ORBCOMM Inc.
Q2 2015 Earnings Call Transcript

Published: 6 Aug 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to ORBCOMM's Second 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. We have got a lot to cover in this morning's call. In terms of an agenda we will start with the financial highlights, give you a feel for some of the recent trends in the business and share details on some pretty exciting recent wins, from there we will transition to the network, it's been an active quarter, in respect to the status of our OG2 satellites and launch plan and lastly we are drill in on the Q2 financials and take questions. So let's get started. Earlier this morning, we issued a press release announcing financial results for the second quarter ended June 30, 2015. Keep in mind these financials include a full quarter of acquisitions of SkyWave and InSync affecting the comps across all aspects of the business as well as a satellite being written down that lost contact. I will try to give you a feel for the financials, both with and without these items. The highlights of Q2 include record high revenues of 44.9 million and 85% increase over last year and adjusted EBITDA of $10.3 million or 102% increase over last year. Breaking this down further, service revenues increased year-over-year by 61% to 24 million and product sales increased to 122% to 20.9 million. Although the comparisons benefitted from the acquired businesses, the company's revenues grew organically by 20%. The strengthening dollar had a negative impact on revenues as weakness in both, euro and yen, reduced total revenues by $900,000 in the quarter versus the prior year. We reported a net loss of 12.2 million for the second quarter compared to a profit of $1.4 million in the same period last year. It's a difficult comparison, the loss in Q2 was driven by onetime costs from the write off, and acquisition related costs and higher depreciation where there would have been a significant improvement year-over-year. Our subscriber count grew in the quarter by 35,000 net subscriber communicators are subs, ending the quarter at just under $1.3 million. While Q2 was a strong quarter, surpassing analysts' consensus in both revenue and adjusted EBITDA, as we dissect the business, we can clearly see some offsetting trends. Strong new product introductions as well as large deployments from key customers lead to unprecedented growth in our transportation business which shipped nearly double the devices year-to-date over last year. AIS continue to show solid quarterly growth as well. Overall we're pursuing more opportunities across our business on more deals than any time in our history. Offsetting this as a difficult international environment, specifically in South America where resellers were building U.S. dollar, struggle with changes in currency and are limiting their satellite transmissions to manage these cost increases. In addition the exchange rates; on the roughly 15% of our business conducted in foreign currency makes our subsidiaries in Europe and Japan which are performing well look flat. These international trends weighed on service revenues which we would have liked to have been higher, we are however, encouraged by a large number of previous hardware shipments that were able to be installed towards the end of the quarter leaving June and July to be closer to a $25 million quarterly service revenue run rate rather than the $24 million achieved in the second quarter. We are focused on taking cost out of the business as we continue to make significant reductions in spendings specifically across professional fees and the rest of our operating structure. If I have to characterize the business trends in a sentence or two, I would say the topline is taking two steps forward and one step backward and we’re making great progress and taking cost out of the business leading to improving results. Overall the momentum feels pretty good. Focusing in on select business units; starting with the solutions business, we saw unprecedented growth in revenue for North American transportation business this quarter with hardware shipments up over a 100% versus last year. This is the third consecutive quarter of record setting sales for this segment of the business. The key driver in Q2 was Hub group, we shipped Hub approximately 5000 devices this quarter and they started factory installs in Asia. This project involves retrofits for fielded containers as well as factory installs on new containers. We’ve shipped just over half of the anticipated 28,000 devices needed to cover Hub's current fleet; they have installed about half of the total inventory that shipped to-date or over 7,000 containers. In addition our major retail customer has we installed about 60% of the shipped inventory totaling more than 10,000 units and with installations moving at a good pace we're on target to be nearly fully deployed by the end of 2015. We've received significant renewal orders from some of our key refrigerated transportation customers including some of the largest companies in North America, such as Prime, Marten Transport, KLLM. Many of our long term customers are now expanding their relationship with ORBCOMM to include new categories of assets. As of our last customer survey, over 90% of our customers have assets within their fleet other than Cold Chain, such dry vans, containers, rail or chassis. These new transportation opportunities highlight our ability to leverage the synergies in scale, we built by combining strategic acquisitions and internally develop products that create an industry power house with the most diverse and broad portfolio devices, web platforms and connectivity options. We’re now able to utilize or expand our capabilities to enhance the solutions that some of our long standing customers are using further in trenching us in their business and enabling us to continue to drive growth for new asset classes. A great example of how this strategy is showing results can be seen with the recent win with the transportation OEM we mentioned last quarter. While they still have not formally announced the product allowing us to use their name, we can say it's one of our largest OEMs for refrigeration globally. This OEM platform will provide their customers with a full suite of products and services including a new version of telematics hardware and sensors and connectivity. It will also help their customers minimize product loss and protect integrity throughout the coaching cycle, I given them remote commands to control other assets, while mitigating the risk associated with the temperature sensitive product distribution such as staff, diversion, chain-of-custody as well as allowing them to be complaint with the upcoming Food Safety Modernization Act. This OEM will initially deploy in North America with Europe, the Middle East, Africa and Asia to follow and will be available as a factory installation. This is an exciting win for us. Well what come has long been the network choice for the world's largest heavy equipment OEMs. We’re excited to be able to further solidify our leadership by expanding our OEM customer portfolio into transportation. As I said earlier, it’s clear to me, how this synergies from several of our strategic acquisitions are making an impact. From Star Track's expertise in North American refrigerated trailer and rail monitoring to Euroscan's vast expertise in temperature compliance and established infrastructure in Europe, is a part of LMS's engineering capabilities, to American success with data recorders used for food safety compliance in the U.S., to anything web-based resources in innovative RFID based temperature monitoring solutions, to SkyWave’s experience on-board ships' long range connectivity, nearly every aspect of ORBCOMM will touch this project in one way or another. Again this is a highly significant example of how ORBCOMM is working as a well integrated company across the business. Turning to AIS revenue; in Q2 grew to 1.3 million and we are now tracking a record number of approximately 150,000 unique vessels around the world daily. We continue to expand our AIS business, which includes new customers, additional service offerings through our partners. We’re pleased to announce that our partner Oceaneering's PortVision service was chosen as the winner for the category of best satellite AIS solution by government security news. This is a strong testament of the quality and reliability ORBCOMM AIS data supporting a partner's solution. Product innovation is another key contributor to our success. There are several new products in the pipeline and they’re generating a number of business