ORBCOMM Inc.
Q4 2016 Earnings Call Transcript

Published: 28 Feb 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to ORBCOMM’s Fourth Quarter and Full Year 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 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 J. Eisenberg:]

Thanks, Michelle. This is our longest period of the year between earnings calls and we have got a number of exciting programs to discuss including an awful lot of rate breaking news much of which evolved just the last few days or hours. There are few really exciting customer developments, many of which are unannounced to date that we will be covering so listen closely. I will kick things off with a quick review of the financial highlights for the fourth quarter and the full year 2016, jump into the key areas of the business, new customers and partners and finish with some recent developments on our products. At that point I will transition to Robert for more detailed overview of our financials and end the call with your questions. So, let's get started. Overall 2016 was an extremely productive year. We have made strides from both the strategic as well as the financial perspective as we continued to scale the business, execute on key opportunities, and drive innovation with settlement products and applications that are already making a significant impact on the business and will continue to in the near term. We are seeing increasing demand for our products, winning some of the biggest deals in play, and expecting more to come. From a financial perspective 2016 was marked by a solid growth in service revenue and corresponding increases in adjusted EBITDA offset by lower product revenues that continued to be lumpy due to the timing of deployments and delays in obtaining product certifications for our new LTE based products. With most of our LTE development complete and approvals obtained for the majority of our products, some of the largest opportunities to date have already started to deploy and tens of new smaller accounts have already begun receiving products as well. With a great deal of backlog and a strong pipeline we don’t expect to have the same issues with products revenue in 2017. Our business has never been better positioned than it is today. Earlier this morning we issued a press release announcing financial results for the fourth quarter ended December 31, 2016. The quarter consisted of total revenues of 46.8 million, up 4% from the prior year led by 29.4 million in service revenues which increased to 8% or 2.3 million. Adjusted EBITDA of 12.5 million increased 5% or 0.6 million over last year. Product revenues were slightly down from last year which is a matter of timing that I will discuss in a moment. Our subscriber accounts through subs grew in the quarter by 37,000 net subscribers taking the base to 1.72 million at the end of December 2016. Subs grew 10% for the year. Q4 service revenues increased approximately 0.6 million or 2% over just last quarter showing multiple consecutive quarters of sustainable growth and improved performance across most of our businesses. Q4 product sales of 17.4 million came in late despite high demands with substantial orders falling into Q1 ending 2.5% lower than last year. As you may remember from our last call we were unsure how much of our backlog would fall into Q4 versus Q1 2017 based on the timing of obtaining necessary LTE approvals. We received approvals throughout the quarter and received the most significant approval just after Christmas. While we were able to start shipping a portion of our products in the last week of December we were unable to recognize most of this revenue within the quarter. With our move to the new contract manufacturer complete, approvals in hand, some of our largest customer opportunities to date starting to deploy and an unprecedented amount of backlog while hardware sales in 2017 could still be lumpy quarter-to-quarter, we believe we're in really good shape for the year. It's been a really active quarter for our transportation group. Just yesterday we put out a joint press release with J.B. Hunt, one of the largest transportation companies in the world. J.B. Hunt operates over 90,000 cargo assets some being monitored previously by other systems but most are not currently being monitored wirelessly. J.B. Hunt and ORBCOMM are ramping up for an unprecedented rollout across a number of asset sites expected to deploy nearly their entire fleet over the next year or so. This is a great achievement for ORBCOMM. Let me give you three reasons how our strategy is taking hold using J.B. Hunt as an example. First, our strategy to design products across multiple asset classes allows J.B. Hunt to manage one system with one vendor. Imagine trying to manage drivers using multiple systems because the asset they're hauling is a reefer versus a dry van forcing the dispatcher to end in end amount of different vendor portals. The ORBCOMM system allows J.B. Hunt to combine all of these assets into one comprehensive platform for seamless and efficient fleet management. Second, our rate to scale supported by our engineering group has been paying off in a big way. In this case we designed a new LTE product based off our GT 1100 with a cargo sensor that could be installed outside the asset in under 15 minutes which was a key metric in their ability to go forward. Any amount of cost savings and installation time and resources can be huge when you're talking about 90,000 assets moving around the country that need to be taken out of service for installation. We have clearly become the vendor of choice and large opportunities that have a good amount of customization or complexity. Third, customers like J.B. Hunt can rely on us having one of the largest support teams including customer service, field technicians, and installation training specialists to complete their deployment at a fast pace and stay productive. This product, I am sorry, this partnership is built to last years. I'm confident that we will do a great job for J.B. Hunt, an absolute icon in the transportation industry. It's a validation that the key strategic decisions we've been making are taking hold. Product for their trailers started to ship in Q4 and while it did not impact Q4 financials it has already contributed in Q1. Another great new opportunity is with our partner AT&T winning business with the U.S. Postal Service, a project we've been working on for nearly a year. The U.S. Postal Service has access to tens of thousands of trailer assets across a vast number of different trailer suppliers and is looking to monitor them on a unified platform for logistical efficiencies. We started shipping on this project in Q1 just a few weeks after getting our necessary LTE type approvals and expect to deploy throughout 2017 and beyond. The Postal Service had small deployments in the past with other competitors. After disappointing results they saw value of our rugged solar based system in the fields. And we believe that went a long way in the evaluations to go with the AT&T ORBCOMM team. This is the third major win for our partnership with AT&T. We now have Maersk, Crowley, and the U.S. Postal Services customers and over 300,000 assets generated by this partnership that are or are expected to be monitored by our telematics systems. This partnership is clearly gaining momentum, expect a press release with more details on the U.S. Postal Service over the next quarter. In Q4 many of our longstanding transportation customers continued to place renewal orders such as Hub, Prime, John Christner Trucking, Walmart, Swift, CR England, and Alliance as well as NFI who we just recently signed in Q3. Prime the largest over the road transport company, refrigerated transport company in North America started using our digital temperature monitoring solution on their tanker trailers which is a new asset class for ORBCOMM as well as this program. It's great to see opportunities with our long standing customers where we can