ORBCOMM Inc.
Q3 2015 Earnings Call Transcript

Published: 8 Nov 2015

[Operator:]

Good morning, ladies and gentlemen and welcome to ORBCOMM’s Third 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 and thank you for joining us. 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 include non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures is included in our press release. There never seems to be a dull moment at ORBCOMM and I suppose that’s part of the appeal of working here. In addition to our traditional update, we have got a satellite launch, a strategic acquisition and a few really exciting new customer wins to talk about. In terms of an agenda for this call, I thought we would start with a brief overview of the financial highlights and switch up our typical order to talk about our satellites and upcoming launch. From there, I will update you on some accounts, our most recent wins and provide a deeper dive on the acquisition of WAM Technologies. At that point, I will transition to Robert for a detailed overview of our Q3 financials and we will finish by taking your questions. So, let’s get started. Earlier this morning, we issued a press release announcing financial results for the third quarter ended September 30, 2015. As a reminder, these financials include a full quarter of the acquisitions of SkyWave and InSync, which affects the comps versus last year. I am pleased to report that we had yet another record high revenue quarter with total revenues at $46.1 million, almost double the prior year period and adjusted EBITDA of $11 million, a 190% increase over last year. Breaking this down further, service revenues increased year-over-year by 65% to $25 million and product sales increased to 165% to $21 million. As I mentioned earlier, the comparisons benefited from the businesses acquired in 2015. However, the company’s revenues grew organically by 33%. The strengthening dollar had a negative impact on revenues as weakness in both the euro and yen reduced total revenues by approximately $800,000 in the quarter versus the prior year. For the third quarter, we reported net income of $1.6 million compared to breakeven in the same period last year despite higher G&A, acquisition and integration-related costs and interest expense. Our subscriber count or subs grew in the quarter by 33,000 net subs ending the quarter at over 1,330,000. Consistent with the Q3 guidance we provided on our last call, quarter-over-quarter service revenues grew to just over $1 million, hardware grew to $200,000 and adjusted EBITDA grew about $700,000 over last quarter. Overall, the market conditions are consistent with the update we gave last quarter. We made good strides in our U.S. businesses. We are on par in the EU. And we continue to face some difficult challenges in other international geographies. Like I said last quarter, two steps forward, one step back. Now, on to our upcoming OG2 launch, this is probably one of the few times I am aware of in recent history that a launch has been moved up. When we last spoke, we were gearing up to launch second or third on the SpaceX manifest and we recently saw an opportunity to move up to first and we took advantage of it. We are now planning around a December launch roughly four to five weeks from today. While there is still some work to be done, mostly from the SpaceX side, December is achievable as long as their preparation continues to go well. There were a number of factors that went into the decision to shuffle the order from both the ORBCOMM and SpaceX perspective. Looking at it from ORBCOMM’s point of view, we have an opportunity to get launched and kickoff new OG2 services that customers have been planning on for quite sometime. AIS customers have been looking to upgrade their service from periodic data to near real-time. Lastly, our spacecrafts are ready to fly and the change in timing avoids putting our spacecraft in cold storage. From SpaceX’s perspective, we are an ideal candidate for the first launch of the newly upgraded Falcon 9. Even with 11 satellites, the mass to orbit is nearly 50% less than other Falcon 9 missions providing substantial performance margins. We are also a standard low earth orbit launch just like our successful OG2 mission 1 completed in July 2014. This mission will be a direct insertion meaning that there is one stage 1 burn and one stage 2 burn. In the 14 minutes after launch, the satellites will be in their final insertion orbit of just over 600 kilometers. Other Falcon 9 missions like those going to a geosynchronous transfer orbit are more complex and require a relight of the second stage engine after drifting in cold space for over 20 minutes. With ORBCOMM going next, SpaceX will be able to conduct an on-orbit test of the second stage relight system after the OG2 satellites have been safely deployed without impacting our mission. SpaceX and their team have conducted a comprehensive investigation over the past few months to ensure the readiness of the Falcon 9’s return to flight. Considering