opportunities. One of these ORBCOMM Connect, a powerful subscriber and device management portal the ORBCOMM is in the process of releasing. Initially the portal will feature seven terrestrial and brief satellite networks, all accessible to ORBCOMM’s customers with just a single connection that's simplifying the process of enabling wireless capability across the broad range of solutions. Once the customer is up and running, the portal will ask customers to provision their units, select between single and dual mode options, set alerts and limits to prevent data overages and greatly simplify billing. This platform is opening up some interesting new opportunities. A great example is Enterprise Connect a set of solutions supporting customers looking to add wireless fail-over backup and management to existing networks. We showcase this solution at Cisco's partner conference in June, initially available for Cisco devices in using the Verizon 4G LTE network Enterprise Connect delivers wireless backup through existing wired network ensuring business continuity for customers big and small across many new industries including retail stores, financial institutions and restaurants. This new turnkey offering leverages Cisco's hardware with Verizon network and ORBCOMM software and connectivity expertise including insyncs, technological capabilities in developing web based solutions to enable the managements of IOT deployments. The new product line will be available to the market through the Verizon and Cisco's sales channel as well as through the ORBCOMM e-commerce site that we are launching this quarter. We will be introducing this product among others at the CTIS show in Las Vegas in September. This is an example of how ORBCOMM connect expands the breadth and depth of our solutions portfolio, opening up a host of new market opportunities and giving us strong traction as a leading MVNO in the global M2M and IOT markets. We have been working on extending ORBCOMM solutions to include advanced smartphone applications. We have created a series of robust mobile applications for both Apple and Android devices that are the compliment to our web based supporting application as well as our ORBCOMM connect portal. These apps will facilitate ubiquitous easy access to ORBCOMM solutions and technology. It's like ORBCOMM on the go. The first of these mobile apps to be released will support our Cold Chain Monitoring Solutions scheduled for the CTI show in September with others to follow later in the year. All of our mobile apps will be available through the Apple Store and Google Play. This is an exciting next step in further positioning ORBCOMM as a leader in M2M. We achieved significant milestone in our collaboration with Inmarsat, the largest satellite company in the MFS industry. First the OGI set modem has received authorization to engage customers begin testing and product integration on the Inmarsat Global L-band satellite network. As a reminder this modem has the same footprint iO programming and power environment as the OG2 modem allowing customers the opportunity to chose the appropriate network with one development cycle and one stream of data through ORBCOMM connect. In conjunction with our modem development effort, we are making progress on our radio frequency, integrated circuit or RFIC which is a custom chip that allows us to reduce the surface area across all i-Sat enabled products by more than 60% as well as being able to cut costs materially. This innovation is a game changer in bringing the lowest cost to satellite modems to the global M2M market in a footprint not significantly different to cellular. We’re continuing to execute on our cost savings plan including several margin improvement initiatives that will increase profitability while lowering price points to increase the elasticity among our products. As we mentioned last quarter removing the bulk of our SkyWave IDP product manufacturing to tier 1 facility to Mexico, which is expected to result in significant savings, while adding operational efficiencies. We are on target to begin production in late Q3 and we anticipate the bulk of the product to be transitioned by Q1 2016. Long term we anticipate additional benefits by consolidating our Supply Chain team and increasing our purchasing volumes across all ORBCOMM product lines. It's been a busy quarter for OG2 program. We just crossed the one year anniversary of our OG2 mission 1 launch in July 14' unfortunately, we recently loss communication with one of the OG2 satellite L1. ORBCOMM Sierra Nevada Corporation and Boeing are continuing to perform recovery efforts, but we thought it prudent to write this spacecraft down at this time. Despite the current status of this satellite, the other five OG2 satellites continue to perform and are receiving the incremental messages. Prior to losing communication, L1 experienced a couple of short outages. Since this problem has not being exhibited on any of the other OG2 satellites, we believe the loss of communication is likely a workmanship or piece part issues specific to this one satellite. We have not seen a degradation and latency for any material impact on our network service. We do not anticipate any impact on revenue. Looking back at our OG1 constellation 35 spacecraft were launched and five died on infancy between zero and three years. Once they pass three years, all remaining satellite lived to 10 years, and 24 are still in the network today. Overall we continue to see improvements in our networks performance. Our engineering team is dedicated to further enhancing these services available from our OG2 spacecraft and we’ve made some recent updates that are taking our network to a higher level of efficiency and reliability. The first improvement is adding the ability to utilize multiple downlinks on the OG2 satellites, increasing the overall system capacity of the network and allowing our customers to send more messages. The second improvement enables our customers to utilize our autonomous message store and forward capabilities, which simplifies modern development and programming for customers and region that are not covered by gateway or stations. We will continue to make additional improvements including higher jitter rates and improved link margin services, which will enable our customers to send larger messages and utilize smaller incentives. Moving on to our second and final OG2 missions here in Nevada corporation has completed factory acceptance testing on all of the remaining 11 OG2 satellites. Ending final close out, the satellites will be placed and secure storage and preparation for launch at the Cape. As you may have heard on June 28th, SpaceX experienced the launch mishap of its Falcon 9 Rocket, which was bringing supplies to the International Space Station. SpaceX believe they found the root cause and is confident that they will complete the investigation and make the necessary repairs, so they can begin launching again. They've recently stated that they anticipates all scheduled 2015 launches still go by the end of the year and our new launch target for our second OG2 mission could be as early as mid-November 2015. As we mentioned last quarter, SpaceX is undergoing and upgrade to the Falcon 9 Rocket. Once SpaceX completes the maiden launch of the new full thrust Falcon 9, we expect to be one of the next two launches. This quarter we received the number of prestigious industry awards recognizing our technological innovation and leadership. ORBCOMM received two IoT Evolution Product of The Year Awards; two, Connected World magazine’s inaugural 2015 IoT Awards and was recognized by the 2015 American Business Awards with two silver CDs for the most innovative company of the year as well as the communications team of the year. I’d like to comment the ORBCOMM team for continuing to drive innovation and excellence in M2M and IoT technology as well as for promoting the ORBCOMM brand globally. Summing up, while there is clearly a lot going on, the company has been focused on execution. We’re steadily making progress on significant programs like Hub our major retailer, Doosan; and now we can add our new transportation OEM and Cisco to the mix. Looking forward as we’ve seen the business performing as expected we see no reason at this point to change our annual guidance of a 174 million to 194 million in revenues and 40 million to 45 million in adjusted EBITDA. For Q3, we’re projecting hardware revenues to be similar to Q2 and we expect to see a rise in service revenues leading to a corresponding increase in adjusted EBITDA. With that, I’d like to turn the call over to Robert to take you through the financials.