expand our offering to cover multiple modes of their transportation needs. In addition we signed many new customers including Covenants, one of the largest transportation companies in United States. They selected our system to help track, monitor, and control their fleet of refrigerated trailers at their subsidiaries Covenant Transport and Southern Refrigerated Transport. This is a great win for ORBCOMM and another example of why we are the solution provider of choice for the industry's top transport companies. We've closed additional opportunities with SpartanNash, Christenson Trucking, Northwest Crane, Summitt Trucking, Riverside Transport, Arnold Brothers, and J&J Transports. Historically most of the transportation customers, most of our transportation customers were over the road carriers. Some of our new customers represent the private fleet, wholesale distribution and grocery market segments such as SpartanNash, a large wholesale grocery distributor and retailer. SpartaNash placed significant orders in Q4 and is continuing to offset their fleet. Group distributors, grocers, and refrigerated transport companies continue to be driven by the FDA's Food Safety Modernization Act or FSMA to stay compliant with ongoing legislation and regulatory requirements. We believe FSMA will continue to generate strong demand for our industry leading cold chain solutions leading to many new opportunities over the long-term. For instance we're continuing to make progress in the launch of our customized cold chain telematics solution for Carrier Transicold, truck and trailer transport refrigeration units. As a reminder this OEM solution will help Carrier's fleet customers manage their refrigerated assets by enabling two way remote monitoring, diagnostic, data management, and other value added capabilities. We started shipping to Carrier in Q4. Carrier believes there is significant demand through their dealer network in North America and expect this to be followed by some factory installs in early 2018. This deployment will be closely followed by Carrier's European operation which is supported in the region by our subsidiary Euroscan. Some opportunities such as Hub Group are almost fully deployed and are now making significant impact on service revenues. We'd like to congratulate Hub for the successful implementation of this program that took years to design and deploy across 28,000 assets that are moving all over North America. Hub is a technology leader and their talented team has built a really successful business that is driving the Intermodal industry to higher levels of performance and service. Turning to AIS, we have two major international government awards and two customer opportunities to announce. First, the long awaited decision from the Government of Canada was announced late last week and we're thrilled to say that it was awarded to our Canadian partner Maro [ph] Space. Maro Space is an industry expert in data analytics specifically in maritime domain awareness and ORBCOMM's industry leading AIS service was a key determinant in this award. ORBCOMM has a large presence in Canada with approximately 150 employees and we are thrilled to participate in this Canadian program. As we mentioned last quarter we received confirmation of an award from a major international government maritime organization that we can now tell you is the Australian Maritime Safety Authority or AMSA. We're working with our partner Cordia to provide AMSA with AIS data to ensure safe vessel operations, combat marine pollution, and rescue people in distress to one of the largest search and rescue regions of the world. The AMSA contract was part of a competitive bid and it's funded for two years. We also renewed a multi-year AIS contract with our long time partner Lloyd's List Group following a competitive bidding process and entered into an agreement with our partners Savi to support their use of AIS for the maritime components of their transportation logistics solution. In Q4 we recorded 1.9 million in AIS revenue, an increase of 22% over the same period last year when we launched the remainder of our OG2 constellation and are pleased with the growth in this platform. We're expecting to start announcing more details on these deals over the next week. In other news we started shipping in the fourth quarter to a new heavy equipment OEM. While we're still a quarter or so from announcing the customer we are already providing this OEM with an end to end telematics solution that enables the customers to access critical engine and equipment data such as engine hours, fuel levels, maintenance schedules, engine fault codes, and location. Our dual mode solution provides OG2 satellite service, combines with cellular connectivity, a number of different hardware configurations including our next generation PT 7000 and our FleetEdge web reporting platform. They've already placed an order for over 2000 units and anticipating a deployment solution in Q2. This is an exciting opportunity that further solidifies our leadership in providing OEM telematics solutions. We're also working with several other OEMs interested in solutions such as this one and hope to get these over the line soon. We're seeing great potential for our MVNO business where we supply cellular connectivity to value added resellers. We added more than 7000 subs and signed 15 new customer agreements in Q4 with nearly 70 new customers in 2016, that's a lot of deals. We're also -- we also saw growth in our enterprise connect router business to recap our enterprise connect customers range from small to medium size retail, corporate and mobile enterprises who are either migrating away from hard wired internet connections to XLTE broadband wireless or any backup wireless connectivity through existing solutions. They're selecting outcome for an ability to ensure a seamless cost effective transition. We already closed a number of opportunities ranging from single to hundreds of units and have doubled the number of units deployed every quarter in 2016. We expect this business to continue to improve in 2017. Let's wrap up with a key product development update. As you probably know ORBCOMM is one of the largest and most diverse engineering teams in our markets and innovation is always a priority. In 2016 we set the stage for several new products that will come to fruition in 2017. We also redesigned some of our best selling products to reduce cost and time to market while leveraging scale and efficiencies achieved through the transition to our new contract manufacturer. As we mentioned previously in conjunction with our satellite modem development efforts we are releasing a radio frequency integrated circuit or RFIC which is a custom chip that allows us to reduce the surface area across all IDP enable products by more than 60% as well as unable to cut costs materially. This innovation is a game changer in bringing some the lowest cost satellite modems to the global IRT market and the footprint not significantly different to cellular. In Q4 we shipped the first RFIC based terminal to a large network channel OEM for their fishing buoy solution. We will start to transition to full production of the RFIC based OEM terminal in Q1 as we begin to take advantage of these cost savings and efficiencies. Summing up 2016 was a productive year and we're pleased with the progress we've made in our transition to a leading IoT solution company while continuing to leverage our satellite network as a keen enabler and differentiator. We've made significant strides in innovation, scalability, and execution which has clearly set the stage for 2017. With J.B. Hunt, the Postal Service, our new heavy equipment OEM Covenants and SpartanNash plus six additional new transportation customers almost 70 new MVNO customers; AMSA, the Canadian governments, and Savi our strategy is working and wow, there's a lot of momentum across the business. At this point I'll turn the call over to Robert to take you through the financials.

