. Hardware revenues decreased from last quarter, due to a number of factors. First, we’ve now moved the majority of our products to a new contract manufacturer in Mexico. While this was a necessary change due to the pricing advantages we will be seeing, it wasn't without some glitches. We had a number of incomplete system shipped, which prevented us from recognizing a significant amount of revenue. In addition, there were shipments that were completed, but not delivered and still at the dock in quarters end. A second issue we ran into was that we had distribution partners that pushed some of their deployments. For instance, we had a $1 million order that was delayed because an OEM changed their installation guidelines, late in the process, causing us to redesign the electric harness, which pushed 2,500 complete systems. The logistics issues at our manufacturer being worked out and the delay deployments through our distribution partners should catch up over the next quarter or two. We are cautiously optimistic that we will partially recover in Q4 amid several large deals already won and others currently being negotiated. Q4 total revenues are expected to range between $48 million and $53 million. I know this is a wider range than usual, but we’re balancing customer's deployment dates, as new contract manufacturer working on volumes that we've never before experienced. Product upgrades are waiting final approvals from our carriers and the pace of the contracting process. As I said, there’s a number of opportunities that we have closed or believe we are on the path to closing. Many of these could be quite large and we have not discussed them publicly to date. We’ve received verbal indication that we’ve been selected by a major transportation company, one of the largest global retail companies, a new heavy equipment OEM, and a government opportunity, and we are working through the contract process. We believe these customers will lead to tens of thousands of deployment over the next year. Looking at our North American transportation business, many of our long-standing transportation customers have continued to place renewal orders such as Prime, Bison, Tyson Target, CR England, and Barnes Transportation. In addition, we saw new customers including Southern AG Carriers, L.J. Rogers Trucking, NFI industries and have launched a record number of pilots with more than 20 additional companies, which is a leading indicator of business to come. There are some crosswinds in the transportation business. Transportation loads in the United States are down 3% year-over-year and many of our customers are pushing out new equipment purchases until 2017, which impacts the need for telematics equipment, but moving in the other direction is strong momentum for IoT where these types of deployments in many cases have moved from a like to have to a must have adding demand for retrofit purchases. There is not another company in the IoT space that has a broad set of solutions, including coal change trailers, rail, intermodal, sea containers, chassis and gensets with products as reliable as ours back by over 300 technical resources. Highlighting a few other areas of the business, we continue to see momentum in containers and port solutions, or our CAPS business. During Q3, we shipped nearly 900,000 in products through one of our cellular channel partners, which will be used by Crowley Maritime Corporation, the U.S. owned and operating logistics company. ORBCOMM solutions will be used to monitor their fleet of nearly 4,000 refrigerated assets. ORBCOMM was established in the sea container industry through opportunities such as the one with Maersk, the world's largest container shipping company. We’re seeing many new opportunities with top shipping lines to output outfit their refrigerated fleets and expect some of these to close shortly. Given the size of the global shipping lines and their respective fleets, we believe that this group will generate some of our largest future opportunities. Our application enablement platform or iApp showed some key events during Q3, similar to the application we provided for Lockheed Martin, Solar Turbines, a caterpillar company, and Newport News, the largest U.S. based shipbuilder both selected iApp to track and monitor thousands of components throughout their manufacturing process using ORBCOMM’s RFID technology and web platform within their factories. These opportunities are expected to start generating revenue in Q4. In our satellite connectivity business, we started to see sales in Latin America rebounce. Our key customers in Brazil saw growth in the region, while this is clearly over small comparative hardware revenues it’s definitely a step in the right direction. Two of our channel partners were selected to assist one of the largest utility companies in Brazil with their skater base recloser application. Both channel partners will use components of our IoT stack to develop their solutions, including our hardware and satellite connectivity, which helps to provide higher quality energy distribution. Shipments for this project are expected to kick-off around the ends of the year or in Q1 2017. Turning to AIS in Q3, we recorded $1.8 million in revenue, an increase of 21% over the same period last year building on the momentum of some recent wins. As we mentioned last quarter, The European Maritime Safety Agency or EMSA awarded a four-year contract to our reseller and partner LuxSpace Sarl and we started providing satellite AIS data to them in the third quarter. As a reminder, the multi-year contract