[Robert Costantini:]

Thank you, Marc. Good morning everyone. Overall in the second quarter of 2015, our underlying business is performing well and highlighted by another record high revenue quarter 44.9 million, which contributed to strong adjusted EBITDA of 10.3 million. We’re seeing sustained momentum in organic revenue growth notably strong product shipments on existing and new orders and new revenue opportunities for AIS. Profitability as measured by adjusted EBITDA in Q2 2015 was 10.3 million increasing a 102%, compared to 5.1 million in last year’s second quarter advancing on higher revenues, several cost reduction initiatives and synergies from acquisition. Adjusted EBITDA for the first half of 2015 was 19.4 million increasing 121% compared to 8.8 million in 2014. Our non-cash impairment loss of 12 million which recorded in Q2 for the non-communicating satellites, otherwise accompanying with the reporting net income in Q2, swaying in from the net loss in Q1. Net income ex-item, which is a non-GAAP measure, was 1.6 million in Q2 this year or $0.02 per share on a non-GAAP basis when adjusting for the non-cash impairment loss and acquisition related and integration cost. Total revenues were a record 44.9 million increasing 85% over the second quarter of last year with organic growth 20%. Service revenues in the second quarter of 2015 increased 61% or 9.1 million over the prior year quarter to a record 24 million. Organic service revenue growth was 5%. Product sales increased 122% growing 11.5 million and 20.9 million over the same period last year, also a record. Organic product sales growth was 43%. Service revenues now comprise 53% and product sales 47% of total revenues. Net subscriber additions were 35,000 for the quarter. Our subscriber base is now just under 1.3 million. Our Q2 net subscriber adds are at a run rate of over 140,000 net new subscriber annually. Since the vast majority revenues are denominated in U.S. dollars, foreign exchange rate fluctuations had had a modest impact on lowering our reported revenues thus far in 2015. On a constant currency basis for the second quarter and full year, our revenue growth is slightly compressed due to foreign currency exchange rate headwinds from the yen and euro versus the U.S. dollar. Total revenue growth for the quarter would have been 88% and adjusted EBITDA growth 105% or higher than reported by about 3 percentages point. On the cost side we are benefiting from the strong U.S. dollar helping out with reported costs associated with significant operations in Canada as well as in Europe, helping profitability on a comparative basis. However, strengthening U.S. dollar will add pricing pressure in international markets such as Brazil with the value of the Brazilian Real is impacting foreign business demand. We are working with our customers in these international markets; however, we can to overcome this burden. Gross profit in second quarter 21.8 million increased by 8.7 million or 66% due to the increases in both service revenues and product sales. Service gross margins for the quarter was 65% lower than the prior period of 69% primarily due to equipment refurbishment in one gateway workstation and the one year in-orbit satellite insurance expense. Product gross margins were 29% higher than our typical 25%. Operating expenses for the underlying business were higher than the prior year period due to expenses from the company’s acquired; higher depreciation and amortization from the OG2 satellite launch last year and acquired intangible assets. Higher acquisition related and integration costs were step by lower operating expenses in the quarter by over 1 million from combined cost synergies. Additionally; second quarter operating expenses included impairment loss of 12.7 million related to the OG2 satellite that loss communication which under GAAP standards require a charge fee recorded. The loss for this one satellite was not expected that have a material adverse effect on communication services or revenues. Under the terms of our in-orbit insurance program, this satellite would have been the first of our three satellites deductable across launch one and two. We are also paying the new one year in-orbit policy extending coverage of the 2016 for the remaining five in-orbit OG2 satellite with the one satellite deductable. There are now two separate in-orbit insurance programs covering the OG2 satellite constellation. Acquisition related and integration costs were 1.1 million in the second quarter this year, compared to 0.2 million last year. As mentioned on our call, acquisition related and integration costs included the non-cash amortization costs of SkyWave’s legacy employee retention plan, which was fully funded by SkyWave’s selling shareholders and was a prepared asset on our balance sheet. Accounting rules required a portion of this retention plan to be captured as additional employee service costs in the first half of the year and this amortization is now completed. The retention bonus amortization is approximately 600,000 for the second quarter and 1.2 million for the six months period. Also in acquisition related and integration costs were professional fees amounting to about a 100,000 with the balance made up costs for integration activities. We expect acquisition related and integration costs will taper out significantly in Q3 to include only long-term