ORBCOMM Inc.
Q1 2015 Earnings Call Transcript

Published: 10 May 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to ORBCOMM's First Quarter 2015 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] A replay of this conference call will be available from approximately 3

[Marc Eisenberg:]

Good morning. Thank you for joining us. Again my name is Marc Eisenberg, and with me today is Robert Costantini, ORBCOMM's Chief Financial Officer. Before we begin, let me remind you that this conference call includes forward-looking statements and that actual results may differ from the expectations reflected in these forward-looking statements. We encourage you to review our press release and SEC filings for a full discussion of the risks and uncertainties that pertain to these statements. I want to remind you that ORBCOMM assumes no duty to update forward-looking statements. In addition the financial information we will discuss today includes non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures is included in our press release. Another active quarter at ORBCOMM highlighted by exceptional revenue and adjusted EBITDA growth. I don't remember a time where we had so many projects underway. Some of the top priorities on the list in the first quarter were the integration of SkyWave and the InSync businesses. The significant progress on the preparation of our second OG2 launch, as well as executing on large customer deployments. We continue to pursue a wide range of new projects that are leveraging the synergies an increased capabilities of our newly combined offerings, which further expand our market reach. On this call, we'll focus on many of these objectives, catch up on some of the business opportunities, and drill in on the Q1 financials. So, let's get started. Earlier this morning, we issued a press release announcing financial results for the first quarter ended March 31st, 2015. These financials include a full quarter of SkyWave and approximately 11 weeks of InSync. The highlights of Q1 include record high revenues of 42.3 million, or 119% increase over last year, and adjusted EBITDA of 9 million, a 149% increase. Breaking this down further, service revenues increased year-over-year by 65% to 23.8 million, and product sales increased 277% to 18.6 million. While the comparisons clearly benefited from the acquired businesses, it's important to point out that the company's revenues grew organically by over 30%, this is also a record. Net loss for the first quarter was 2.9 million or $0.04 a share compared to a net loss of 0.4 million or $0.01 a share in the same period last year. Excluding acquisition-related and integration costs of 2.5 million, net loss for the quarter was 0.4 million or $0.01 a share. Net loss was driven by one-time costs from the acquisitions, as well as higher depreciation from our new satellites being put into service. Breaking it down, we had depreciation and amortization expense of 6.5 million, acquisition-related integration costs of 2.5 million, and interest expense of 1.2 million. Other than G&A and interest expense, we expect many of the other Q1 expenses to be significantly reduced starting in Q2 as most of the professional fees and severance costs from the acquisitions, as well as the typically higher Q1, costs tied toward year ends and 10-K are behind us. Robert will break down the financials into more detail in a few moments, as well as expanding on multiple initiatives underway to further reduce costs. Our subscriber count grew in the quarter by 286,000 net subscriber communicators or subs, ending the quarter at just over 1.26 million. This includes 36,000, net sub adds from growth in our organic business and approximately 250,000 incremental subscribers added from the acquisition of SkyWave. Moving to our business highlights starting with the solutions business, Q1 was one of the largest quarters on record for our Transportation Group. We signed many new customers in the refrigerated market this quarter including Greater Omaha Express and Light Speed Logistics, further demonstrating our leading position in the market. Both transportation companies will be using ORBCOMM's Cold Chain Monitoring Solutions to improve operational efficiency and gain a stronger competitive edge and customer satisfaction and regulatory compliance. We also received significant renewal orders from some of the largest Cold Chain transporters including Prime, Marten Transport, C&S Wholesale, Hirschbach, and Celadon. As we mentioned during our last call in March, we completed the shipment of more than 15,000 dual mode transportation products for a major retail customer and we're now beginning to see these units installed and communicating throughout the country. Currently they've installed over 6,000 of these devices on both dry van and refrigerated assets. We believe that we should see further impact of these deployments in our service revenues beginning in the second quarter and expect these units to be fully deployed in Q3 that they continue to install at a rate of over 600 units per week. A key takeaway on the mix-fleet opportunities such as this one is the strength of our broad product portfolio, which is gaining momentum in our existing customer base. We often start the relationship deploying on a customer's refrigerated assets, but they soon find out that they can realize additional overall cost savings by installing our dry van products as well. ORBCOMM customers are unique in that they get the benefit of a single web platform for maximum efficiency and seamless operations across the mix fleets. In 2015, a key part of our growth strategy is focused on working within our existing customer base to expand our offering to cover multiple modes of our customers' transportation assets. From cold chain to dry van, chassis to intermodal and rail, ORBCOMM has an industry-leading solution and it's on a common web platform. We're making great progress in our strategic relationship with Hub Group. Our immediate focus is getting the Intermodal units we shipped to Hub in late 2014 installed. Of the 6,000 units shipped-to-date, they have installed roughly 4,000 of them. ORBCOMM has recently taken responsibility for the installation for these assets and we're growing from five to 11 installation sites. As Hub recently alluded to in their earnings call, their goal is to end 2015, with 20,000 installed devices. They anticipate all of their over 28,000 containers in their intermodal fleet to be equipped by early 2016. To accomplish this goal, Hub has recently placed orders for 15,000 additional devices that we expect to deliver in nearly equal installments over the next three quarters, starting in Q2. In our heavy equipment solutions business, Doosan is continuing to deploy our customized telematics system around the world. We've also received an initial stocking order from our solutions partner Terex, in support of their impending product launch. Initially, Terex will install these units as an aftermarket product while they work out their final details for a factory installation. We spent a great deal of time and effort providing Doosan and Terex with a highly customized web-based platform unique to their business, which not only showcases our advanced technical capabilities, but also our expertise at the holding full service end-to-end solutions. For our heavy equipment fleet owners, we just released a new version of our web-based platform called FleetEdge. We've already migrated several of our key rail customers with heavy equipment assets to the enhanced platform and the response to the new features has been extremely positive and helping