is funded for up to 11.2 million U.S., a good portion attributable to ORBCOMM. We’ve also received confirmation from an additional major international government maritime authority of another award in cooperation with one of our global partners. We’re working through the contract and hope to give you more detail shortly. Both of these awards were won by ORBCOMM and its partners following a highly competitive process. On the commercial side of the AIS business, we recently announced our agreement with Global Fishing Watch to provide data from commercial fishing vessels for its new online technology platform. Global Fishing Watch is a collaboration with Oceana, Google and SkyTruth to end Illegal, and Unregulated fishing by providing a comprehensive view of commercial vessel activity worldwide, our AIS service helps Global Fishing Watch better manage fishing quarters and harvesting to prove reserve depleting ocean resources threatened by overfishing and habitat destruction. The platform was launched by actor and ocean advocate, Leonardo Dicaprio. As we continue to make improvements in our AIS service, we’re now able to process over 23 million messages per day, a 35% increase from last year and we’re tracking and monitoring over 180,000 unique vessels per day, up 33% from last year. This is well ahead of our competitors. Clearly with the string of recent wins and several more promising near-term opportunities along with our extensive network of grey channel partners there is an awful lot of moment in this business. Moving to the OG2 constellation, we’ve got some unfortunate news that we lost communication in early August with one of our OG2 satellites that was launched in our primary mission in 2014. While we are still conducting an ongoing investigation in continuing to perform recovery efforts with support from Sierra Nevada Corporation and Boeing, financially we took an impairment charge of approximately $11 million in Q3. Satellite constellation such as ours generally experience and fit mortality, in this case losing an OG2 satellite is not completely unexpected, which is why our insurance program has a three satellite deductible. However, the resiliency of our entire constellation design and increased capacity enables us to reposition the satellites in the event of these circumstances, which greatly minimizes the impact on network services. We are not experiencing a similar anomaly on any other satellite and we continue to monitor them closely. Again, this has not impacted service expectations. Our customers are pleased with the network's improved performance and quality of service. We continue to perform for propulsor maneuvers to position the OG2 satellite into their final operational orbits. Two of the four satellite planes have reached their targeted position and are in the process of being thrusted to their final altitude. The other two planes will continue drifting for the next 8 months to 12 months. During this time, the network's messaging performance will continue to gradually improve. Currently the OG2 satellites processed about 65% of the network's total message traffic. The OG1 satellites continue to perform well, providing good coverage, while the remaining OG2 satellites continue to drift to their final orbits. Our satellite constellation is still the only fully funded, fully operational, second generation satellite network purpose-built for the global M2M industry available today. As other constellations struggle to get launched and funded we are receiving a great deal of interest from some of their customers to build on the platforms and de-risk their business. Our ability to in innovate new products that reduce cost, time-to-market, and achieve increased scale across our business is essential to our strategic plan, while providing meaningful advantages to our customers. This quarter we are recognized by IoT Evolution Magazine and IoT Evolution World with four technology innovation awards. Our PT 7000 Heavy Equipment Solution and the ORBCOMM Connect Management Portal both received awards in the products of the year category. Our CargoWatch Secure web platform and ColdChain telematics solutions both received awards in the asset tracking category. Leveraging the expertise of one of the largest engineering teams in the industry, we've got some exciting new products on the horizon that will help us continue to make a strong impact from the IoT industry. To wrap up, we certainly face some challenges in the third quarter, but I’d like to emphasize that ORBCOMM has an aggressive growth plan and we typically have a lot on the table not just this quarter, but every quarter. We have nearly 100 active engineering and design projects. We are on a path to reducing cost through both product redesign initiatives and the moments renew contract manufacturer. We put a new constellation in space and are in the process of adding additional services and products. We've engaged in new partnerships and are building platforms with AT&T, Carrier, CIMC, Verizon, and others. In Q3, we closed and are in the process of closing some significant opportunities that we believe will alter our business both financially and from a market perspective. Sometimes things just don't go perfectly and this quarter was a pretty good example of that. However, more often than not things go pretty well despite pushing the envelope pretty hard. Without a doubt, our pipeline is stronger than ever and the business is healthy and on a great path. With that, I’d like to turn the call over to Robert to take you through the financials.