integration projects such as integrating systems like standardizing our CRM and desktop software packages. Depreciation and amortization increased by 4.5 million in the second quarter to 6.6 million. Of the increased about 2.1 million is due to additional depreciation for the OG2 satellite and 1.8 million of amortization for acquired intangible assets. Q2 2015 adjusted EBITDA of 10.3 million grew 102% or 5.2 million over the prior year period and once again a record high for the company when will look at the operational components. Growth in adjusted EBITDA was driven by increases in service revenues and product sales, cost synergies from the acquisitions and employing cost control initiatives. Adjusted EBITDA margin of 23% improved almost 200 basis points over the prior period of 21%. Our scale improves our operating leverage and purchasing power, which we expect to translate into contiguous margin expansion throughout the year. GAAP net loss in Q2 2015 was 12.2 million or loss of $0.17 per share compared to net income of 1.4 million in the prior year period or $0.03 per share. The satellite impairment charge of 12.7 million created the GAAP net loss in Q2. In Q2 this year, the impact of acquisition related cost was $0.02 per share compared to zero cents per share in 2014. The impact in Q2 interest expense is also $0.02 per share this year compared to zero cents per share last year. Net income ex-items, which is a non-GAAP, measures 1.6 million in Q2 this year or a $0.02 per share on a non-GAAP basis, when adjusting for the non-cash impairment loss and acquisition related in integration cost. Looking at the balance sheet cash, cash equivalents and restricted cash is about 56 million at June 30, 2015 compared to 82 million at March 31, 2015 decreasing 16 million. Cash decreased primarily to the capital expenditures of 19 million most of it related to milestone payments for the OG2 program offset by cash provided from operations of 3 million. Our total debt outstanding at June 30, 2015 is a 151 million with an undrawn $10 million revolver. ORBCOMM continues to be fully funded with a good profit for the remaining OG2 launch campaign. As Marc mentioned earlier on the call, we’re now targeting the launch being closer to November. As a result, we expect to incur significant capital expenditures in Q3 including milestone payments for the 11 satellites, of about 25 million, and over 16 million to our satellite insurance providers required for the final launch. We expect to start generating meaningful free cash flow when the final launches done, after which the company will embark on a decade long satellite CapEx holiday. The initiative we announced last quarter to save an additional 2 million in annual cost savings in 2015 is making significant strive towards achieving this target; including rationalizing our professional services fees, streamlining our telecom services and providers, and leveraging new technology to reduce travel expenses, we expect to capture the full 2 million in savings this year. Our guidance for 2015, are revenues of 174 to 194 million and adjusted EBITDA of 40 to 45 million. Based on Q2 results coming in as expected and current visibility into Q3, we are once again reaffirming this guidance for 2015. Wrapping up all the pieces seem to becoming together as evidenced by our strong Q2 financial results, our revenues are growing robustly through both organic growth and from acquisition, cost synergies are contributing significantly to the bottomline and our adjusted EBITDA margins are improving. We hope you are as excited about our prospects as we are. So this concludes our remarks for today and at this point we would be happy to take your questions.

[Operator:]

[Operator Instructions] We will take our first question from Chris Quilty with Raymond James.

[Chris Quilty:]

Thanks gentlemen. Just wanted to touch these on the OG2 failure and additionally I think Robert you mentioned, you took out a new insurance policy on our remaining five satellites and has that those incremental costs factored into your current guidance?

[Robert Costantini:]

Yes.

[Chris Quilty:]

Okay. And with regards to the anomaly, how soon would those issues start showing up. And are there any additional checks that you will end up doing on the 11 that are still on the ground?

[Marc Eisenberg:]

This particular satellite experienced a couple of resets. And there were a couple of outages. They were mostly recent. And we came to the conclusion on this satellite just like a week ago. So we are kind of working our way through it and I think the best news on that one is most likely a component issue and it is related to this satellite. And we do not believe there anything systemic on our new space craft. It is pretty similar to OG1 where the first satellite was lost in the first seven months. As you know Chris, these particular space crafts, while they are solid space craft they do not have the redundancy like a geo where you are putting $400 million or something into one space craft, the way we get our reliability is putting up lots of space craft. And that's what we have done here. So the statistics are kind of following similarly to most leo networks and well we do not certainly do not like to lose satellites, we do not see any real difference in the overall network performance and we are not anticipating any change in revenues.