[Robert G. Costantini:]

Thank you Marc, good morning everyone. The key financial highlights for the fourth quarter includes sustained improvements in service revenues to 29 million and for the full year of 2016 service revenues of 113 million were precisely at the level we guided to at the beginning of 2016. We are pleased to deliver growth and service revenues, that most important metric as well as the continued demonstration of robust adjusted EBITDA of over 25% margins from the operating leverage in our business. Record service revenues of 29.4 million were up 2.3 million over Q4 2015 and Q4 marks the third consecutive quarter with over 500,000 of growth in service revenue. This strong momentum in service revenues comes from multiple factors with almost all parts of the business moving higher this quarter. Service margins expanded to 67.4% from Q3 margins of 66.1% and increasing by 170 basis points from 65.7% in Q4 last year. Product sales of just over 17 million did not reach the levels we were expecting due to delays in the pending LTE certifications preventing us from fulfilling product orders which resulted in pushing these orders into Q1. Overall higher fourth quarter service revenues contributed to a higher adjusted EBITDA this year versus last year. Adjusted EBITDA 12.5 million was up 5% from the year earlier period at nearly 27% adjusted EBITDA margin. Typically Q1 product sales are the softest for the year but this year it will be aided by the roughly 10,000 units pushed into Q1, the impact of which I will discuss in a moment. In Q4 total revenues of 46.8 million were up from last year with growth in high margin service revenues outpacing a small decline in the fourth quarter product sales year-over-year. Service revenues grew 8.4% in the fourth quarter to a record 29.4 million compared to the prior year period. Service revenues were also up 2% over the previous quarter highlighting the strength of our growing subscriber base as well as benefits from OG2 satellite. AIS revenues totaled 1.9 million in Q4 2016 with a strong finish to the year at 6.9 million up 29% over the prior year period. This puts AIS revenues already near a run rate of 8 million per year continuing to head towards our 10 million to 15 million per year expectation. Service revenues hit the mark for 2016 expectation despite the headwinds experienced in international markets with other markets like transportation and satellite services compensating for that weakness. Incremental service revenues contribution margin which is service revenues less direct cost to services was 2 million higher this quarter than the prior year quarter compared to an increase in service revenues of 2.3 million implying nearly a 90% incremental service revenues contribution margin. Our fourth quarter product sales of 17.4 million decreased by 0.5 million or 2.5% from Q4 last year. As previously mentioned products still came in lower than we were first casting due to the timing of deployments and delays in obtaining the required LTE product certification resulting in the shift of about 10,000 units of backlog or about 3 million to 4 million in product sales pushed into the first quarter. Net subscribers added in Q4 were about 37,000 coming in the high end of the trend over the last several quarters of net subscribers in the 30,000 to 40,000 unit range. Our total billable subscriber base of 1.72 million at December 31st, a 9.8% increase over the 1.57 million at the end of December last year. Looking at direct contribution margin, service revenues net of a direct cost of service for Q4 was 67.4% of total service revenues improving consistently and as mentioned 170 basis points higher than the prior year quarter. Product sales net of direct cost of products in Q4 were at 24.3% of total product sales which included our efforts to continue to monetize slower moving, higher cost inventory in order to take advantage of market share opportunities. The cost basis for products shipped from the new contract manufacturer are lower and this quarter still included a mixture of units shipped from inventory at a higher cost. Our hardware margins for the full year 2016 were at 25.5% which is above our full year goal of 25% of product sales contribution margin. Q4 this year produced a robust adjusted EBITDA of 12.5 million growing 0.6 million or 4.9% over the 11.9 million in Q4 last year. Adjusted EBITDA margin of 26.6% percent in Q4 improved 20 basis points over the prior year quarter. Full year 2016 adjusted EBITDA margins of 25.3% of total revenues finished just above our guidance for the full year. In the fourth quarter of 2016 the company had a net loss of 3.2 million compared to net income of 0.2 million for the same period last year. Driving the loss this year in Q4 compared to last year was 5.1 million higher costs for depreciation and amortization and interest expense now that the OG2 satellites are in service. The full year increase in these two items also significantly advanced the company's full year net loss of 23.5 million as well as the satellite impairment of 10.7 million reported in the third quarter. Depreciation and amortization increased by 4 million in the fourth quarter to 11.1 million mainly due to 4.2 million increase in depreciation from the Mission 2 satellites put into service partially offset by lower amortization expense. For the full year 2016 depreciation and amortization total was 42.8 million, an increase of 16.2 million over the prior year. Interest expense for Q4 was 2.5 million and for the full year 2016 interest expense was 9.1 million including the amortization FTE [ph]. Acquisition related and integration costs was 0.5 million in the fourth quarter this year mostly from the Skygistics acquisition compared to 0.7 million in the same period last year and for the full year 2016 acquisition related and integration cost totaled 1.6 million. Shifting to the balance sheet, cash totaled 25 million at December 31, 2016 compared to 28.1 million at December 31, 2015, a decrease of 3.1 million. For the full year 2016 cash provided from operations was 28.9 million reflecting 7.2 million used for working capital purposes. In addition 3.8 million was paid for the Skygistics acquisition in Q2. Capital expenditures of 28.4 million consisted of 8.3 million for the OG2 program launched in late 2015. Breaking down even further the balance of capital expenditures 5.2 million related to sustaining CAPEX for existing infrastructure and 14.9 million related to investment CAPEX for new products and services. Our total debt outstanding at December 31st is 151 million with an available 10 million undrawn revolving credit facility. For the first quarter -- while the first quarter is typically our softest quarter of the year, we expect to see total revenues between 48 million and 50 million in Q1 2017 compared to about 43 million last year in Q1 2016. Service revenue should be about 30 million and product sales are expected to range between 18 million and 20 million including the product sales push from Q4 and the timing of shipments for the deals just announced. Adjusted EBITDA will reflect the additional costs we typically experience in Q1 with public company and employee costs coming off of Q4. Due to the growing nature of the business, the large scale of the deals, and the difficulty in timing the shipment of product sales and installations we're taking a new approach to providing guidance this year. For the full year of 2017 service revenues are expected to range between 118 million and 122 million increasing 5% to 8% over 2016. Product sales can reach as high as 110 million but since we have historically underestimated the timing of customer installations and therefore shipments we are projecting a broad range of products sales from a low of 80 million to a high of 110 million. The adjusted EBITDA margin for 2017 is expected to be between 25% and 27% of total revenues depending on the revenue mix of hardware to services. And for modeling purposes I suggest around 67% margins for service plus direct cost and for product sales 26% margins less direct cost. Costs and expenses growth will be typical for ORBCOMM with SG&A growing 5% to 6% at around 12.5 million per quarter and cost of product development growing 15% over a smaller base to about 1.7 million per quarter. Capital expenditures are expected to be 16 million to 20 million in 2017 with sustaining CAPEX of 3 million to 4 million, growth CAPEX of $9 million to $10 million and some additional CAPEX spending for the OG2 satellite to 4 million to 6 million to develop new services and make one final one year In-Orbit milestone and spent the payment. Wrapping up our accomplishments this quarter in the full year of 2016 were significant in delivering service revenues on plan, growing our subscriber base 10% and better than expected margins for adjusted EBITDA. More importantly the successful execution of our strategy throughout 2016 helped to drive outstanding customer wins setting the stage for a really exciting 2017. So this concludes our remarks for the call, and we will be happy to take your questions.