them further improve operational efficiency and lower maintenance cost. Turning to our AIS business revenue in Q1 grew to just under 1.2 million as we continued to add new customers around the world, which now spans six continents. ORBCOMM signed new customer and partner agreements including several in the Asia-Pacific region. Our customers are now seeing the advantage of improved AIS service, including increased detections and a 50% reduction of latency as a result of the six new OG2 satellites and service, which will further improve when the next 11 satellites are launched in late summer. We're also excited that LBX Company, the maker of link belts hydraulic excavators has selected ORBCOMM to provide satellite data communications for its global OEM telematics application called RemoteCARE. Leveraging our network, LBX will provide its customers with machine location, operational performance, working status and periodic maintenance reporting along with 24 hour security and geo-fencing capabilities. With RemoteCARE, LBX customers can significantly reduce operating cost, minimize equipment downtime and enhance theft prevention. LBX's selection of ORBCOMM affirms our position as the network of choice for industrial OEM telematics. Looking at our government business, our partner Corp Ten International's GSA schedule for ORBCOMM's portfolio of end-to-end solutions has been approved and the contract number has been issued. The GSA schedule facilitates ORBCOMM's access, the government's access to ORBCOMM's products and services including satellite and cellular connectivity, hardware solutions, and web applications for government procurement, expanding our ability to deploy into government markets. In addition, ORBCOMM successfully completed product testing at Sandia National Labs to confirm acceptability of use of ORBCOMM's cargo security devices by the Department of Homeland Security, which also opens up new opportunities for cross-border asset monitoring and cargo security applications. In the first quarter, we made a great deal of progress with the integration of with SkyWave and InSync. During the first phase of integration, we made most of the intended changes including a 9% reduction in force across the combined company, which has resulted in approximately $4 million in annual savings. We have also restructured and merged several key business and support functions impacting product development, technology and operations, network sales and marketing, leading to additional cost synergies and more effective in streamline operations. As is evidenced in our financials, we've been able to obtain a good part of the cost synergies but that's not the entire story. When we choose our acquisition targets, the focus typically begins with the strength of the strategic fit as well as the potential financial impact. During diligence as you get to know the people you get a better feel for the team to see if the cultures can melt so as not to distract the core business. At this level, we're extremely pleased the team is already working cohesively on large projects, and the sell teams are integrated and working on a number of new opportunities as if we've been together for quite some time. As part of the InSync integration, we began the consolidation of several of our customer's applications into InSync's iApp platform, which expands our technical capabilities while increasing revenues and reducing costs. We broadened InSync's iApp core offering of RFID and cellular-based applications to include satellite technology, which now opens the door to new opportunities. We recently announced that Iron Mountain, a longtime customer of InSync has expanded its use of the InSync platform to enhance its tracking capabilities for document storage. This will help Iron Mountain's customers improve the efficiency of their business operations and enhance the integrity and reliability of their stored data. Through our acquisitions, a series of great hires, not to mention starting with some of the best employees in the industry, ORBCOMM is a better company overall. We've enhanced our technical capabilities, we have far greater distribution, and we've achieved larger scale. No other M2M Company could match the breadth and depth of our product and services portfolio. This has led to multiple awards, and in Q1, we're pleased to report that ORBCOMM won the Mobile Satellite Users Association's 2015 Innovation Award for SkyWave's IsatData Pro IDP service. This award not only recognizes SkyWave's innovative contributions to advancing satellite communications, but also our proven success to delivering high performance products and services that are taking the M2M industry to the next level. Product innovation is core to ORBCOMM's strategy. Post acquisitions, our product development team now has over 200 technical resources designing new products, adding functionality, and customizing customer applications. After a strenuous period of development followed by the kick-off of several large customer deployments, it feels as though we're now properly staffed to execute on the many projects in hand. Recently, Euroscan completed developments on a module that can drop in as an option for our temperature recorded products for the European refrigerated market adding wireless capabilities for new deployments. This product can also be used as a retrofit option that can be deployed on non-wireless units previously deployed in the field. In addition, we've made solid progress on the new transportation OEM program we announced last quarter, including conducting field trials for their hardware and completing the custom SaaS application on schedule. We hope to make a formal announcement on this opportunity by our Q2 call. Over the coming months, our operations teams will be focused on transitioning the bulk of our SkyWave product manufacturing to a Tier 1 facility in Mexico, which is expected to be completed in late Q3. This should result in significant cost savings while adding operational efficiencies. Let's now turn to our OG2 satellite replenishment program; the six new space craft that were launched last July continue to operate as expected. We started to take advantage of the inherent capabilities of billings reprogrammable payload, which has significantly improved messaging throughputs. The six new satellites, which are overhead about eight hours a day, are now processing nearly 40% of our network's total traffic. Since our last earnings call in March, Sierra Nevada Corporation has completed another four OG2 satellites, which gives us a total of eight satellites that are ready to be shipped. The remaining three OG2 satellites are currently undergoing system level acceptance testing, which we expect to be completed over the next few weeks. We anticipate having all 11 OG2 satellites ready to ship well before they are needed at the Cape for launch. Our target to launch Mission 2 continues to be late summer. Our launch window from SpaceX opens in mid-August and extends through the end of September; the exact timing depends on when SpaceX finishes qualification testing and successfully completes the maiden launch of the full thrust Falcon 9 Rocket. Once this launch is complete, we expect to be one of the next two launches. Wrapping up, we're extremely satisfied with how the business is shaping up, and we're pleased with the first quarter results and the direction that we're headed in. There are many projects underway and we continue to be well-positioned for growth and play a significant role in the M2M industry. With that, I'd like to turn the call over to Robert to take you through the financials.