[Chris Quilty:]

And the change in any way your deployment of where the next patch satellites will go?

[Marc Eisenberg:]

No. A1 has already been shifted to another plane. So we’re going to launch the other 11 exactly 180, I should say 90 degrees off from where the last launch was and then start drifting.

[Chris Quilty:]

Okay. Robert, did you mentioned and expected flat Q3 hardware revenues I missed what you said?

[Robert Costantini:]

Yes, actually Marc had mentioned that. So they should be a hardware revenues should be up not dramatically.

[Marc Eisenberg:]

But yes quarter-over-quarter?

[Robert Costantini:]

Yes.

[Marc Eisenberg:]

So the hardware revenues, the segment hardware revenues is with Hub and the big retail customer. They can kind of fall from quarter-to-quarter and it doesn’t long-term really make a difference. But we’re kind of seeing right now is hardware is going to be similar Q3 to Q2 maybe could be up a little bit, maybe could be down a little bit, but very-very similar. And service revenues have already trending well up over Q2. Q2 in terms of service revenues was funny where we were doing actually something like $600,000 more at the end of the quarter than we were at the beginning of the quarter on a monthly run rate. So we could see the momentum building there and we’re anticipating higher service revenues in Q3.

[Chris Quilty:]

And can you give us an update on the deal pipeline in terms of I think you have mentioned significant number of new potential OEMs in the pipeline both in terms of scale and timing of when you might close some of these deals?

[Marc Eisenberg:]

Some of these deals Chris we closed all the time. In order to due $21 million in hardware when a couple of years ago, you were doing almost nothing. I’m looking in a chart in front of me. In Q3 of 2013, the company shift under 7,000 devices and in Q2 2015, we shift 46,000. So deals are closing all the time, but there is some big ones out there. In terms of what we’ve already closed, this new OEM could be really substantial, should be in a couple of years the biggest customer that we have this Cisco opportunity could be a huge deal. And then in terms of new deals stop that we’re working on in the bids are out there, there is anything from five units to some of them go is big as 150,000.

[Chris Quilty:]

And with the new OEM win. What factor or factors do you think led to your win and was this a competitively option the deal or was it more of a direct placement?

[Marc Eisenberg:]

So it was definitely an option deal and what you had was the disadvantage ORBCOMM has as we were smaller than some of the other betters out there. But the advantage we had was AV history of being so prevalence in this refrigeration business and then they also wanted to grow to drive and containers and all the different things and we’ve done so much work there. But when you typically go out in these bids, you beat again to this huge integrators that are adding a lot of costs and really what you’re looking at this [indiscernible] type of thing what you’re buying connectivity from this guy and hardware from that guy and you’re buying your portal service from another guy and because or come those everything internally your costs on these units in some cases it’s something like 15% of what’s your competitors are, because we’re doing everything internally. So we were able to hit the reliability numbers, we’re able to hit price point sound like these guys is ever seen before and yet we could be extremely profitable those numbers. I’d say that’s really what set is off and then when you look at the new work come compared to where we were a couple of years ago. We really do a lot of business in Europe, how can you support us in Europe. Like we’ve got 65 employees in Europe and most of them are engineers and we’ve got customer service, but speak all the languages and we’re just a perfect fit for you. What you got in the U.S., what you got in South America. We build out our platform, what we can really do a good job supporting these global deployments.

[Chris Quilty:]

And final question among the anticipated new business. How is that breaking out in solutions versus network services and likewise satellite versus [indiscernible]?

[Marc Eisenberg:]

Okay. A lot of comps there. So the solutions business is as grown to be North of 50% of our total deployments and I think the good news there is when the installations catch up it’s going to leads for lot more service revenues and we’re in a little bit more control than we have been. A good portion of our growth in the thousands of units is the SkyWave business and we think the SkyWave business will continue to grow as we got them into our OEM portfolio, we’re starting to be able to do that. AIS is kind of segregated, you get a good feel for what that is. I would say so far or satellite business is like a good slow growth business, between 5% and 10% until all the spacecraft get up there. When the solutions business from a hardware perspective give it’s up a 100% year-over-year and the service revenues are starting to catch up now. I mean it was really strong towards the second half of Q2.

[Operator:]

We’ll take our next question from Mike Walkley with Canaccord Genuity.

[Mike Walkley:]

Great thanks congratulations on the strong results. Just getting over on some of Chris’ question if you look at the hardware shipments into the back half for the year, it sounds like Hub group in your larger retail customer were driving the first half are they the same customers driving the second half for their new customers that are driving, continue to high levels of hardware shipments?

[Marc Eisenberg:]

Hub was a big number in Q3 and it was 5000 out of 46,000 shipments. So it’s big, but it’s not like overbearingly big. But we need to continue to ship our Hub until 14,000 were units are shipped. So you’ve got that the retail customer, maybe there is few thousand more but the rest of the business is really the rest of the business, so in terms of like our business as you look customer by customer by customer, if you go back a few years, we have customers that were 15%, 20%, 25% of our business, I think on a run-rate now, you are going to struggle to get to anyone at 7% of our business.

[Mike Walkley:]

Okay. Thanks and Marc I know you’ve been building on your installation team as in customers any update on any other paces installations and how this couldn’t impact your ARPU trend in the second half for the year?