[Robert Costantini:]

Thank you, Marc. Good morning everyone. The financial results of the third quarter of 2016 includes strong sustained growth in service revenues of about $29 million or over 15% compared to prior year, and had increasing margins at over 66%, less the direct costs of service. Service revenues grew $1.2 million, sequentially marking one of the company's largest organic quarterly increases, highlighting the continued momentum we are seeing in service revenues. While product sales of $17 million did not reach the levels we were hoping for, demonstrating its characteristics choppiness, overall third quarter revenues contributed to higher adjusted EBITDA due to a greater mix of high margin service revenues this year versus last year. Adjusted EBITDA at $12 million was up 8% from the year earlier period and at 26% adjusted EBITDA margin. Product sales are expected to rebound higher in the fourth quarter from Q3, although not likely to reach levels that would achieve our full-year target, unlike service revenues, which are expected to achieve our goal for the year full-year. Operating expenses are within the expected range that we believe puts us on track to achieve our target of 25% adjusted EBITDA margins for the full year 2016. In addition, we are seeing cash flows from operations increase significantly as our working capital requirements reflect strong collections and inventory management. Before moving on further, I’d like to point out the change incorporated in our income statement, eliminating the calculation of gross profit since it removed depreciation and amortization that would reflect the full cost of providing revenues. We will continue to show depreciation and amortization as a separate line item to provide visibility and to a how we are managing the other direct cost of revenues. In Q3, total revenues of $46.3 million were slightly up from last year with an increase in high margin service revenues this year providing year-over-year growth, fully offsetting the decline in product sales over the prior year. Product sales can be lumpy and we believe these timing issues do not represent a change in overall demand for our products. Service revenues grew in the third quarter to a record $28.8 million, up 15.2% compared to the prior year period. Service revenues were up strongly at 4% sequentially, compared to the second quarter’s 3% sequential growth, highlighting the strength of our growing subscriber base, as well as benefits from the OG2 satellites. The growth in service revenues was tempered by a few international headwinds as some customers continue to struggle in economies such as Brazil. AIS revenues now at $1.8 million per quarter are trending over $7 million on an annual run rate heading toward our expected $10 million to $15 million per year. Service revenues are on track for 2016 expectations, despite the headwinds experienced in international markets. Incremental service revenues contribution margin, which is service revenues less direct cost of services with $2.8 million higher this quarter than the prior year quarter implying the 77% incremental service revenues contribution margin. Third quarter product sales of $17.4 million decreased by $3.6 million or 17.1% from Q3 last year. Product sales came in lower than we were forecasting, due to the various factors, including the timing of deployments and logistics associated with new manufacturer and customer specific specifications. We see a robust pipeline and we expect the solid rebound of higher product sales over the next few quarters. Throughout the year we have emphasized the choppiness in product sales to be the biggest obstacle to reaching our expectations for total revenues. This appears to be the situation for just product sales and for Q4 we are expecting product sales to be between $19 million and $22 million bringing full-year product sales within the range of $75 million to $78 million. Net subscribers added were about 37,000 for the quarter, maintaining the trend over the last several quarters of net subscribers in the 30,000 and the 40,000 unit range. Our total billable subscriber base is closing in on $1.7 million at September 30, a 27% increase over the $1.3 million at the end of September last year. Looking at direct contribution margins, service revenues net of direct cost of services for Q3 were 66.1% of total service revenues, consistent with the expectations and 110 basis points higher within the prior year quarter. Product sales net of direct cost of products in Q3 were 24.2% of total product sales. Below our target for Q3, which included our efforts to continue to monetize slow-moving inventory and inventory stocked up to solidify our new manufacturing capability and capture the expected savings from that new manufacturing relationship. The cost basis for products shipped from the new contract manufacturer are lower and this quarter included a mixture of units shipped from inventory at a higher cost. Our hardware margins for the nine-months ended September 30, 2016 or 25.8%, which is above our full year goal of 25% for product sales contribution margin. The high margin service revenues in Q3 this year produced a robust adjusted EBITDA of $12 million, growing $0.9 million or 8.5% over the $11 million in Q3 last year. The adjusted EBITDA margin of 25.8% in Q3, improved 190 basis points from 23.9% in the prior year quarter. We are expecting for the full-year of 2016, net adjusted EBITDA margins will finish around 25% of total revenues. Non-cash impairment loss of $10.7 million was recorded in Q3 for a non-communicating satellite. The loss of this one satellite is not expected to have a material impact on communications services or service revenues. In the third quarter of 2016, the company had net loss of $14 million, compared to net income of $1.6 million for the same period last year. Excluding the impairment, the net loss this quarter would have been $3.4 million. On a comparative basis to last year in the third quarter 2016 had significantly higher depreciation and amortization and interest expense now that the OG2 satellites are now in service. Depreciation and amortization increased by $4.8 million in the third quarter to $11.2 million, mainly due to $4.3 million increase in depreciation from the mission 2 satellites put in service and an increase in amortization expense of approximately $0.5 million related to the growth in intangible assets. For the fourth quarter of 2016, we expect depreciation and amortization expense to be lower by about $300,000 to approximately $10.9 million. Acquisition-related and integration cost was $0.2 million in the third quarter this year, mostly from the Skygistics acquisition, compared to $0.5 million in the same period last year. We expect between $200,000 and $300,000 of acquisition-related and integration cost for Q4 of 2016. Interest expense for Q3 was $2.5 million. For the full-year 2016, interest expense should be about $9 million, including the amortization of fees. Looking at the balance sheet, cash and cash equivalents totaled $21.3 million at September 30, 2016, compared to $28.1 million at December 30, 2015, a decrease of $6.8 million. Cash provided from operations was $19.2 million through the first nine months of 2016, reflecting $8.3 million used for working capital purposes, and improving $11.3 million sequentially in the third quarter over the $7.9 million for the first six months of 2016. In addition, $3.5 million was paid for the Skygistics acquisition last quarter. Capital expenditures of $22.5 million consisted of $8.3 million for the OG2 program launch in late 2015 that included $6.7 million due to its completion of milestone and insurance payments, as well as $1.6 million of capitalized interest. Breaking down the balance of capital expenditures further $5.5 million related to sustaining CapEx for existing infrastructure, and $8.7 million related to investment CapEx for new products and services. Our total debt outstanding at September 30 remains at $151 million with an available $10 million undrawn revolving credit facility. For the full year 2016, the company now expects total revenues to range between $188 million and $191 million and adjusted EBITDA margins of about 25%. Given the growth and predictability of service revenues, the key determining factor has been and continues to be our ability to ship roughly $75 million to $78 million in annual product sales. We see hardware shipments rebounding higher in Q4 from Q3, and expect to be between $19 million and $22 million as I mentioned along with an anticipation that service revenues will grow quarter-over-quarter. Our plan is to provide more definitive full year 2017 guidance in the first quarter of next year once we complete 2016. Wrapping up, the results were mixed this quarter. Key to ORBCOMM’s strategy is the addition of subscribers and highly profitable service revenues. Building and selling products has always been an enabler and our service revenues performance in Q3 clearly demonstrates that this strategy is working. We are enthusiastic about the opportunities ahead of us and optimistic to have a lot of exciting news for you on our next call. This now concludes our remarks of this call and we’re happy to take your questions.