[Robert Costantini:]

Thank you Marc, and good morning everyone. ORBCOMM's first quarter results signal break out quarter financially, achieving new highs for revenues and adjusted EBITDA, driven by both organic growth and acquisition. Adjusted EBITDA reflects higher revenues and disciplined cost controls, resulting in higher margins. Total revenues of 42.3 million in the first quarter increased by a 119% over the prior year. First quarter includes SkyWave and 11 weeks of InSync, but it was also highlighted by an over 30% increase in organic revenue growth. Service revenues of 23.8 million increased 65% or 9.3 million over the prior year quarter and now comprise 56% of total revenues. Product sales for the quarter of 2015 increased 277% adding 13.6 million over the prior year and are now 18.6 million this quarter and comprise 44% of total revenues. Subscribers added were 286,000 for the quarter increasing sub base by 30% which is now just under 1.3 million. We added 36,000, new subscribers from our existing business. And that would have put ORBCOMM at over a million without the addition of SkyWave subscribers and that's a substantial milestone in its own right. The effect of foreign exchange rate movements lowered revenues by about 300,000 compared on a constant currency basis and that comprises of 100,000 in service revenues and about 200,000 in product sales. This was split evenly between the yen and euro denominated revenues. Over 90% of our revenues were denominated in U.S. dollars. So while foreign exchange rate fluctuations have not had a significant impact on our business thus far in 2015, the strengthening of the U.S. dollar is adding some pricing pressure in various international markets. Gross profit in the first quarter of 20.7 million increased by 10.4 million or 102% due to the increases in both service revenues and product sales. Service gross margins for the quarter improved to 68% from 65% in the prior year period through a combination of higher revenues from satellite service, solutions and AIS. Product gross margins of 25% for the quarter improved 660 basis points over the prior year reverting to more normalized levels. Operating expenses were higher than the prior year period primarily due to expenses from the companies acquired such as additional employees, increases in professional services, higher stock-based compensation expense, AR reserves and marketing costs. Depreciation and amortization is higher due to the new operational OG2 satellites launched last year and acquired intangible assets. Acquisition-related and integration costs are also higher from the two deals closed in the first quarter. The result of this activity has captured over 1 million of combined cost synergies for both SkyWave and ORBCOMM in the quarter with synergies being achieved earlier than previously projected. Acquisition-related and integration costs were 2.5 million in the first quarter compared to 1.2 million in the prior year quarter. Higher acquisition related and integration costs in Q1 included an unusual component related to the amortization of SkyWave's legacy employee retention plan. It's unusual in that it was fully funded by SkyWave selling shareholders and is included as a prepaid asset on our balance sheet. Accounting rules require us to capture a portion of this retention plan as additional employees service cost in the first half of the year. Note, this does not repeat post Q2, and the plan was fully paid for by selling shareholders of SkyWave and therefore has no impact on cash flow from ORBCOMM. This amounted to 650,000 for the quarter and we expect to see a similar amount in Q2. Acquisition-related and integration costs in the quarter also included severance and professional fees related to the recent acquisitions. We expect acquisition related and integration costs relative to these acquisitions to taper off significantly in Q2; excluding the remaining piece of the SkyWave retention planned payment. Depreciation and amortization increased by 4.7 million in the first quarter to 6.5 million due to the additional depreciation of 2.1 million, primarily related to the six operational OG2 satellites launched last year and 1.8 million related to the amortization of intangible assets for SkyWave and InSync. Q1 adjusted EBITDA of 9 million grew 149% or 5.4 million over the prior year period. That was a record high for the company, when we look at the operational components in our calculation. Growth in adjusted EBITDA was driven by increases in service revenues and product sales, cost synergies from the acquisitions and benefiting from tighter cost control processes. We have already realized significant cost synergies from the SkyWave acquisition including savings and cost of service, the elimination of duplicate operations such as the consolidation of selling, marketing and product development activities. Adjusted EBITDA margin of 21.4% improved considerably over the prior year period from 18.8%. Our increased scale translates into more leverage and better purchasing power. We expect to see continued margin expansion throughout the year as we grow revenues and paying the strong focus on cost controls. Net loss in Q1, 2015 was 2.9 million compared to a net loss of 0.4 million in the prior year period. The widening loss was primarily attributable to higher depreciation and amortization, acquisition-related and integration costs, higher interest expense related to the debt financing for the SkyWave and InSync acquisitions, and higher taxes mostly related to our foreign operations. Ex-item, adjusting loan for the acquisition-related and integration costs, net loss in Q1, 2015 is 0.4 million or $0.01 per share. Looking at the balance sheet, cash, cash equivalents, restricted cash and cash held for acquisition is about 82 million at March 31, 2015 compared to 216 million at year end 2014 decreasing $134 million. Cash decreased primarily due to the purchases of SkyWave and InSync and repayment of 10 million to the bank for the revolving credit facility. Cash decreases were offset by cash provided from operations of 4.8 million and the InSync acquisition debt financing of 10 million previously secured under the same credit facility. Total debt outstanding at March 31, 2015 is 51.2 million and it's essentially the same from year end. During the quarter, as I just mentioned, we borrowed 10 million in acquisition financing the purchase of InSync and paid down the 10 million revolving credit facility, making it available in the future. ORBCOMM is fully funded with a good buffer for the remaining OG2 launch campaign. We anticipate significant milestone payments to SNC and SpaceX in Q2 of approximately 37 million as we get closer to the launch date of our satellites. We expect to start generating meaningful free cash flow when the final launch is completed, after which the company will embark on a decade long satellite CapEx holiday. Both the SkyWave and InSync integration activities are moving faster than expected. We believe there's an opportunity to look for additional savings. We started an initiative to save an additional 2 million in annual cost savings. We're looking across multiple functional areas including professional fees, product costs and marketing and operating expenses. We're not currently considering reductions in headcount as we feel the company is right-sized for the opportunities we are pursuing. On our last call, we guided to 2015 revenues of a 174 million to 194 million and adjusted EBITDA of 40 million to 45 million. Based on Q1 results coming in as expected and visibility into Q2, we're reaffirming this guidance for 2015. Wrapping up, it feels like we're firing on all cylinders. Our legacy business is strong with solid organic growth, the integration of SkyWave and InSync are going faster than expected and we are looking forward to completing our satellite constellation. This concludes our remarks, and at this point, we're happy to take your questions.