the huge focus SpaceX has placed on this launch and the fact that return to flight missions generally have more favorable success rates than those following normal missions, we have full confidence in SpaceX and believe this is our best opportunity for launch. Sierra Nevada, our prime contractor, completed all factory acceptance testing on all 11 satellites and the first batch of 6 satellites have already arrived at the Cape. The second batch of the 5 remaining satellites will ship over the next couple of days. Of course, ORBCOMM is tracking both satellite shipments using our solar-powered GT 1100 tracking device, which provides us with the exact location and speed of the trailer throughout the trip as well as the moment when the satellites arrive at the Cape. From here forward, the satellites will be tested to verify proper operation after transit, fueled, and attached to the Moog dispenser, which once launched is used to dispense the satellites into orbit. The final satellite operation is to encapsulate the satellite stack into the Falcon 9 fairing. Once the first and second stages of the Falcon 9 arrive at the Cape, they will undergo final verification followed by the integration of the fairing. The day before launch, the rocket will go vertical followed by a static fire test. Once that’s completed successfully, we go airborne. Looking ahead to the typical December forecast in Florida, the weather turns to be more favorable compared to our last launch in July. Winter weather patterns tend to be mild with temperatures in the low 70s. We expect to announce a more specific launch date in the next couple of weeks and we will recommend the live streaming source at that time. If we launch in December as expected, breakout the coffee, it looks like a late evening event, great for spectators. Assuming a December launch, we will be close to having our fully deployed OG2 constellation placed into commercial service by our next earnings call. Our customers will see an immediate improvement in network coverage and performance while providing our AIS customers with more frequent visibility of vessels with a higher probability of detection. They will also have availability to the incremental service enhancements offered by the new generation of satellites, including backward compatibility with our OG1 network, the ability to utilize multiple downlinks and autonomous message store and forward capabilities, which will further increase the overall network capacity and allow our customers to send more frequent messages. Additional improvements to come, include higher data rates and improved link margin services, which will enable our customers to send larger messages and utilize smaller antennas. After many years of planning to get this constellation fully deployed, you could imagine this is a pretty exciting time for us. We anticipate providing updates on our website in the OG2 launch page. Moving on to the business highlights, starting with the transportation solutions business, we had another record quarter of sales strengthened by a key shipment to Hub of over 8,000 devices. Hub recently showcased their ORBCOMM-based solution at the Intermodal EXPO trade show last month. They displayed a new container that had been shipped directly from their factory in China promoting the ORBCOMM solution with the hardware and sensors already installed. There is no better marketing for ORBCOMM than endorsements directly from our customers especially when it’s an industry giant like Hub. Other intermodal players have taken note of Hub’s market-leading platform and we have seen a surge of interest surrounding ORBCOMM’s intermodal container monitoring solution. In support of the Hub project and others, ORBCOMM has significantly grown its installation team. Currently, we are installing more than 450 units a week for Hub at nearly 25 different locations using upwards of 30 different individual installers combining third parties and our own team. We have exceeded 13,000 installations to-date of more than 20,000 units shipped. Our major retail customer continues to grow their installed base. They have installed over 13,000 of the more than 22,000 units shipped comprised of both cold and dry assets. We are continuing to see and win multiple opportunities on mix fleets. These opportunities allow us to leverage the synergies and scale that we built through our strategic acquisitions and expanded solutions portfolio. In Q3, we received significant renewal orders from some of our key refrigerated customers including some of the largest transportation companies in North America such as Prime, Celadon, Target, Navajo, and Swift. Our refrigerated customers, now with the added benefit of using our new mobile app that was launched in September to manage their refrigerated fleets on the go, the ReeferTrak mobile app runs on both Apple and Android devices and provides our customers with enhanced capabilities in how they track, monitor and control their assets along with greater flexibility in the