[Operator:]

Thank you. [Operator Instructions] And we will go first to Ric Prentiss at Raymond James.

[Ric Prentiss:]

Thanks, good morning.

[Marc Eisenberg:]

Hi, Ric.

[Ric Prentiss:]

Hi. Appreciate it. Obviously challenging quarter with, specially the lumpy on the product side, I wanted to probe a little deeper there, you kind of called out the new manufacturer in Mexico, the program, the distribution partners, and engineering delays, can you kind of help us size the changing and the revenue guidance for the year, kind of how that would break down each one of those kind of major categories?

[Marc Eisenberg:]

So, the stuff at the manufacturing was $1 million or $1.5 million. The delayed shipments was, maybe another $1 million or $1.5 million. So that was $3 million right there.

[Ric Prentiss:]

Okay. And I think you also called out something with the engineering delays in the press release.

[Marc Eisenberg:]

Yes, a little bit. I think, the engineering delays has more to do with kind of our view of the fourth quarter. Let me give you a feel for what we’re looking at right now. You know like a good example would be our GT 1100, which is our trailer/container products, we shipped to date over the last three years about 60,000 of them. In Q4 we’re manufacturing 30,000 in the quarter alone with a new manufacturer in Mexico, you know it’s our first, these will be LTE enabled products where the other 60,000 were 3G. So when we're giving guidance we're focused on, a, what’s the risk of getting them all manufactured; b, what’s the risk that some of the - the products you know are designed, there is not an issue with that, but what are the risks of getting them finalized through PTC or be, which is the approval mechanism to get them on the road from the carriers. And then lastly, a lot of these, we know we've been told we won the deals, but we're just working through the final contracts and that tends to slow things down as well. So you’ve got all of this complexity hitting us once in the fourth quarter, which I know you are new to the story Ric, but that is as wide range as we’ve ever given.

[Ric Prentiss:]

Okay. And that kind of leads to my other question, is visibility then, so given the visibility is a little tight there, what gets you comfort like when you give guidance on the next call, how long, how good is the visibility? I guess, what I'm asking for is we think through onto the next call, given the lumpiness?