[Operator:]

Thank you. [Operator Instructions] And first we'll take our question from Mike Walkley of Canaccord Genuity.

[Mike Walkley:]

Great. Thank you and congratulations on all the integration and strong results. Marc, I wonder if you could just give us a little color on the pipeline for the year maybe starting with the cold storage markets. You mentioned some customers during the call, but maybe you can talk about how InSync tied into it and if the Food Safety Modernization Act is leading to any increased visibility for that business?

[Marc Eisenberg:]

Sure. You asked a bunch of questions. So, let me take them one at a time. I think in terms of our outlook for the year, we're pretty comfortable with the guidance because if you take like the run rate that we're working -- what we've been working at, and you add the just the Hub, the Doosan, and some of the other deals that we've already closed, it's giving us a whole bunch of comforts, so the pipeline looks really strong on the food safety side. We're definitely seeing a lift in the demand for our refrigerated service. And the refrigerated business just continues to be strong and it's tough to break out, but while powerful quarter for our transportation group. I mean they are shipping -- they're shipping more subscribers in our transportation network than our competitive guys and the satellite guys are shipping subscribers, just this one little VAR. So, we continue to be pleased with that. And I think there are some new products that are coming out and the idea is not just to get the food-safety business that's on the trucking part, but the food safety or FSMA, it extends from bananas leaving Honduras all the way to the supermarket where we go and buy them. So, the idea to extend our ability to monitor those things with the InSync acquisition across not just being on trucks, but also being on -- also inside the truck being on pallets and you're going to see a more comprehensive refrigerated product coming out. InSync, while there are some you busy guys over there, they are working on multiple projects. We have guys that we sell airtime and hardware to that are either using a third-party or they're under development to create these web platforms, and there's three of them that I can think of off the top of my head that they're scurrying around getting these things integrated. And net-net, it may not show like an increase of subs, but it might end up where a $3 sub looks like a $10 sub. And that's what that acquisition was all about. So, we can -- we're pretty pleased with where that's heading.

[Mike Walkley:]

Great. Thanks. And then just a follow-up question just on the model and the cost synergies; sounds like they're ahead of plan. Is 5 million to 6 million kind of appropriate run rate exiting 2015, and is 50 million the right level of SG&A? And as a final question, it relates to your guidance, is it still -- do you still think roughly 60% services, 40% product to hit the midpoint of your revenue range? Thanks.

[Robert Costantini:]

Yes. So, covered a lot of ground there. Yes, we -- let's start with the SG&A, probably be a little bit better, so exiting the year at 5 million to 6 million is still good and probably benefit in that line item. So, you probably can just be under that number, for SG&A, product development as well as going to sort of be leveled out. Acquisition and integration-related costs are going to tail off. You're going see again that retention plan payment and a little bit above that, but we're going to also try to capture some additional cost synergies. There was a third or final part of your question -- what was that again?

[Mike Walkley:]

Just a services mix?

[Robert Costantini:]

Yes, the services mix. Yes, so I think where we are right now, it's again -- it'll start to rebalance, so start moving up more to 60/40. So, just generally you're going to see it tick quarter-over-quarter, a little bit higher.