[Operator:]

[Operator Instructions]. And we'll go first to Ric Prentiss with Raymond James.

[Ric Prentiss:]

Thanks, good morning guys.

[Marc J. Eisenberg:]

Hey Ric.

[Ric Prentiss:]

Hey, obviously a lot of stuff going on. Busy end of the year beginning of the New Year, wanted to ask some questions on the J.B. Hunt deal, can you help us understand kind of the pacing of that, 90,000 is obviously a large fleet and any implementation or deployment risks that you're concerned with kind of working on the facing of that deal?

[Marc J. Eisenberg:]

Yeah, from everything we learned that was our concern as well. So the first thing we did with J.B. Hunt is we simplified the installation process unlike we've ever seen. So it's an external installation. Ric check out my Twitter, I put a picture up this morning of the installation on the outside of the container. So we were able to do it in our yard in 8 minutes which is less than the 15 that J.B. Hunt required. So there is a portion of the year that J.B. Hunt stacks a lot of trailers in Q2, Q3 and we've got to zoom ahead to get as many installed in those quarters as we can. So, J.B. now wants to complete 90,000 units in a year. It's aggressive, we're going to push and help them do it. Toward the end of that installation it's really hard to find containers because you're not tracking them yet. But that is the goal and that's why you're getting this broad guidance from us because gee, we want to install 90,000 containers all in 2017 but we're kind of hedging a little bit there too.

[Ric Prentiss:]

But to 2Q, 3Q should be really the spike in it?

[Marc J. Eisenberg:]

So I think their first order which we started shipping in Q4. Like I said we didn't get the financial impact until Q1 was over 7000 units. So they're somewhat off to the races already. And now we're doing a big build that we expect to start shipping again at the end of Q2.

[Ric Prentiss:]

And is there a service component to it as well?

[Marc J. Eisenberg:]

Of course, yes. You see the struggle that I have with the service component. We didn't want to -- they're really sensitive in terms of throwing the economics out there. So what we did is we amended our guidance to give you a feel for how to model ORBCOMM as opposed to how to model J.B. Hunt. So we separated our service revenues, we separated the hardware revenues, and Robert gave you an idea of the margins and we focus -- we want you to focus on that.

[Ric Prentiss:]

Okay, makes sense. And then you mentioned the U.S. Post Office partnership with AT&T, more information coming has to be about that, is that in the guidance but just not a lot of details yet or…?

[Marc J. Eisenberg:]

Well, it is in the guidance. And we're going to ship thousands of units to them in Q1. It was a deal that was originally slated for Q4 and the last certification was an AT&T certification and it's an AT&T project. So you can imagine now the struggle in getting that stuff out the door in Q4. But that could be tens of thousands of units with an upside of 40,000 over the next year or two. The reason it's a shorter part of the script is we haven't released it yet and we'll get the press release out and whenever AT&T gets to it. So it's not really in our control but I think it's a really important part of the plan and it's a really important part of the guidance. So we have asked AT&T to include it. But you heard me say twice in the call and I made sure to say it twice, 2017 hardware should be in better shape than 2016 and you've got 90,000 units of demand and growing because J.B. Hunt's fleet is growing there and tens of thousands of units at AT&T/U.S. Postal Service and we are a lot of sales people. So they're going to close some more deals so you're getting a sense of where the comfort is coming from. And it's been there all along but these are just deals that we weren't able to release until now.

[Ric Prentiss:]

And one big picture question obviously, Intelsat, Softbank, OneWeb making a splash this morning and any thoughts on how that affects the business just in general. Softbank wants to be a disruptor but -- and then pointing at maritime aeronautical and other stuff but maybe don't have a large -- but just any thoughts preliminarily on that other call going on right now?

[Marc J. Eisenberg:]

Yeah well, I was kind of listening to my own call so and I can't comment on theirs because I haven't heard it. But I think there's an awful lot of new capacity in satellites and OneWeb is launched and there's other guys. There's a lot of guys looking at high bandwidth applications in the space industry which is why I like the fact that ORBCOMM is really focused on little bits of data and really cheap modems and trying to get to $100 per install per truck and smaller bits of data. And we're kind of hunkered in there in a really good spot. But looking at some of my competitors that you cover they are going to be infringing on the higher end of some of their business. I don't know it feels to me like every 15 years Wall Street kind of forgets how difficult the space business is. And they support the deployments of these big constellations. And there's going to be a lot of high bandwidth stuff out there. I don't know that these guys are going to affect our little IoT business. Maybe in just the really hard data stuff.

[Ric Prentiss:]

Right, as you guys go after much lower ARPU, kind of more IoT mobile-to-mobile solution, just want to get your quick sense on it? Appreciate it.

[Marc J. Eisenberg:]

You know the question that they're answering is how much data can I get through a sophisticated satellite device. The outcome question is how cheap can we track a trailer.

[Ric Prentiss:]

Right, right and how that end-to-end solution…

[Marc J. Eisenberg:]

Rely on our software, you're absolutely right.