[Marc Eisenberg:]

Yes. The visibility on these service revenue, and if we ever missed there, it’s usually couple hundred thousand dollars, and that’s roughly 50% or 60% of our business. So that part is pretty clear and then on the hardware revenues, roughly $15 million or so is kind of the day to day and renewal business that we do. And then the risk is typically the last $5 million to $7 million on the hardware alone. I think if we go back to the original target that we gave out for this year, we said something like, I think we could do $200 million, not so worried about the service revenues. What kind of trips us up a little bit is that $85 million or $90 million or hardware and the timing of it. I think we’re going to do a pretty good hardware number in 2017. I just don’t know what quarter it’s going to fall into. Some of these opportunities that we’re working, some of the questions we get around hardware is you’ve got a hub that’s fully deployed, you’ve got, your large shipments that you are comping [ph] out at Walmart that are going to shrink to smaller shipments. What’s next, how are going to fill that void, and we’re going to fill that void with seven or eight different opportunities that are, every bit is big and some of them are bigger, and we know we’ve got these deals, I’m just struggling to time them. So, I think 2017 looks bright. I think that the backlog is there, I think the visibility is there, but we’ve always struggled quarter-to-quarter on that last $7 million of hardware only.

[Ric Prentiss:]

Makes sense. I guess the other piece of the multi-facet question is, the margins on the product side or hardware side is kind of tied to going up with the Mexican plan, it sounds like, so as we think about lumpiness and margins how should we think about how that could play out into the future to get the benefit of that new manufacturing?

[Robert Costantini:]

I would say that we are seeing lower cost from that relationship. So that would have to sort of be online fully to capture that. Our goal has been to hit the 25 points, we've worked hard to do that in spite of some of these hiccups, and I would say that we want to have you target somewhere between 25 points and 30 points for hardware margins going forward and the question would be how much of that would we be willing to pass along those savings, lower hardware prices that see the market. And that will roll out more detail for you guys in the first quarter. I mean that is what we want to see that's been online and producing the consistent steady stream of product flow.

[Marc Eisenberg:]

As I watch it, I we are bouncing like three things on the product side that are affecting margins. Number one, we build up some inventory from the old manufacturer and those margins aren’t as good as the eventual Mexican margins. Number two, you’ve got the Mexican product, which once we ship those products from Mexico will go up. And then, I don't know if you’ve listened in on the last quarter, but we were working through a couple of million dollars as we did that transition of inventory to blow that out, especially you've got LTE products and different products coming out you need to sell off some of that old inventory. And I think you could see it is pretty clear on the numbers that some of that was sold and you saw a reduction in inventory and an increase in the subsequent cash.

[Ric Prentiss:]

Okay. That helps. A lot of moving pieces, but I appreciate the color.

[Operator:]

We’ll go next to Mike Walkley with Canaccord Genuity.

[Mike Walkley:]

Great, thank you. Building on some of those questions on the hardware side, Marc with some of the push-outs you talked about, maybe you could help us on the cadence of when you think they might come back into the model? I know it’s, you said it’s going to take several quarters and some of these big deals and they just think about the 3 million this quarter and more maybe 3 million to 5 million again in Q4 that’s maybe getting pushed into 2017 and how we should think about the model, and then the cadence of gross margin in Q4 that’s implying your guidance Robert? Thank you.

[Marc Eisenberg:]

Yes. So, I think maybe - in terms of some of the, it’s all over the board, I mean because it’s not won a consistent story here. So that's why I’m kind of struggling. That one particular OEM with the million, I don't know if we're going to be able to get those harnesses from China, repackage it with all that product, and ship it in Q4. It’s not many quarters out, it’s either going to be in Q4, it’s going to be in Q1, but there is an example of like $1 million. Some of the other stuff moving to the LTE products will ship it as soon as the product is ready and it gets through PTCRB and we’ll ship it as soon as we can. So, there is a lot of different answers to your stories, but we're going to go into 2017 with the biggest backlog this company has ever seen. And we’ll get through these issues and you know, I don't want to like make it seem like all of a sudden we're throwing these issues on you in one quarter. These issues are here every quarter, we just navigate through it. We sit there and the contracts the speed of it, typically what happens is we just throw more into the top of the funnel and then the bottom it just comes out with the right number, and there is an awful lot out there for the next quarter or two in the top of that funnel and eventually we think we're going to ship everyone of those products. We just can't tell you what quarter all those things are going to come together.