[Robert Costantini:]

Yes, I think the service part and that low 100 million range Mike is pretty easy to point to. The more explosive part is the hardware. So, we don't want to box ourselves into a percentage. When you know what the service is going to come out, but you want to hold back on hardware because that hardware is going to generate meaningful service revenue in 2016. To your guidance question, just before the call we were looking at where the street was out in the next quarter, and it was looking like in the low to mid 44s, some of even approaching 45. We're comfortable with where you guys are in Q2. And then EBITDA perspective, we're comfortable with where you guys are. If I were to make one little change to the way it looks right now, I would maybe take some of these guys; we're almost a 26 million in service. I would take that down a million, and add it to hardware, and then the difference in the margins I would take out of SG&A, but other than that, I think we're just kind of moving right up the middle of the fairway here.

[Mike Walkley:]

That's helpful. I'll pass it on. Thank you.

[Marc Eisenberg:]

Sure.

[Operator:]

And next we'll go to Rajesh Ghai of Macquarie.

[Rajesh Ghai:]

Good morning. Can you hear me?

[Marc Eisenberg:]

Yes, we can. How are you doing?

[Rajesh Ghai:]

Good. How are you? Congratulations on a strong start to the year. Marc, I just wanted to go back to the refrigerated transportation momentum that you're seeing. You mentioned that your existing customers are looking to bring you into adjacent opportunities. What -- can you give us more color on the size of opportunities potentially and if there was any incremental investment you needed to make in order to get those opportunities off the ground?

[Marc Eisenberg:]

Sure. In terms of investment, I think that was some of the frustration that we had with ourselves last year that there's significant investment around our intermodal products and significant investment around our dry van products and then the revenues kicked-in in Q4 where we did that. I think it was $29.4 million in revenues. So, I think what you're seeing now is like a steady run rate of those products on a quarterly basis. And I was just looking the other day; we kind of did a quick run through with the transportation guys. And it feels like a third of the products that we're deploying now are products that didn't exist at this time last year. But, I think you're going to find that there is this constant level of innovation that we're working on. The new thing is, it's a kind of leveled off, and we've got a little bit of a bigger frame so that R&D spending, it doesn't -- it kind of fits more appropriately with the service revenues that we're generating. But there is constant innovation here. You're going to see a product rollout in Q2, you are going to see another one in Q3, you're going to see iPhone apps this year, you're going to see three new product lines, but it's going to fit within our guidance.

[Rajesh Ghai:]

That's great. And the RFID opportunity you announced in Iron Mountain. Obviously that appears to be a pretty large opportunity, could you put some numbers around it in terms of how big you could see that becoming over the next few years. And again, is there any incremental investment required beyond the InSync acquisition you've already made?

[Marc Eisenberg:]

So, no additional requirement. InSync is pretty properly sized, there's about 48 guys there and they're predominantly web developers. So, in terms of sizing the Iron Mountain opportunity, it's hundreds of, thousands of dollars, but the upside there is in the millions of dollars. And that's just one example that we put out just before the RFID show, but they've got opportunities with Lockheed, with Boeing, lots of stuff there. But I think the biggest customer for InSync by far is going to be ORBCOMM, I think give us another quarter or two, but we're working on some pretty neat stuff that they're developing for us. And just typical to us, there is a couple of customers that are unidentified, because we're in the middle of getting through that development and it will be like us, I get it.

[Rajesh Ghai:]

Great. Thank you so much.

[Operator:]

And now we'll go to Mike Malouf of Craig-Hallum Capital Group.

[Mike Malouf:]

Great. Thanks, guys for taking my questions.

[Marc Eisenberg:]

Hey Mike.

[Mike Malouf:]

One of the things you sort of talked about quick was the core Corp Ten approval. I'm just wondering how do you see government sort of playing into your opportunity over the next couple years. And how important is this?

[Robert Costantini:]

So, I think one of the struggles that we've had with the government is, we didn't have a contract vehicle. So, we're always selling through third parties. When we did our deal with the GLA, it was something that the GLA kind of enforced that they required the fuel companies in Afghanistan to acquire, but the contract wasn't directly with GLA. So, in order to do that Government business, we need these contract vehicles and Corp Ten just gives us that opportunity. That one another example would be RFID-IV that we announced a couple of quarters ago and we're starting to ship our limited amounts of products on that deal as well. So, first you need the avenue to do the business and then you do the business. But the way these things work, there is no guarantee that they're going to do one unit, but you have the opportunity to do millions of dollars' worth of units. So, that's why it's so difficult to size. Now we've got a platform to go out there and sell in market this thing and hopefully we'll be successful.

[Mike Malouf:]

And then, with regards to the second batch of satellites coming out, I'm wondering, if you could just give us an updated color on regards to how you think that the new constellation will drive subscriber growth and ARPU, just sort of given the increased coverage and size of packets that you're able to transfer. Just some color on what you've done so far and whether that's changed at all as you look out over the next couple of years. Do you think we'll still get that acceleration? Thanks.

[Marc Eisenberg:]

So, I guess one way to kind of look forward is to take a step backward and look at the six satellites that were launched. And those six satellites have improved throughput just about 8%. So, once we launched and put them into service and then it took us another 90 days to kind of perfect the transmissions that were taking place over the satellites, but once that was all done, we were receiving 8% more messages than the day before. And that has resulted and you could see some of that creep its way into this quarter's service revenues. And there will be another small jump when the next batch launches as well, but the first launch was launching into a hole in the sky, and the second launch is kind of covering the rest of the sky whether it tends to be more service. The upside on the second launch, the big revenues are in developing new services, larger messages, indoor-outdoor coverage, those are really where the benefits are of the second launch because today you'd only be able to have those services eight hours a day. So, it's not really a usable service. So that's what's coming along with that second launch and there is -- we've sold that, probably over a 100 development kits. With people that are working on those applications, we think there's going to be some growth there. There's definitely demand for our larger messages. It's just not something that we've guided to improve significantly revenues in 2015; number one, we didn't know that they were going to launch, and number two, we needed to get that development under wraps. I think it's a big opportunity, I think it's just going to take a little time. The big I think the big change, which will come a little quicker in 2015 might be on the AIS side, where you go from -- visibility every 15 minutes for eight hours a day to visibility 24 hours, 15 minute intervals. And you can see AIS it's just kind of creeping up. It's really steady, it's like a 100,000, 150,000 a quarter, it's just kind of creeping up, and that could put a little acceleration into it when we do that second launch.