[Ric Prentiss:]

Okay, thanks guys, that's it.

[Operator:]

And we will go next to Mike Walkley with Canaccord Genuity.

[Mike Walkley:]

Great, thank you. Congratulations on the Post Office and the J.B. Hunt deals. Just want to get a little clarity on the full year services revenue guidance, can you walk us through maybe just the AT&T customers kind of how hits your services line for the post office? And then also some of these large deals are a little more back-end loaded by the time they get the services up, I would have thought services might have been higher single digits and than what you guided, thank you?

[Robert G. Costantini:]

Yes, so it's always about getting the installation up and running and then getting started with the monthly subscription. So as those start to roll out in Q2 and Q3 then you'll see the start but if you are working a model and just look at how many, hundreds of thousands of subs you put in next year that will get you to the guidance and roughly our current run rate for ARPU. So I think that will hold. As far as AT&T is concerned specifically we haven't released the details of this.

[Marc J. Eisenberg:]

But theoretically we charge them a wholesale monthly rate and then they put a margin on it and that's the model. So it doesn't really change, there's no new category at ORBCOMM.

[Robert G. Costantini:]

Right as far as mix is concerned these are -- it will be lower than what the refrigerated products total in ARPU. So, that is also factored into our guidance.

[Marc J. Eisenberg:]

And that's why we kind of put Hub into the commentary today. You know we started deploying with Hub almost two years ago and they're fully deployed right now. And when I say fully deployed they still take units every year as they put new containers in to service but the existing fleet is nearly fully deployed now. So there's a little bit of a lag there sometimes and I think that's why you're seeing right now when hardware sells we're a little soft the last two quarters, all of a sudden services pick up because you're catching up. You're actually picking up the services from the higher art work orders a couple quarters ago.

[Mike Walkley:]

Great, that makes sense. So I am at a Mobile World Congress kind of loud and crowded here, in any way you could just share Rob real quickly again just the margin targets for services and for hardware, that would just help me out on my modeling, thank you?

[Robert G. Costantini:]

Yeah, as I have mentioned we're looking at 67 points for service margin so there is less direct cost somewhere between like 26 points on hardware. And those who -- those are the targets for this year and adjusted EBITDA 25% to 27% so that would probably range below 26 to north of 26 depending on the quarter. 26 would be a good ballpark for the model.

[Mike Walkley:]

Okay, thanks and then just on the longer-term model as the business scales over time should we still think kind of higher 30 gross adjusted EBITDA margins if you are closing on the 300 million revenue run rate?

[Robert G. Costantini:]

No, absolutely. We'll continue to see margins expand, we've demonstrated that over the last couple years and sort of again this quarter and this year. So we expect that to continue to hold.

[Mike Walkley:]

Great, one last question and I'll pass it on. Marc just as you think about the hardware driving the services business longer term, with this growing base of customers can you maybe walk us through how you are speaking of visibility in the quarter on the hardware and obviously given a big range this year. But just based on the growing install base how do you speak kind of your annual run rate of hardware going forward after you grow out some of these bigger deals?

[Marc J. Eisenberg:]

So, as we've talked about in the past the kind of the maintenance hardware at the bottom was always that $15 million number. So add to the $15 million number between the two deals we talked about today, a fair number to predict for this year and we still have to execute on that number, you got to build the product, you got to get it installed. But it would be something like a 30 million which already gets you to 90. And that gets you toward the middle of the range we gave. The reason it starts at 80 is in case we have some sort of hiccup on the production or the installations. You get a battery component manufacturer that is running along products and just the little things that can happen. So it's just a matter of timing that that gets you to like 90 and like I got 10 more months, its February. We're going to close some stuff. So you kind of get a sense of how it's built, right.

[Mike Walkley:]

Yeah, absolutely, thank you.

[Operator:]

And we will go next to Andrew De Gasperi with Macquarie.

[Andrew De Gasperi:]

Great, thanks. I guess first question can you maybe explain a little bit on the Canadian Australian Government wins with AIS, how should we think about the opportunity there? And then secondly can you maybe just let us know like the opportunity in cold chain relative to the FDA deadline coming up next year, like what do you think is lost on that? Thanks.

[Marc J. Eisenberg:]

Sure, we moved AIS way up. I mean there is some momentum in the AIS business. A couple quarters ago we released EMSA which is the European maritime. And then this quarter you've got AMSA which is the Australian and then you've got Canada and these are kind of important deals because think of the areas that they're in and the amount of Oceanic coverage that these guys need. And they are some of the biggest wins out there and you know, gee I don't remember losing one of these opportunities for a really long time. So the momentum has really shifted over to the ORBCOMM side along with our strategy to combine with local technology companies that are experts in selling services to their various governments and municipalities. So going pretty well. And in terms of our guidance I don't think anything has changed. We said 10 to 15, our competitors said a 100. It's 10 to 15. So we're going to get to that 10 to 15 run rate. We are already at an 8 million run rate. You know these two deals are going to add something like -- it's going to add hundreds of thousands of dollars a year, closing in on something like a 0.5 million. We share some of that revenue with our, I'm sorry that's our portion of it, but there's revenues for our partners as well, high margin stuff. And I think that business model of putting in on a satellite and being the lowest cost guy out there in terms of the -- it's all in the CAPEX. There's very little incremental costs on it. It's been a strong model for us.

[Andrew De Gasperi:]

Got it and on the cold chain side.