[Mike Walkley:]

Okay thanks. Just maybe switching gears can you update us on how the Carrier relationship is going both in terms of maybe finding smaller fleets in North America that need to comply with the Food Safety Miniaturization Act and also maybe helping you [indiscernible] new international customers?

[Marc Eisenberg:]

So, Carrier is one of the - not the one that I gave the example of, but Carrier is one of the OEMs that push to the next quarter and their products I believe is ready to go. They’ve got a fully working portal. They've got a hardware that we built a number of products for and they are just working through their internal billing and customer service issues to make sure it gets rolled out as flawlessly as possible. I think it’s going to be a top five or hopefully a top three or maybe a number one or two customer for us in a couple of years, but in terms of their deployment, they are incredibly careful as you’d imagine being a Dow component and hopefully we’ll start shipping to them in Q4.

[Mike Walkley:]

Great, thank you.

[Operator:]

We will go next to Andrew De Gasperi at Macquarie.

[Andrew De Gasperi:]

Great. Thanks for answering my questions. First, can you maybe, you mentioned transportation as being weak, can you may be mentioned to us or give us some color as far as what other verticals might be showing some weakness or on the opposite may be some strength? And then secondly, your ARPU for the service revenue side seems to be back to levels that were in 4Q, are we seeing an inflection point? Thanks.

[Marc Eisenberg:]

Sure, first on I think the exact quote on transportation was crosswinds. So there were some strength and there were some weakness. So, just to focus on that loads are down, 3% and that’s across rail and trucking and that’s a pretty well documented number, but in the face of that the IoT deployments are going up. So, it’s more and more expected that these things are going to be monitored and I think we could take some of the credit for that and guys like the Hub Group has established that. If you're going to have a container on rail, I don't know how you could run that business without it being tracked and monitored and knowing where the brakes are and when the pickups and drop-offs and they have kind of carried the torch and lead to a class of product that’s going to be monitored going forward and we are seeing an awful lot of demand for retrofits, which are bigger deals. And when you have those bigger deals it is one of those situations where monitoring 10% of your fleet isn't that helpful. You need to take that leap of faith and you need to monitor it fleet wide in order to change the way that your dispatchers and operators do business, and that’s the positive momentum that we’re seeing in those markets. Across our other markets, heavy equipment has been weak for not a couple of quarters, but it feels like a couple of years and you could see all the publicly traded companies that are filing. It doesn't impact us too terribly in that, you know there is very low churn in that business. We are not activating as many subscribers as we like, but there is still positive growth in the subscriber base. So, the business is still growing although it’s only growing a couple of percentage points a year. It’s not going to the extent that it was a couple of years ago when heavy equipment was booming. I think heavy equipment is more of a global issue than it is an United States issue, and it’s definitely an issue that’s struggling more in the mining in the commodities businesses than it is in the housing businesses. So that business continues to be weak. The AIS business, lots of positive momentum you know seeing some strength there, you know we don't have a ton of our business in oil and gas, but oil and gas is just kind of bouncing off the bottoms, but we have seen those particular businesses have struggled over the last couple of years. We’ve got one project with one of our integrated integrators. IBM that’s going to roll out, that’s a couple thousand units over the next couple of quarters. In oil and gas, we are nice. It is nice to see it bouncing back a little bit. Let me just talk about Brazil because Brazil is going to lead into your other question. I would say last year one of the things that people questioned us on is, your hardware business is booming, yet your ARPUs are falling a little bit, what the heck is going on there? If you put on a $5 sub why doesn’t your subs revenue go up $5 times - the amount of subs that you add? And a lot of that was this incredible softness in Brazil, where we had tens of thousands of subscribers and we got triple hit there where; a, trucks were parked on the side of the road and we’re just suspended, so they went to 0; b, the math didn't make sense, where if you had an $8 ARPU in Brazil and the dollar all of a sudden has doubled and it has the feel of $16 and our Brazilian partners were wrapping dollars around their applications because we were more expensive than what they were able to build their customers. So, we where we had to help them out and that certainly hurt as well. And then c, they re-routed some of the traffic to have less usage. And all three of things hit us at one time. So, as service revenue was growing, it was being offset a little bit by that weakness in Brazil, which also hurt our ARPUs. So what you have right now is, two major reasons that service revenues are coming on strong. Number one, as I kind of hinted out in my script, number one we’ve kind of hit bottom in Brazil. We don’t see them shrinking anymore, the last couple of quarters. And then the second thing that happened is, where did we ship a lot of hardware last year? And we talked about shipping the hardware and shipping it in these great big lumps and they are not able to install them all overnight, so it takes an awful lot of time when you ship 20,000 units to one customer. When they are installing them it’s 500 a week. To get all those units deployed, in some cases it takes months or a year and those things have started to catch up, where you don't have this massive backlog of hardware that you’ve shipped and hasn't led to service revenues, which is why we're seeing this healthy growth in service revenue and that’s why we are in this business. The hardware business; a, because no one can do it better; and b, because I can't figure out how to make a product transmit without it and we do it so well.