[Mike Malouf:]

Great. Thanks for all the comments.

[Marc Eisenberg:]

Great. Thanks Mike.

[Operator:]

And we'll move on to our next question comes from Howard Smith from First Analysis.

[HowardSmith:]

Yes, good morning. Congratulations to some good momentum to start the year.

[Marc Eisenberg:]

Thank you.

[Howard Smith:]

Question concerning Euroscan, in your prepared remarks, you mentioned the development of the -- kind of wireless drop in product, does that mean the real efforts to convert that installed base to subscription model starts now or has that been going on regularly for the past year, maybe you can just provide some color there?

[Marc Eisenberg:]

It was going on at a much higher cost of the products. So, it was a little painful that you were buying a product that was $500 to $1,000, and you are adding a module that was $500 to $1000. So, you're doubling up the price of the deployments and now with the drop in module, its closer to $100 to $200, and it's a whole lot less painful. So, it's really beginning now. So, it was available, but I don't know that it was as marketable as it is right now.

[Howard Smith:]

Okay. That makes sense. That's helpful. I don't know if you'll break it out quite this way, but the services revenue, you broke out how much FX headwind you had specifically on that? I know sometimes there's some one-time professional services just as you look at that business kind of the organic year-over-year normalized growth rate. Maybe you can give us some sense of what that looks like?

[Robert Costantini:]

Yes. So organically, that business grew what it has historically been growing with the core business not with the acquisition. So that was like mid to high single-digits. It was still sort of in that trajectory, there is a lot of pieces. Again, exiting out some of those professional services -- none, I want to say systematic components to our revenue business. So, that's kind of what we're still looking at. We'll see an inflection point as the new satellites come in, as AIS continues to develop and things like that.

[Marc Eisenberg:]

Answering in another way Howard, we did $24 million or just under $25 million of service and you might be interested in what SkyWave look like, and then you can kind of work it backwards. SkyWave true to form did exactly what we said they would do. We said it was 60 million in last year, and they did 50 million in the first quarter, it splits nearly evenly between service and hardware revenues. And then, on top of that InSync was predominantly busy during the quarter getting the deal closed and they ended up at just under half a million of service revenues and the rest is ORBCOMM growth.

[Howard Smith:]

Great. I appreciate the transparency and the color. Thanks so much.

[Marc Eisenberg:]

Got it.

[Operator:]

We'll move on to our next question, which will come from Chris Quilty of Raymond James.

[Chris Quilty:]

Hi gentlemen. Excuse me, if you addressed this, I got dropped on the call part way through, but did you provide any updated guidance on a full year basis?

[Marc Eisenberg:]

We affirmed our guidance and we gave pretty detailed guidance in the Q&A on Q2.

[Chris Quilty:]

Okay. And I'll circle back on the transcript on that, but given the strong start to the year and better than expected subs, what's you're feeling to emulate the fact that you achieved more cost reductions earlier on than expected. How are you feeling about moving maybe towards the upper end versus the middle part of the range or lower end?

[Marc Eisenberg:]

We're feeling pretty good, but we'll take another quarter to look at it.

[Chris Quilty:]

Okay. And the ARPUs we're a little bit lower on a blended basis than I expected. Is there some issue in there in terms of timing of subs coming on or mix shift that impacted the quarter?

[Marc Eisenberg:]

Well, we still have that denominator issue where we got a bunch of these guys reporting, but not -- it's still a pretty small percent. So when we said that 6,000 of the retail ones of the 17,000 shipped are reporting -- that's 6,000 as of this morning. So, a lot of those are in Q2, a lot of those installations. And the same thing with the Hub Group that is -- they're installing I think 100 to 150 last week. But they're going to get to 900 sometime in the third quarter on a weekly basis. So, it's ramping up, it's going to catch up.

[Chris Quilty:]

Got you. And you did indicate that you've taken more control of the installation process. Do we see that Robert impacting your cost of service in any way or where do those costs fall and are they significant?

[Robert Costantini:]

Yes, well we're starting right in the GAAP. So that--

[Marc Eisenberg:]

You'll see it in Q2. So, what you'll see is something in the service revenue line and then something in the cost of service line with pretty narrow margins. The upside for us wasn't to make a business of this, it was to get the things pad up and make sure that the installs were done properly.

[Chris Quilty:]

Okay. And just to be clear, I mean you're not hiring a bunch of handymen to put on payroll staff, you're just managing outside organizations?

[Marc Eisenberg:]

We're hiring five handymen, and we're managing a group of 30 guys that are outside contractors. And as we look back, when we made that decision of putting on our own install team. There's always a project, always. And with this transportation OEM that we're kind of hinting at there will be a full-time job for them even after Hub. But Hub is going to keep us pretty busy for the next year.