[Marc Eisenberg:]

Yes, like I said, service revenues are clearly seem to be on the rise, is the trend that we’re seeing, I don’t know if you caught in my script there, but we said June was a whole lot better than April, the trend was higher and July was even better than June, kind of kicking off Q3. So installs are going at a good rate, I think we actually gave you the exact number. So in terms of Hub, you are at about 7 out the 28,000 units or 7 out of about 14,000 that were already shipped that have been installed in generating revenue. So we got lot to go, in terms of the 18,000 units that were shipped to that retail customer, 10 of the 18,000 were shipped, but in Q2, you didn’t get a full flavor of that because most of the installs were done in the quarter, leading to like I said, June being better than April.

[Operator:]

We will take our next question from Rajesh Ghai with Macquarie.

[Rajesh Ghai:]

Yes, thanks. So Marc you had a very strong quarter in terms of uses, but as I do the math ARPU ticked down a little bit, and more functional fact that the mix you had more or low ORBCOMM customers versus pricate or the more coming coming onboard in services?

[Marc Eisenberg:]

So we have got a huge base of subscribers there is 1.3 million subscribers and there are certainly ebbs and flows in the business. So service revenues are taking pretty substantial leads forward in our transportation business, but sometimes it gets hidden by reduced revenues in places like Brazil or our GLA project with the U.S. government is kind of winding down as Afghanistan kind of winds down. I am hoping that the headwind or those things that are slowing down service revenues are slowing. And like I said we saw a substantial difference at the end of Q2 over the beginning of Q2 when we are kind of seeing that. And as I said we have never publicized this number before but there is 46,000 wireless devices that were shift between Skywave and huge organic growth in our business. And in total those units -- get deployed, you have got the numerator is growing forward than the denominator. So that is catching up. I am telling it's going to be a prettier picture in Q3.

[Rajesh Ghai:]

Great. There is lots of the satellite in Q2 -- I noticed that there was some -- insurance in Q1. So is the insurance going to offset any of the cost of the satellite or payment that you have recorded this quarter?

[Robert Costantini:]

No, that satellite will be applied towards the deductable. So there was a three satellites deductable and that satellite will carry over the - in the next month.

[Marc Eisenberg:]

If I can elaborate on that Rajesh. First of all the second insurance policy, which is insuring the other ones with the one satellite - was not a reaction to what happened with -- that is something that we are well on the, I mean you can't find insurance in a week. So that was something that we were doing anyway. But the way we look at the network is we launched 17 satellites as we did this statistical analysis, we knew that some might go early and once they kind of leave through that infancy period, they kind of leave for really one-time and that’s the way it’s build and that’s the way the insurance is booked as well. So there is a three satellite deductable, because the expectation, it something might happen with one particular spacecraft. So I don’t know that this is completely unexpected, I mean we were certainly not hoping for that, but it is in around of what we see.

[Rajesh Ghai:]

Okay and the last question essentially that you talked about mission to getting launch around November timeframe. I know you haven’t takes into the expectations from the machine to launch fiscal ’15 guidance. But I think things goes on time as your plan. Do you kind of see some kind of demand that potentially start show up revenues in Q4 or kind of too early to say?

[Marc Eisenberg:]

I’m sorry, you’re asking if we launch in Q4, the new satellites launching in November 15th will help revenues?

[Rajesh Ghai:]

Yes, it would be kind of, yes, that’s actually it.

[Marc Eisenberg:]

I’m really feeling pretty good about the guidance that we gave for last year and I think you should go with it, I think if we were able to launch in November ’15. We kind of highlight like a 90-day period to put them in service. We’re able to achieve it little earlier in the first launch. But we’ve seen the analyst number, sitting there and that 180 to 185 number and you should go with that.

[Operator:]

We’ll take our next question from Mike Malouf with Craig-Hallum Capital Group.

[Mike Malouf:]

Could you give us a little more color on the satellite impairment? How many more could you lose before this against have an impact on the business?

[Marc Eisenberg:]

So was your question on the impairment, the financial aspects over the…

[Mike Malouf:]

Financial aspect, loss satellite.

[Marc Eisenberg:]

Okay. So the way of constellation works is one satellite would provide global service and these new satellites have, almost is much capacity is today’s whole network. But when you have more or less satellites, you really focused on latency and how long it takes to transmit a message. So the 17 satellites was kind of build to plan where you can get a 90 plus percent of the messages through in a five minutes period. So as satellites come out of that service, five minutes goes to, five minutes and 30 seconds, or five minutes or 40 seconds. When we went and source the satellites and pick our number, there are couple of ways that we can go, we can build a constellation that where you’ve got that five minute latency or we can build the constellation for $400 million roughly double where you get zero latency. And what we decided was that the incremental business that we would have gotten from going down to zero latency just didn’t justify the cost of doing that, so what we do instead is we create a deal with Inmarsat and instead of the extra $200 million, we spend a $122.5 million and we buy SkyWave and SkyWave gives us eight seconds of latency and it's a complementary to the service that we have where if we were to go from 17 satellites to 16, to 15, to 14 it’s not going to have a huge effect in the business, maybe latencies would creep up to seven, eight, nine minutes, but we’ve been 98% in 15 minutes for years and that's the business that we sell and then we really started to transition customers that need real time service to the SkyWave network. Now going forward there are things that we can do to unite those networks to create the best network in the world between ORBCOMM, LEO’s and SkyWave, GEO’s and some of those we’re looking at could be on the spacecraft, but some of the easy short term fixes are just doing things in the moto where you can see both satellites and you realize you are communicating with two networks. Mike if you thinking that this spacecraft is going to change your model looking at five years it’s not.