setup, provisioning and configuration of their connected devices. Our European business continues to make headway in Europe with key customers in response to an uptick in the European transportation market. Euroscan recently deployed 500 wireless temperature systems to Avnet Logistics, a German-based transportation and food distribution company that will primarily be used to monitor the refrigerated cargo for McDonald’s throughout Europe. In early October, we closed on the acquisition of WAM Technologies. WAM is a leading provider of remote wireless management and control solutions for ocean transport refrigerated containers and related intermodal equipment for global shipping companies and international produce companies. WAM solution has already been deployed globally at AT&T to serve Maersk, the largest marine shipping company in the world. Based on ORBCOMM’s strategy to be the premier provider of cargo solutions including both cold chain and dry telematics across the broadest base of asset classes, ORBCOMM has been focused on entering the market for refrigerated sea containers. The acquisition of WAM is transformative to ORBCOMM on multiple levels. First, it expands and strengthens our industry-leading cold chain monitoring solutions, which already included trailers, railcars and gensets and now includes sea containers enabling us to deliver best in class solutions for nearly all refrigerated asset types. Secondly, with the addition of WAM’s install base and strong customer list, ORBCOMM continues to be the clear choice for large companies looking to monitor their cargo shipments and improve their logistics processes. Lastly, the acquisition allows us to further access the addressable market for cold chain refrigerated containers, which is largely untapped with more than 1 million assets worldwide. The addition of WAM’s incremental capabilities coupled with ORBCOMM’s support, engineering resources and OEM relationships is a solid strategic combination. WAM has approximately 40 employees located throughout North America, India and Australia. Over the coming months, we are planning to co-locate the WAM employees in Hyderabad, India with ORBCOMM’s software development facility in the same city. Sizing the WAM business, we expect them to initially add about $1 million per quarter in revenues with a 75 to 25 service to hardware ratio. However for Q4, until we build inventory, we do not expect hardware shipments. We anticipate they will add a significant number of subscribers to our accounts, but we are still actively trying to size it. The integration of WAM is progressing well and we are receiving positive feedback from customers and partners. On to our OEM business where we have some exciting news for our customers, we entered into an agreement with Morsviazsputnik, the licensed operator of Inmarsat’s mobile satellite services in Russia for ORBCOMM to provide IsatData Pro or IDP service in Russia. This agreement opens this critical geographic market for the heavy equipment OEMs as well as other key industries such as transportation, oil and gas, and maritime. The ability to deploy in Russia has been a top priority for our OEM customers. Speaking of OEMs, Doosan continues to expand deployments of our customized OEM telematics program. We have developed them across a larger number of heavy equipment assets and we have now deployed over 5,000 systems. In transportation, we are still expecting the approval for a large cold chain OEM to give us the green light to announce the products. Meanwhile, we are making great progress on the program. As a reminder, we are providing this OEM with a customized cold chain telematics solution for their truck trailer division for global deployment. This OEM solution will provide their customers with two-way command and control of fleets, complete cargo transparency and maintenance alerts from origin to destination. We have completed development and have already deployed field trials in North America with select customers. European field trials will also be starting soon in preparation for a scheduled Q1 2016 launch. In some very exciting recent news, we have been selected by China International Marine Container Company or CIMC to provide satellite service and modem technology for their new OEM container telematics platform. CIMC is the world’s leading supplier of logistics and energy equipment headquartered in Shenzhen, China and has container manufacturing capacity of 2.4 million annual units and builds nearly 50% of the world’s shipping containers. Their telematics platform will be a dual-mode product that could be purchased and installed as a factory option. CIMC has ordered 1,000 satellite modems to begin field trials and we anticipate a modest ramp up leading to potentially large volumes of future deployments. With the largest reefer OEM, the largest shipping container OEM and the largest steamship carrier all deploying ORBCOMM technology, we feel confident that our strategy around development, distribution and M&A is the right one