[Chris Quilty:]

Got you. And then switching over to the SkyWave business, I know you've got a big initiative around spending for new silicon and working on modem costs and what not, can you give us an update on where you stand there?

[Marc Eisenberg:]

Yes. So, jumping on the cost side and I'll just give you from a technical perspective there's a couple of things going on here. First is we're moving production of the IDP modems, which is a good part of their current deployments, they still have legacy IsatM2M business, but we're going to move that to Mexico and on the ORBCOMM front, we're kind of deciding between Flextronics in South Carolina and Mexico what we do there as well. But that will move in some time in Q3, best case beginning at Q3, worst case the end of Q3, and then there's this RFIC that we're building, an integrated circuit. Its two years that they've already been working on this. So, they're getting the first pin of that chip and if it's successful, we'll be installing those in 2016. And there's over 200 components that will be taken down to one integrated circuit. So, that's going to be, I think impactful is an understatement. But we're going to take between these two efforts; we might be taking 60% of the cost out of their products.

[Chris Quilty:]

And also the size of the modem and is that an issue for any of your potential customers?

[Marc Eisenberg:]

Sure. So, the size is going to go from four inches by four inches by inch and a half to two inches by two inches by one-inch, it's going to look like a GPS patch.

[Robert Costantini:]

It's going to be great for our customers, not so for our competitors. On the cost side, as Marc pointed out, a lot of this is already behind us. Investments have been made; there is cash flow component -- probably some $1 million for the rest of the year, just to get through these final phases, not going to be significantly impacting cash flow.

[Marc Eisenberg:]

And Chris, just one more point on that. I don't think I was clear. That two-inches by two-inches by one-inch that is an integrated modem with an antenna built in all-in-one. The modem only -- if that's where I was kind of leading you is two-thirds of the size of a credit card and it's a couple of millimeters high.

[Chris Quilty:]

Great. And Robert on hardware margins, I mean they were good here in the quarter after being squeezed a little bit in Q4. Are we still on track for one and about 25 points for the balance of the year? Are there any big customer shipments that might impact it?

[Robert Costantini:]

No, I mean -- when I said we were reverting back that's -- those are in our target ranges. So, that's where we expect it today that's still good to go -- 25--.

[Chris Quilty:]

Great. Thank you very much.

[Operator:]

And now we'll go next to Jim McIlree from Chardan Capital.

[Marc Eisenberg:]

Good morning Jim.

[Jim McIlree:]

Thank you, and good morning. Hey, good morning. Can you talk about the pace of the product revenues for the rest of the year? Is it going to be generally upwards from this say 18.5 million or do you have a big quarter in Q2 or Q3 and then it drops down again?

[Marc Eisenberg:]

It's a great question because it was -- my fear coming into the year because we have this retail customer that was coming in and we shipped an awful lot of that in January leading to a big Q1 in hardware revenues. And just amazing that transportation business has picked up where not only are we going to be able to keep up in Q2, but we're going to surpass it in Q2. So, we're pretty comfortable in that range where you guys are in that 44 to 45 range. So, we think it's going up. And then there might be another lift in Q3. So, that's what gets us to the mid or high point of the range and that's the goal.

[Jim McIlree:]

Okay, great. And Robert, it sounds like the acquisition and integration costs in Q2 are going be somewhere around a $1 million, is that close enough?

[Robert Costantini:]

I target between a 1 million and a 1.5 million.

[Jim McIlree:]

Okay. And then it drops down to nothing or drops down to a couple of hundred K per quarter?

[Robert Costantini:]

Yes, there's always valuation work that has to be done, pieces that you're going to pursue, plus now we have the integration piece. But, yes generally speaking that's correct. You could tell it off in Q3, down to couple of hundred thousand.

[Jim McIlree:]

Great. And then there was a question earlier in the call talking about the SG&A for the year? I thought you said something less than 50 million. Did I hear that correct?

[Robert Costantini:]

Yes. Yes, you did.

[Jim McIlree:]

Okay. And then prior to that there was something about 5 million to 6 million, was that referring to product development costs?

[Robert Costantini:]

No that was like, we were talking about capturing synergies and exiting the year on a 5% run rate. So, when we talked about our new initiatives--

[Jim McIlree:]

Okay. Right. And so how much of those synergies have been captured to date? If you exit 5 million to 6 million, what did you exit in Q1?

[Marc Eisenberg:]

Pretty close to 5.

[Robert Costantini:]

Yes. I mean we exited, yes--

[Marc Eisenberg:]

It was 4% and the 9% reduction in force, and then the towards the end we are -- in the model for the year, there is a reduction in marketing and some other stuff it's pretty close.

[Robert Costantini:]

So, our initiative is going to not capture 2 million in this year, but we wanted to be systemic enough that it'll be in part of our going forward cost reduction.

[Jim McIlree:]

Okay, great. So, the SG&A costs for the rest of the year just going to be kind of the natural growth in the business and inflation adjustments, things like that. Is that correct?

[Marc Eisenberg:]

Yes.

[Jim McIlree:]

Okay, fantastic. Thank you very much.

[Marc Eisenberg:]

Thanks.

[Operator:]

And now we'll take a question from Daniel Amir of Ladenburg.