[Mike Malouf:]

Okay. Great and also could you give us a little more color on the Enterprise Connect product that you guys are launching that in terms of timing and what do you think this could mean for the business?

[Marc Eisenberg:]

Sure, sure I love to and if you want I can just give you like 30 seconds of history on it as well.

[Mike Malouf:]

Great.

[Marc Eisenberg:]

So ORBCOMM Connect is a -- it's a portal, it's a connection portal, it’s very simple, similar to, it’s not simple, but it certainly similar to what the big MDNOs do, they have been getting acquired recently, so ORBCOMM Connect really started is a tool to enable customers to use dual mode applications, it didn’t start off at the concept of being terrestrial only, so we started building in a couple of years ago to allow customers to manage their cellular SIMs, their satellite deployments, but typically both should they be on the same asset, when we completed it, we realize that we do not support all, every bit is as good as the big MVNOs out there, but it also encompass satellite connectivity. So it's so much cooler and with the pending shut down of 2G there is literally 10s of millions of deployments out there looking for a home. And in Cisco we saw an opportunity to enable wireless - for their routers in ORBCOMM and Verizon that is the natural combination to go chase it. Now this is not new concept backing out your systems companies like Cradlepoint have been doing it. What's unique with this is doing it with Cisco, the biggest company, the biggest company by far in the world and it took us months to be common approved Cisco IOT partners and we received the certification just last week. To my knowledge we are the first to achieve the - IOT industry expert specialization from Cisco in the world. But from an economic perspective which I think is what you are kind of zoning in on, basically there is about $1,000 in hardware provocation that ORBCOMM that can sale or Verizon or Cisco could sale with is and then there is monthly fee to keep this backup enabled which is in the $20 range. Keep in mind when these things actually kick into service they are sitting there quietly, but when they kick into service it could be gigabytes of data. I know it seems a little bit off our plan but it's really not, I mean we run a first class data and connectivity center. We have got industry leading connectivity portal - user interface it came together quite well from a business model selling hardware and recurring service, kind of seems like ORBCOMM one on one, clearly it's a new vertical market. We are hoping to sale 5,000 to 10,000 of these next year and it could be a nice addition to our business leveraging a lot of the investment we have already made.

[Operator:]

We will take our next question from Howard Smith with First Analysis.

[Howard Smith:]

Yes. Thank you. Interest color on Cisco and congrats on managing whole a lot of business activity very well. I would like some more color on South America weakness if I could. Just kind of a detail, do customers, a select group of customers has kind of stopped transmitting or a broad set reduced the number of assets or does everybody just kind of set the little - walk me through that a little better. And also maybe what are some of the steps you could do to work with the customers to bring them on the volume.

[Marc Eisenberg:]

Sure. So just to explain the situation in Brazil from a macro perspective, their currency is off significantly versus the U.S. dollar and some of them are sitting this uncomfortable situation where they are billing, these guys are service providers. Imagine something like the omni track units or the PeopleNet version that Trimble has in South America. But in South America, it’s a very high transition rate that uses satellite because you need satellite in order to get insurance. So there is a lot of units out there. So these providers are sitting in a position, where there sourcing satellite connectivity in U.S. dollars, but charging their customers in riyal. So is the riyal falls and the dollars go up, they could be underwater on our application. Literally rapping riyal around monthly service fees and that’s the struggle if they’re having and they also in a little bit of recession where someone’s hold me this number, so you have to check the fact, it’s just something that I’m hearing. But literally new truck sales are down 40% in South America as well. So there customers are going back to them looking for some price breaks and it is competitive, they’ve come back to us. And in order to and way their billing works is there is a small monthly amount than they literally pay, per paying as they use this particular service. So instead of pinging in a 5 minute or 10 minute or 15 minute rate, you can expand that what 15, 20 or 30 minute rates and you reduce the pings and it reduces the revenue and that’s what we seen so far in terms of reduction. I mean to quantify its couple of hundred thousand dollars, because it’s millions of dollars. But instead of the growth that we’ve expecting, it’s shrinking a little bit, we talk about it.

[Operator:]

Our next question from Jim McIlree with Chardan Capital.

[Jim McIlree:]

Marc can you just kind of some up, where you are on these major deployments and installations. So if you added up all of these major programs like Hub and Doosan and the major retailer. How many have you shift, how many still need to be installed and how many still need to be shift?

[Marc Eisenberg:]

Well the good news there is, I’ve already done that. So to summarize that Hub is expecting to be 28,000 deployments approximately 14,000 to 15,000 have been shift and approximately 7,000 have been installed. And we went into last quarter it about 3,000 and we came out at about 7,000. So you can see the rise and why I’m saying June was better than April. In terms of retail customers , we shipped 17,000 or 18,000 and these are mix-fleet, so they still take refers almost every month. The dry van stuff they are taking some time to install, we’ve shift total between [indiscernible] about 18,000 units and they have installed about 10,000 of them and I think it was closer to 5000 at the beginning of the quarter maybe from last -- I don't remember what I said in the last call. So they continue to go at about 800 or 900 a week run-rate as they build up their installation presence. Doosan is not a fleet, Doosan works completely different, Doosan, as they sell excavators, we get a subscriber, so there is no fleet that we’re trying to penetrate there or something like that, but we ship, what a bad quarter about a 1000 and a good quarter about 2000 units, to Doosan, they tend to be pretty long life assets and the base keeps growing.