and is taking hold. Looking at AIS revenue in Q3 grew to $1.4 million and we are continuing to gain momentum with several new licenses this quarter. Our AIS customers have been patiently looking forward to the upcoming OG2 launch, which will further enhance the operations and capabilities of our AIS service. Once the 11 additional AIS equipped OG2 satellites are launched, our customers can expect up to 135 satellite passes per day over densely populated shipping lanes providing refresh rates of well under 15 minutes giving our AIS customers the highest levels of performance and visibility in the industry. Turning to our government business, we were recently selected by [indiscernible] to provide hardware and dual-mode IDP satellite and cellular services in support of a U.S. government agency's transportation service, [indiscernible] is a leading provider of software and cloud computing solutions in the health, education, and navigation industries and was awarded a 3-year government contract, which will equip approximately 1,200 vans and shuttle buses when fully deployed. Through the combined [indiscernible] and ORBCOMM solution, the government customer will gain complete visibility into the location and status of their fleets while enabling efficient two-way communication, navigation, routing, driver management and scheduling of pick-ups and drop-offs. Product development is the key aspect of ORBCOMM’s success. Customers continually look to ORBCOMM to develop applications and keep them current, supply reliable hardware and accurate sensor data, as well as integrate with third-party systems. With the recent addition of WAM, we now have nearly 300 engineers and technical resources throughout the United States, Canada, India, and the Netherlands focused on the developments of ORBCOMM’s solutions. About one-third of the team is focused on the software developments of our SaaS applications. The remainder of the team spans more than 15 different engineering disciplines ranging from firmware to electrical to networks to quality to database to mechanical. As we have grown, we have also focused on building a customer care team consisting of 40 members that is larger than the total number of employees at most companies in the M2M space providing 24/7 expertise and support through the entire product lifecycle. As the capabilities of our product development team have significantly expanded and become global, so is our capacity to innovate and deliver quality solutions for our customers around the world. Our success in technology, innovation and telecommunications leadership also continues to be recognized through industry awards. We were honored again by the 2015 American Business Awards with two more Silver Stevies for the Telecommunications Company of the Year as well as the Most Innovative Tech Company of the Year in the technology industry category. We were also chosen again this year as one of the Connected World magazine’s, select 2016 CW 100, an annual ranking that recognizes the best companies of the evolving IoT industry and sets the precedents of what is to come. We have moved up to number 23 in this year’s list, up from 31 last year. We are proud to be recognized for our hard work and commitment to excellence and innovation in delivering best-in-class M2M and IoT products, services and technologies to the global marketplace. From a cost savings perspective, we are on track to complete the transition of the bulk of our SkyWave IDP product manufacturing to a Tier 1 facility in Mexico in Q4 and the first prototypes have already come off the line. We expect about one-third of our IDP products to be produced out of Mexico in Q4 and ship to customers in Q1 2016. As we mentioned previously, this move is expected to result in significant savings while adding operational efficiencies. Going forward, we will be looking for additional opportunities with this manufacturer to achieve cost savings across incremental ORBCOMM product lines. Summing up, while the markets continue to be a bit choppy based on geography, we are encouraged by the success we have had at introducing new products, the integration of our multiple businesses and the resulting strong pipeline. Hub, our retail customer and Doosan are in full deployment. Our now two major transportation OEMs are about to begin deployment and we are working on a number of RFPs with some of the largest players in transportation and heavy equipment that could represent even more significant growth. Looking ahead to Q4, we expect service revenue to continue to grow. WAM plus organic growth should help bring us to over $26 million. Due to its lumpy nature, hardware is a bit more difficult to predict at this time. We do not anticipate a Hub shipment in Q4 like the over $4 million shipped in Q3, but hardware deployments across the rest of our businesses should be up nearly across the board and allow us to chip away at the $4 million Hub gap. With that, I would like to turn the call over to Robert to take you through the financials.