[Andrew De Gasperi:]

Great, thank you.

[Marc Eisenberg:]

Sure.

[Operator:]

We will go next to Mike Malouf at Craig-Hallum Capital Group.

[Mike Malouf:]

Great. Thanks guys for taking my questions. I’m wondering if we could talk a little bit about CapEx, you talked about such a strong funnel and opportunities they have in your pipeline right now and I’m wondering if that has any effect on CapEx going forward, and if you could just give a sense of, as you move into 2017 where that’s going? And then as you talk a little about CapEx, specifically with regards to the growth CapEx, one of the things that you talked about is expanding your growth rate from sort of that 10% that this growth CapEx would expand that up to perhaps even as high as 20%, and I’m just wondering if you could talk a little bit about how that breaks up between product and sales? Thanks.

[Robert Costantini:]

Sure. So, if you look at the breakdown where we are, so let’s say the first nine-months, we’ve had $14 million plus of sustaining and investment CapEx and the sustaining CapEx around $5.5 million is on track to where we - $5 million to $7 million that we expect to a year there. Lot of work was done along those lines and I don’t think that number would need to go any higher in 2017. On the investment side, the $8.7 million that added like $4 million in this quarter. If you did that again you would be $12 million to $13 million for the full year. I was thinking on growth CapEx you’re probably between $12 million and $16 million a year would be not a reasonable target considering our revenues. And as far as how that translates into - that is a step function future removed, let’s say then, what is happening in the engineering to deliver a customer product. So, you got to build it, just got to get through some certifications, but we are hoping that, again depending on the economy I don’t know if it is going to translate the higher growth in 2017, but certainly we expect to continue to see our growth rate improve because of these investments. So, I don’t want to put that into 2017 timeframe for you right now and that’s why we want to see how this shaped up for the rest of the year. That engineering effort does a lot to help customers get ready to deploy. We help provide tools that make it easier for them. So that has got to increase the - or accelerate the ability for the customer to deploy, which naturally would increase the growth rate. I mean last year and this year were $75 million to $80 million worth of product. Two years in a row, we are seeing ARPUs rise and we attribute a lot of that to that engineering effort around - whether it be new products, new brackets, new harnesses, you know the work that’s being done there. So, we expect that to start accelerating growth.

[Mike Malouf:]

Okay, great. Thanks.

[Operator:]

And we will go next to Jim McIlree at Chardan Capital.

[Marc Eisenberg:]

Hi, Jim.

[Jim McIlree:]

Thanks, good morning. Do you guys have a sense of how much hardware inventory your customers are sitting on that is product that you sold, but they haven’t installed?

[Robert Costantini:]

Do you have that?

[Marc Eisenberg:]

I would guess it is at record lows because you know the ones, the big guys that were sitting on the most product, you know the Hub Groups, and the Walmart’s they are not sitting on a tunnel product anymore. So, I don’t think it’s a whole lot.

[Jim McIlree:]

Okay. And then Robert, I think you said something about net ads going forward that you continue to expect it to be in this 30,000 to 40,000 per quarter range, did I hear that correct, did you say that?

[Robert Costantini:]

What I said basically is, it’s been consistent with what we’ve been doing. When we took that step function up, remember we were in the 20s to 30s, now we are in the 30s to 40s.

[Marc Eisenberg:]

He was looking backward, not forward.

[Robert Costantini:]

Yes. We are doing over a 100,000 now already for this year. That seems to be a pretty good level in terms of how quickly we can get this stuff moving. If we see it move to the higher bracket let’s say 40 to 50 we will signal that. I don’t see it.

[Marc Eisenberg:]

I don’t know what the net number is Jim, but our solutions business alone should be growing pretty close to those levels in a couple of quarters.

[Jim McIlree:]

Okay, okay. And has any of the issues that you’ve encountered resulted in a change of your due product deployment plans, you know like in Maersk dual-mode units, is there any changes in your product development plans based on - either based on what happened in the last quarter or based on anything else.

[Marc Eisenberg:]

So the operations folks and the engineering folks are different people.