[Jim McIlree:]

Okay. Great and I just want to make sure the status of the Gen1 constellation, because anything changed over the past quarter?

[Marc Eisenberg:]

The Gen1 constellation? OG1?

[Jim McIlree:]

Yes.

[Marc Eisenberg:]

The space craft that enter the quarter in service, or still in service, OG1 is long in the queue but hanging in there.

[Jim McIlree:]

Okay. And lastly how much exposure do you have to the oil and gas industry and have you seen any weakness there?

[Marc Eisenberg:]

We have very little exposure into the oil and gas industry from a satellite perspective. I suppose you are kind of point towards the Iridium comments, where they are struggling with oil and gas, one of the customer --

[Jim McIlree:]

Yes, [indiscernible] as well.

[Marc Eisenberg:]

So one of the customers that Iridium sale satellite services to, we sell terrestrial services too, so maybe there is a small terrestrial component to that, when oil & gas, SkyWaves got a little bit of exposure, but it's a simple digit percentage, pretty small for us. So we’re not seeing, a whole out there but that being said, as you are probably hearing in the market is something we’re very interested and going into. And these guys have been charge some incredibly high rates, and with this combination of Inmarsat in ORBCOMM were pretty well setup to penetrate those markets.

[Jim McIlree:]

Okay. And lastly do you contemplate changing any insurance on the 11 satellites that you are still to launch based on the loss of L1, are you going to keep the insurance as it is?

[Marc Eisenberg:]

So there is one big insurance policy that’s for both and it’s already bound. So when we say have a deductable of three satellites that’s on both launches. So it’s one big deductable. I don’t know, I mean if we were, it’s bound. So it is what it is, but just kind of thinking out of the box with you the SpaceX issue, I don’t know because up or down. But we’re pretty comfortable with where we are right now. That being said what we buy is launch plus one year and then typically what we can do is take a look at what the market is to turn to one year in-orbit to a two year in-orbit or three year in-orbit that’s what we’re investigating now and that’s what we announced that we bound today for the first launch.

[Operator:]

[Operator Instructions] We’ll take our next question from Mike Latimore with Northland Capital Management.

[Mike Latimore:]

Just want to clarify on South America. Did you say is that generates a couple of hundred thousand per quarter for you guys or what was comment that?

[Marc Eisenberg:]

The decrease was a couple of hundred thousand.

[Robert Costantini:]

And to generate a lot more impact.

[Mike Latimore:]

What for the South America [indiscernible]?

[Marc Eisenberg:]

We’re talking about service revenues, because the hardware fluctuates.

[Robert Costantini:]

10%.

[Marc Eisenberg:]

10% of the 30 million, 3 million a year.

[Mike Latimore:]

And then you’ve mentioned that, you think you generate characterizing the satellite business is growing sort of 5% to 10% before the new satellite launch. What do you think satellite growth after the satellite?

[Marc Eisenberg:]

Well, I think there is a couple of things that are going to help satellite growth, I think the new space craft or certainly going to be helpful and the combination of selling the SkyWave services through the same channel as the ORBCOMM, we’ll help as well, it’s more than integrated product and it is just in OG2 product. So we certainly expecting it would be North or at least double-digits. I don’t know how high we go into the double-digits, but we’re certainly expecting 10% plus growth. There is, it’s not like, there is a thousand different customers, there is some big guys in some large markets that we need to get close, we need to pick-up China and Russia and some of those other markets. And then there is some large opportunities there.

[Mike Latimore:]

And it sounds like SkyWave is on track record, but just -- is that right SkyWave was on track?

[Marc Eisenberg:]

SkyWave from an EBITDA perspective SkyWave is well above track. The integration is gone well from a cost perspective they’ve gone well but they are the predominantly the international flavor that ORBCOMM has so when we site issues in South America, specifically its SkyWave issue, but overall there still up over last year, there is still growing in that single-digit rate, but I think the big step forward to SkyWave is integrating them and their products since ORBCOMM sales channel which as we said this year, we’re expecting the ton of cost synergies at the SkyWave and we haven't budget it a single revenue synergy and that is coming in 2016.

[Mike Latimore:]

Got it and just last question. How are your -- kind of [indiscernible] the customer of caterpillar commodity trending are they stable as they are growing some general characteristic it will be great?

[Marc Eisenberg:]

So in terms of CAT, we haven't seen a difference at all they put on the same amount of units this quarter that they did last quarter, but so as of now there has been very little change in CAT, but we understand that historically, there was a cellular offering at CAT and after the 2G cellular termination announcements satellite got a bigger share then we were typically getting in the past, and we do expect, their cellular offering that [indiscernible] announced to get a piece of the installs, but which could reduce the new installs, but I don't think there’s going to be an effect on service revenues at Caterpillar for quite some time, from Komatsu they haven't changed their plan at all, Komatsu always have their cellular components and the cellular components that they did have as maintain the same share, so Komatsu continues to grow quarter-over-quarter.

[Mike Latimore:]

Okay. Thanks a lot.

[Marc Eisenberg:]

Sure.

[Operator:]

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

[Marc Eisenberg:]

Thank you for your questions and as you can see, we’re executing well as we transform the company to play a significant role in the growing M2M industry. And we certainly don't intend on slowing down now. Thank you again for participating in our call and we look forward to speaking to you again next quarter.

[Operator:]

And that does conclude today’s conference call. We appreciate your participation.