[Daniel Amir:]

Yes, thanks for taking my call. So a question here with regards to the reiterating of the guidance here for the year, what's the moving parts kind of do see whether it will be towards the high end or towards the low end? You commented a bit on the transportation business doing clearly better than you expected. Some of the subscriber growth here, but just trying to better understand, kind of where the end markets that we should be looking at that could surprise or not?

[Marc Eisenberg:]

It's 100% based on the timing of hardware shipments.

[Daniel Amir:]

So, in terms of -- so it's not necessarily, we're looking at certain customers and certain industries?

[Marc Eisenberg:]

No, there's a lot of demand, and there's probably a 100 different deals that we're looking at. And I'm sure; we're going to close a bunch of them. And it's just a timing of getting them close and getting the hardware shipped. That's it.

[Daniel Amir:]

And then, there was -- the follow-up there, has your visibility your business changed in the last 90 days in terms of your overall outlook here into the next 90 to 120 days?

[Marc Eisenberg:]

The first quarter in terms of our internal plan was right smack down in the middle of the fairway. I wouldn't say it was 20% high and I wouldn't say it was a penny low. We did exactly what the model said we would do and the visibilities is incredibly consistent. I know there's a lot of guys talking about ForEx out there, we modeled that pretty well in Q1 and we're just affirming. And we'll take another quarter to look at it. Hopefully we're rising northward not southward.

[Daniel Amir:]

Hey, great. Thanks. Congratulations on the good quarter. Thanks.

[Marc Eisenberg:]

Thanks Dan.

[Operator:]

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

[Mike Latimore:]

Great, thanks a lot. You've given a lot of good sort of guidance details. I just have one more question on service gross margin. What are you generally thinking about there? You had good service gross margins in the quarter, but I guess, kind of for the year, what are you thinking about on service gross margins?

[Robert Costantini:]

Yes, I would say you could model that consistently throughout the rest of the year. So, whatever we're saying, it's going to be in the high 50% range, came in exactly that. I wouldn't go up to 70% at this point, but if you can model just as we came in this quarter.

[Mike Latimore:]

And then on the -- you mentioned that you might be able talk about your transportation OEM next quarter, I guess is that -- if so, would that put us on track for fourth quarter launch early?

[Marc Eisenberg:]

Yes, there's -- this is one that we've quietly put a whole lot of effort and there's tens of guys working on that in the building. This is -- I hate to go and pump it up as it's a big deal, because it's easy to say that when you can't tell the customer's name. But it feels like a big deal.

[Mike Latimore:]

Great. And then just another one, rest of the LBX, what sort of general size range might that be in?

[Robert Costantini:]

So LBX, they are going to the name Link-Belt. So, you may not have heard of LBX, but if you see the red excavators in the side of the road, it's Link-Belt. And Link-Belt is related to Sumitomo and Link-Belt is going to start out right around 1,000 subscribers a year. So, net 100 a month range and we keep growing with Sumitomo as well. It’s a good deal. Just kind of affirms that we're the first choice for every heavy equipment OEM out there.

[Mike Latimore:]

Got it. And just to clarify one thing you said earlier, did you say that service revenue second quarter and kind of roughly 25 million, is that where you're in today?

[Marc Eisenberg:]

Yes.

[Mike Latimore:]

Okay, great. Thank you.

[Operator:]

And now we will go to Jeff Rudner with UBS.

[Jeffrey Rudner:]

Good morning.

[Marc Eisenberg:]

Hi, Jeff. Good morning.

[Jeffrey Rudner:]

Good morning, Marc, good morning Robert and congratulations on a very, very nice quarter.

[Marc Eisenberg:]

Thank you.

[Jeffrey Rudner:]

I'd like to get back to the launch of the remaining 11 OG2 satellites. You said in your prepared remarks that the three remaining satellites are prepared to be finished by Sierra Nevada in the next few weeks.

[Marc Eisenberg:]

Yes.

[Jeffrey Rudner:]

But still we have to wait for the launch window from SpaceX and you anticipate that being somewhere near the end of August?

[Marc Eisenberg:]

Well, let me walk you through that right.

[Jeffrey Rudner:]

Sure. Thank you.

[Marc Eisenberg:]

So there's two more launches of the current rocket, and one of them is in just a couple of weeks, and then there is one more and then that's followed by ISCS, which is the first of the generation rocket that we're launching on. Funny thing is that the two that are coming up, we don't watch them at all, we're really focused on this SES launch. That SES launch is scheduled to launch in the middle of July, and assuming that they hit that date in July, SpaceX launch is every three weeks and we're the first or second launch. That's how we get to the August timeframe for the opening of that window. The -- if it were to go to the end of September towards the tailwinds of that window; that would be a result of some tweaking or something they need to do, post that SES launch.

[Jeffrey Rudner:]

Okay. Thank you very much.

[Marc Eisenberg:]

Sure.

[Operator:]

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

[Marc Eisenberg:]

Thank you for joining us on our Q1 call. We're very pleased with the fast start to 2015 and look forward to an exciting latter half of the year as we prepare for our second OG2 launch, the next phase of deployment and the new opportunities that are leveraging the synergies and breadth of our combined offerings. We're gaining significant traction in the marketplace and our pipeline is progressing nicely. Thank you again for participating on our earnings call. And we look forward to speaking to you again next quarter.

[Operator:]

And with that, ladies and gentlemen, that does conclude today's call. We'd like to thank you for your participation.