[Robert Costantini:]

I mean, we learn along the way, but I don’t think that’s changed the plan.

[Marc Eisenberg:]

I don’t think it’s changed the plan at all.

[Jim McIlree:]

Great. And just a couple more if you don’t mind. Robert, can you help me understand how much of the current inventory is what you have characterized as the old inventory? So how much are you still trying to work through that, the old engineered products?

[Robert Costantini:]

I’m going to say that number is probably in the order of like $6 million. If you look at the inventory, it went slightly up in Q3 and that was like some of the stuff that we were talking about leaving on the dark right. So that's stuff should have been out in the customer's hands. So we've been managing that and just understand when you start streamlining this manufacturing relationship you are taking a lot of inventory, everything down to the component level and you’re putting it into play with the new contract manufacturer and that is also part of that balance, but we've been pretty aggressive to make sure that we’re not left with slow-moving inventory on the shelf. So, right now I'm going to put that number right around finished goods inventory in that category around $6 million.

[Jim McIlree:]

Right okay, I'm just trying to get a sense of how long it is going to pressure margin? It was not like maybe a couple of quarters?

[Robert Costantini:]

Yes.

[Jim McIlree:]

It might linger in the Q2 next year, but it really sounds like there are couple of quarters at the same time?

[Robert Costantini:]

Yes, I would hope not, but that’s not unrealistic.

[Jim McIlree:]

And then just lastly, any changes in the OpEx expectations for next quarter or beyond?

[Robert Costantini:]

No that situation I’d say is pretty consistent for us, I mean we manage - you know how we manage that, but I don't see anything pushing that around dramatically in any way.

[Jim McIlree:]

Okay. Fantastic, thanks a lot, appreciate for your answers and good luck with everything.

[Robert Costantini:]

Appreciate it.

[Operator:]

[Operator Instructions] We will go next to Michael Latimore at Northland Capital Markets.

[Michael Latimore:]

Great, thanks. Just curious on the MVNO side of things, how many subs are coming through that and say on the third quarter, and maybe in the fourth quarter as well?

[Marc Eisenberg:]

So, off the top of my head, I don't know the exact number, but the MVNO business started the year at couple of hundred a month and it’s adding a couple of thousand a month in Q4. So it’s grown about 10x.

[Michael Latimore:]

Got it, okay. And then in the press release you announced a number of the - or you noted a number of the customers you announced during the quarter, combined how many subs might those add on an annual basis?

[Marc Eisenberg:]

I'm sorry, say that again.

[Robert Costantini:]

The announcements.

[Michael Latimore:]

Yes the announcements. Just combined you had four listed in the press release from the quarter, but combined how many might they add on an annual basis?

[Marc Eisenberg:]

Meaning before the unnamed once?

[Michael Latimore:]

Yes.

[Marc Eisenberg:]

In transportation or before that we named.

[Michael Latimore:]

The named one.

[Marc Eisenberg:]

So the named ones are a couple of thousand units and the unnamed ones, you know if we were to ship every product across all of them it would be about 200,000.

[Michael Latimore:]

Okay. And then just any update on CIMC, how is that trending, how many units might that be next year?

[Marc Eisenberg:]

I don't have a unit number for you, but they are fielding pilots and moving along and the relationship is certainly grown since we've spoken last quarter. It’s pretty clear that in addition to rolling out our services that they’re going to be our country rep in China and they've already started the process of filing for the ORBCOMM license in China. So, a lot going on with CIMC and we’re also co-developing a product in the refrigerated space for them. I can't tell you in terms of subs, it depends on what they close and how they go and how they price it and standardize it, maybe 10,000 or 15,000, but I can't be - I can't get it done to an exact number.

[Michael Latimore:]

And then what would be a rough call estimate of CapEx for the fourth quarter?

[Robert Costantini:]

Yes. Again, if we just look at the same growth that we had it would be about $6 million to $7 million, but it would be mostly skewed towards investments sustaining 1.5, if you keep it on the run rate it is about 7, and at this point I would say put a fore handle on the investment CapEx in Q4.

[Michael Latimore:]

Okay, thanks.

[Operator:]

And that does conclude today's question-and-answer session. I’ll turn the conference back over to management for any closing remarks.

[Marc Eisenberg:]

Sure. Thank you for your questions and for participating on our call. We look forward to speaking to you again when we report our full year in Q4 2016 results in March of 2017.

[Operator:]

And that does conclude today's conference. Again, thank you for your participation.