[Marc J. Eisenberg:]

Sorry on the on the cold chain side, so there's two deadlines we're talking about, right. So the deadline for the big guys, these coming up in April and those fleets you're seeing them roll in. You're seeing Covenants and that's a really big one. And we've done a good job closing the larger fleets in the country. If you look at the top 25 fleets out there and I'm not looking at the numbers in front of me but I'm guessing something like 18 to 20 of them are fully deployed with ORBCOMM and part of that service revenue number that you see. And then every year they buy more products as they expand their fleet or they swap out hardware and that is part of that maintenance business that we keep telling you is that $15 million. So we're not fully penetrated there but we're a good ways penetrated on the big side. On the small stuff, the stuff that's in a year from April, the smaller guys that need to comply you are starting to see it, right. You saw in the last few quarters us announce some of the smaller names. I think this quarter we gave you six of them. Last quarter it was even more, so they're starting to get motivated, they're starting to deploy but wow, we need Carrier's help there. And their products and their dealer network, that sees and touches all of these small fleets is going to be helpful. We've got a decent sized sales force out there but 14 or 15 guys. It's not thousands like it is with Carrier so we're going to require their help. In terms of like a number, a number of penetrated off the top of my head I don't know but it's small. It's really small on the small side and I think there's obviously volume discounts for the bigger guys. So the smaller guys probably make up an equal number of subscribers but you do it in smaller components and they could be a little more profitable.

[Andrew De Gasperi:]

Got it and just remind me the ARPU is in the cold chain side tend to be higher than normally what you get there?

[Marc J. Eisenberg:]

Low double-digits.

[Andrew De Gasperi:]

Double-digit, got it, perfect. Thank you so much.

[Marc J. Eisenberg:]

Sure.

[Operator:]

And we will go next to Mike Malouf with Craig-Hallum Capital Group.

[Mike Malouf:]

Great, thanks a lot guys for taking my questions. I have just one, when I take a look at the subscriber numbers or the subscriber revenue guidance that you gave on the low-end, 118 million, can you talk a little bit about why or how you could get to sort of that low end because when I take a look at just even the fourth quarter if you annualize that number and then you just add in the growth of AIS which you talked about is a couple of million dollars year-over-year with that, you get some pretty dramatic slowdown so it must be a revenue percent that is decreasing so within the installed base is there something going on that we should know?

[Marc J. Eisenberg:]

Yeah, I don't know that we're expecting to you know...

[Robert G. Costantini:]

Yeah, I know it's not that. I mean is -- there are components in the fourth quarter revenue that have to do with things like installation, some stuff that we're working on and in sync which are platform opportunities to develop those programs for companies like General Dynamics, so those things they're hard to -- you don’t roll them back into a sub number or ARPU type of equation. But that we wanted that guidance to reflect all the things that were happening in the business whether the mix whether those non sub related revenue component and that's what we're saying right now. So again the guidance today is pretty in-line with conservative growth that we've seen over the last year if you look back over 2016. We've grown the business 5% to 8%. Again because of all the shifts and the complexity that's happening in the business. So that that's our thinking around that.

[Marc J. Eisenberg:]

But to your point, you are at 29 number so you are already at the run rate without any growth to the number that we gave. So it looks like a low number compared to Q4 and a higher number compared to 2016 because there was significant growth for service in 2016. But you know Mike there's nothing out there that we're aware of. Let's hope we just be back out of it.

[Mike Malouf:]

Awesome and then if you could just go over those CAPEX growth numbers as you see there's some onetime issues in that or some onetime expenses in the CAPEX and as you see going into 2018 you see the sort of similar CAPEX requirement over the next couple of years as you have. I know that you were certainly looking at that recently and now that you have a little bit of a CAPEX holiday with the satellite I am just kind of wondering if we can get an update on that?

[Marc J. Eisenberg:]

Yeah, so again we are happy to announce that one year In-Orbit milestone payment was earned so the satellite operations reflect that. There were some additional couple of million dollars also associated with just building out some of these services around OG2 that that need to be done this year or would like to see get done this year. In addition to that going back to the balance of it, our sustaining CAPEX this year was running a little over 5 million. We think it's going to be under that in 2017, running more like on the $3 million to $4 million basis because we've taken care of a lot of the stuff already. We don't do it annually. And then the growth CAPEX of 9 million to 10 million kind of looks like a number that I think we will probably also see in 2018 where right now in the verticals that we're focused on with we have kind of run out of I want to say big headline projects but some of that will run into 2018. So things like you've already felt [indiscernible], you're building is dual modems, so there is a different network modems and then you are going to do dual network modems. So those are the types of things. Once they are done, they're done. And we're probably expecting they would continue to invest, something will pop up so we want to be clear about that. But that looks like a good number in my mind based on the long-term development aspects that we're seeing in some of the program. So again if you want to just look at that number, it drops down to like 15 to 16 in 2018 with 3 million to 4 million sustaining in products that 10 to 12 on development.

[Mike Malouf:]

Okay, great, that's very helpful and again congratulations on the J.B. Hunt and the U.S. Post Office and that's all. Thanks.

[Operator:]

And we will go next to David Gearhart with First Analysis.

[David Gearhart:]

Good morning Marc, good morning Robert. My first question is I was wondering if you can provide a little detail on the 1 million unit pipeline that you referred to in the past, if you back out J.B. Hunt, U.S. P.S. roughly what does that pipeline look like and could you give us some indication of a complexion versus -- of new versus expansion?

[Marc J. Eisenberg:]

I think in the transportation business we're kind of at least the ground based stuff we're kind of knocking the cover off the ball. There's probably 100 different opportunities that make up a million units and we are closing an awful lot of them. And I think this is going to be a really good year for gross subscribers. I think there's another part of the business that we've got a lot of small prototypes and small rollout. So that is the way this business started. And that is in the marine business. And in the marine business some of these deployments are hundreds of thousands of units almost like our Maersk deal which is closer to 250,000 and there's a bunch of other guys that will follow Maersk now that they've developed a solution. So following that is following that as well. There's still an awful lot of runway where these were some great wins, they are the biggest wins in the industry for anyone this year on the commercial side and we're not done by a long shot.

[David Gearhart:]

And the complexion of new versus expansion I am guessing the bulk is new opportunities versus expansion, just a little color there?

[Marc J. Eisenberg:]

You know I think most of the -- well I think it's certainly a mix but I think the sophisticated users of the ORBCOMM network, they typically deploy across their entire fleet otherwise if you don't make that leap of faith you don't get the efficiencies. You can't say that we deploy a third of our fleet one way and two thirds with pen and paper. So a lot of that maintenance business that we do in the incremental subs are two things. Either it's really well run companies that are increasing the size of their fleets or old 2G product or reefers coming out of service or something else where they actually buy a new product and then they get new telematics to go along with it.

[David Gearhart:]

Okay, and then in terms of your sub additions for the quarter, was there an offset from 2G just a lingering effect of AT&T network shutdown affecting your sub number even on a modest basis?

[Marc J. Eisenberg:]

I mean hundreds maybe a thousand but we started the swap outs a year and half ago. So we did not wait until the very last moment. There are still some 2G units out there, a couple of thousand on some customers that let's say you have a reefer that's going to last 8 years and it's 7 years old. You are not going to replace it so it just kind of sits out there and as long as it's providing service you'll keep using it until the very minute that AT&T shuts down that 2G network. And they're not shutting it down in a day. They're shutting it down region by region, tower by tower. So there's a couple of thousand left but it's a blip on the radar.

[David Gearhart:]

Okay and then last question from me, in terms of the installation process that you developed for J.B. Hunt and what not, is that leveragable for other opportunities or would there be incremental investment if you have another large fleet to pay, they like the sub 15 and they'd like something would you have to invest heavily there or could you leverage what you've developed already?

[Marc J. Eisenberg:]

Oh, it's our design so that it is now our container product and if any marine or land base container group were to look at that particular asset that's what they'd be buying.

[David Gearhart:]

Okay. Thanks a lot.

[Marc J. Eisenberg:]

This is right what we do, right. I mean we find like a really large customer, we develop a product and once we do that we sell it through the channel to the other guys. But typically we make the investment. We've done it with six or seven different large companies already.

[David Gearhart:]

Alright, thanks for the color. That's it for me.

[Marc J. Eisenberg:]

Sure, thank you.

[Operator:]

And we will go next to Jim Mcilree with Chardan Capital.

[Jim Mcilree:]

Yeah, thanks, good morning. Robert can you talk a little bit about the contract manufacturing, when you'll cut completely over to that? And then Marc, it was Marc or Robert I can't remember which one of you talked about the RFIC, can you talk about the pace of how that is rolled out in 2017?

[Marc J. Eisenberg:]

So you take the first one, I will take the second one.

[Robert G. Costantini:]

We actually made good strides towards the end the year getting that manufacturing into same unit. So that's gone well. Not everything has been completed so we have a little bit of work left to do but part of that effort was lot of components and not finished goods pieces that had to be managed. So I would say well we're pretty much up and running at this point in Q1 coming out of that manufacturer. So we get a lot of support for them not only in Mexico but other locations. So I would say that is on track. What we want to do is push as much fine now through that program as we can to ramp up scale and continue to reduce our cost. So that's the effort. So I would say we are in pretty good shape on that right now.

[Marc J. Eisenberg:]

On the RFIC, SkyWave's biggest customer is a manufacturer of buoys and they have already transitioned over. And every reseller that they have will transition over by the third quarter of 2017 but as they build it in it will be one after the other after the other. But there will be a time where if they want to continue using the old product which I don't know why they would unless they want to pay a significantly higher price they'll have to do a last buy and keep that inventory and then we will no longer manufacture the old product.

[Jim Mcilree:]

And on that inventory issue Robert, is there a lot of the old inventory still to be sold, are we balanced on with that?

[Robert G. Costantini:]

We've -- the stuff that you would probably put in the slow moving categories been reserved and it is still marketable. I mean it's just an accounting thing. The components, we're still working through the component levels but not significant. I mean I think we've had a bump up in -- most of us are building product in anticipation to ship and we were unable to get it out the door. But it is shifting more heavily towards finished goods which is where you wanted to go in this transition process. So I am not expecting -- there is a little bit that will done there but…

[Marc J. Eisenberg:]

And unlike the ORBCOMM business which is lots of skews and flavors and different networks and everything else, there is a very limited amount of skews in the SkyWave sub side. I'm thinking it's like less than 10. And you know the sell through should be easier and quicker.

[Jim Mcilree:]

Okay, great, thanks a lot. Appreciate it.

[Operator:]

And we'll go next to Mike Latimore with Northland Capital Markets.

[Michael Latimore:]

Thanks. Regarding the J.B. Hunt opportunity there is a 90,000 of total opportunity there?

[Marc J. Eisenberg:]

90,000 is what we believe is allocated to ORBCOMM and we think it's significantly higher than that because their goal is to expand their fleets. But I think in terms of how quick they expand their fleet and what that number is that's kind of proprietary to J.B. Hunt.

[Michael Latimore:]

Okay, but currently fleet sizes is 90k? I am asking is that the current fleet size exceeds 90k right?

[Marc J. Eisenberg:]

Yes.

[Michael Latimore:]

Okay, who are the competitor on that deal?

[Marc J. Eisenberg:]

I guess you could say it is the usual suspects but J.B. Hunt is a professional company. They wouldn't -- they wouldn’t force an update on who the competitors are. I mean certainly we have our suspicions but I couldn't say any of that as a matter of fact.

[Michael Latimore:]

Alright, okay. So, you announced the few big deals, that the U.S. Postal or J.B. or the Covenant, I mean there is 90 from J.B. Hunt and some from U.S. Postal, yes -- AT&T. [indiscernible] 130, I mean how many of these subs probably you are going to add in 2017?

[Marc J. Eisenberg:]

There is a chance all of them. There is a chance but there is that is the goal but I will warn you I'm always wrong when it comes to timing these things. So, let's say a significant portion is the downside but the goal is all of them.

[Michael Latimore:]

No, no, okay 90 plus but why would the remaining the Covenant, the SpartanNash and the rest of the recent wins that you announced, I mean how much would they amount to?

[Marc J. Eisenberg:]

You know those guys would probably be another 10,000 or 12,000. I mean there is a lot of demand out there and that is just a quarter's worth of deals.

[Michael Latimore:]

Okay, that is cool. And on the adjusted EBITDA guidance, actually missed the quarterly guidance -- 25% to 26%?

[Robert G. Costantini:]

Right, so we -- yeah 48 to 50 in Q1. Right now we are just looking out to Q1 on a quarterly basis.

[Marc J. Eisenberg:]

And Q1 is typically a soft quarter. This 48 to 50 is going to stand out versus a 43 last year.

[Michael Latimore:]

Okay, alright, and so regarding the AIS targets, you announced the target of 10 million to 15 million, right, can we expect…?

[Robert G. Costantini:]

That's our expectation for the market.

[Michael Latimore:]

Okay and everybody was running around 8 million?

[Marc J. Eisenberg:]

Well, we're running around 8 million now.

[Michael Latimore:]

Yeah, that's what I am saying, probably north of 8 million. So probably by next year FY18 you might reach like around 15 at the high end?

[Marc J. Eisenberg:]

No, I don't think so. I think we are hoping to do on one hand as opposed to a single digit but I don't think we're going to get to 15 next year.

[Michael Latimore:]

Okay, so somewhere around like mid 12 or something like that?

[Marc J. Eisenberg:]

I think you're kind of new to our story but for the people that listen every quarter we have been saying for years that we think that it's fully deployed, we're going to grow to a $10 million to $15 million business. And it just feels like every quarter we kind of inch under the 200 grand closer to that number. So, in terms of that long-term outlook we're just holding steady to that number.

[Michael Latimore:]

Thanks guys.

[Operator:]

[Operator Instructions]. And we'll go next to Chris Colte [ph] with Colte Analytics [ph].

[Unidentified Analyst:]

Hey Marc, I don't know whether you commented or not but on the U.S. P.S. deal is that a purely terrestrial wireless or a global [ph] solution?

[Marc J. Eisenberg:]

It's both. So in some places it's terrestrial only and then in the hard to reach places it's got a satellite component as well. I mean it is -- when you learn about the Postal Service, I mean what they do in some of these places like Alaska and others it's pretty daunting, small airplanes and other stuff. So yes, it's a mix.

[Unidentified Analyst:]

And was that a selling point in the win with AT&T?

[Marc J. Eisenberg:]

You know the story goes back to one of the leasing companies here in New Jersey that is leased to them. And one of our competitors was really struggling and this leasing company was in bad shape just from the technology perspective and performing what they needed to do because of batteries that were dying and other things. And we were able to help them out, deploy the GT 1100 and the stuff just worked. And that resonated not only through the leasing company but with the U.S. Postal Service in general. And when we went in there and there was a couple thousand of these that we fielded in the past. It wasn't that hard from a technology standpoint like gee, we've been fielding thousands of these. We're coming from basically a nightmare and this stuff just works. So, that was the intro and then AT&T had the relationship there as well and the contract vehicle. Because this is a government entity just like any other and together we were able to get them what they needed.

[Unidentified Analyst:]

Okay, and shifting gears, you kind of had mentioned the International Intermodal, can give us a specific update on where you are with the CIMC in terms of deployment in factory install?

[Marc J. Eisenberg:]

Well there's no factory installs yet with CIMC. But CIMC is -- they've committed to 50,000 units per year first couple of years. Their product is just about ready, they're out there pitching the deal, pitching their deals on an aftermarket basis. And you know their expectation, you know they've committed to 100,000 in year three and 250,000 in year four. So in terms of this commitment it's not a -- it's not like they have to buy hardware or something it's just committing to pay the royalties. So it's -- they've got hundreds of thousands behind it but I think they're going to do well with it. But it is China so we don't have an awful lot of visibility like you'd hope we have. But I think there is -- at some point in the next couple of years I think they're going to be one of the top three customers.

[Unidentified Analyst:]

Great, and two questions for Robert. One, when you mention the incremental margin of north of 90% in the quarter does that imply a heavy mix of satellite where clearly it's about 100% margin or…?

[Marc J. Eisenberg:]

Yeah satellite has done well. I wouldn’t say it is a heavier mix but satellite has improved.

[Unidentified Analyst:]

Because I think traditionally you have said that your terrestrial was more like a 40% to 50% margin…

[Robert G. Costantini:]

No, it depends on the volume. I mean because some of those deals are more north of like 70. Once you get over the minimum that you might have with an entry level in a relationship. So we are seeing much higher margins than that on the terrestrial side.

[Marc J. Eisenberg:]

Really in terrestrial side of our solutions business or the terrestrial side of the MVNO business Chris or just terrestrial in general.

[Unidentified Analyst:]

Terrestrial in general, when you're reselling somebody's wireless service?

[Marc J. Eisenberg:]

Oh so in other words you buy a container to be tracked with a terrestrial component.

[Unidentified Analyst:]

Correct.

[Marc J. Eisenberg:]

90%.

[Unidentified Analyst:]

Okay, so not all that indifferent from your...

[Marc J. Eisenberg:]

Incrementally the satellite is 100%.

[Unidentified Analyst:]

90 and 100 are pretty close in my thoughts. Marc, I was looking at my notes and you had previously said that you did not expect the RFIC solutions to ship until 2018, am I -- are you ahead of schedule or were you referring…?

[Marc J. Eisenberg:]

No, no, no, there is -- it is a two step operation. The cost reduced RFIC is years in the works. It's a project we do with Immarsat and it is ready. Then the next version is the dual mode with ORBCOMM and that's the one that's a year away.

[Unidentified Analyst:]

Okay, got you. And final question for Robert, anything we should watch for this year in terms of balance sheet optimization?

[Robert G. Costantini:]

Balance Sheet optimization, other than the working capital components which were always sort of fixated on with inventory, I mean was up just slightly year-over-year and we did this huge transition which I am pretty pleased with. It's not where I'd like it to be. And we're just -- again, just always working the working capital. Other than that I don't really have anything in growing the cash. Those are the things we're focused on in the balance sheet.

[Unidentified Analyst:]

That's good, thank you.

[Marc J. Eisenberg:]

It's fun Chris, how long have we've been talking about J.B. Hunt.

[Unidentified Analyst:]

Years.

[Operator:]

And it appears there are no further questions at this time. Mr Eisenberg I'd like to turn the conference back to you for any additional or closing remarks.

[Marc J. Eisenberg:]

Thank you for your questions and for participating on our call. We look forward to speaking to you again when report our Q1 2017 results in May.

[Operator:]

This does conclude today's conference. We thank you for your participation. You now disconnect.