[Robert Costantini:]

Thank you, Marc. Good morning, everyone. The third quarter of 2015 demonstrates the robust demand for our products and services with revenues almost doubling over the prior year driving higher earnings growth. In addition, we were busy completing the acquisition of WAM Technologies, which occurred on October 6 and had an impact on Q3 acquisition-related costs. We recorded another quarter of record high revenues totaling $46.1 million with organic growth of 33%. Service revenues were higher on more installed units, product sales were strong on shipments of existing and new orders, and we saw revenues from new AIS opportunities. The acquisition of WAM Technologies did not add revenues in Q3. The higher Q3 revenues contributed to strong adjusted EBITDA of $11 million, growing $7.2 million, or 190% over the $3.8 million in Q3 last year. Adjusted EBITDA in Q3 this year also benefited from cost reduction initiatives and the synergies from acquisitions. Adjusted EBITDA for the first nine months of 2015 was $30.4 million, growing 142% or increasing $17.9 million over the $12.6 million in 2014. The adjusted EBITDA margin of 24% in Q3 is on the rise and improved almost 800 basis points over the 16% from the prior year period. Our growing scale improves our operating leverage and purchasing power, which we expect will translate into expanding margins. The company had net income in the third quarter of $1.6 million, reflecting the strength in the underlying business as Q3 was not burdened by the large one-time costs recorded in the first two quarters of 2015 namely the SkyWave legacy retention bonus and the satellite impairment charge. Net income of $1.6 million in Q3 this year reversed from a net loss last year. We were profitable in Q3 from higher gross profits covering the increased cost for depreciation and amortization, interest expense and acquisition and integration-related costs that combined were higher by $5.4 million over the prior year quarter. This is further supported by net income ex-items of $2.1 million in Q3, a non-GAAP earnings measure that is adjusted for $500,000 in acquisition-related and integration costs, improving over the prior year net income ex-items of about $200,000. Net subscriber additions were 33,000 for the quarter. Our subscriber base is now over 1,330,000 and the level of Q3 additions maintains our high annual run-rate for net new subscribers. The component of Q3’s total revenues of $46.1 million included service revenues totaling a record $25 million that increased 65% or $9.9 million and product sales of a record $21 million, increasing 165% or $13.1 million over the same period last year. The 65% increase in Q3 service revenues exceeded the year-over-year growth of 61% recorded in this year’s second quarter indicating that service revenue growth is accelerating. Organic service revenue growth of 9% on a constant currency basis rose 4 percentage points over the second quarter’s increase of 5%. Organic product sales grew 88% in Q3 on a constant currency basis over the prior year period compared to the second quarter’s 43% growth demonstrating strong demand, but it’s also important to remember that product sales can be lumpy quarter-to-quarter depending on the timing of shipments. We saw this occur last year in Q3 when expected Q3 orders were not shipped until Q4. The sales mix for Q3 is similar to Q2 with service revenues at 54% and product sales at 46% of the total, which bodes well for increasing subscribers and leading to higher future service revenues. Since the vast majority of our revenues are denominated in U.S. dollars, foreign exchange rate fluctuations have had a moderate impact in lowering our reported revenues in 2015. On a constant currency basis, our revenue growth is pressured by a weakening yen and euro versus the U.S. dollar, lowering reported revenue growth by about 4 percentage points. From a cost perspective, we are benefiting from the stronger U.S. dollar as costs are lower for our foreign operations thereby helping profitability on a comparative basis. Overall, the strong and strengthening U.S. dollar adds pricing pressure in international markets for our products and services. This is evident with customers in South America and our overall growth added by the acquisitions we believe would have been higher. Gross profit in the third quarter of $21.9 million increased by $9.6 million, or 78% over the prior year period due to the increases in both service revenues and product sales. Service gross margins were 65% and comparable to the prior year period. Product gross margins were 27% and higher than the typical 25%. Operating expenses in Q3 increased 53% period-over-period mostly due to higher depreciation and amortization. Also, the operations of the companies we acquired in 2015 increased operating expenses. Despite adding significantly sized acquisitions, selling, general, and administrative expenses grew relatively modestly in Q3 by $1.9 million, or 22%. Depreciation and amortization increased by $3.9 million in the third quarter to $6.3 million. Of the total increase, depreciation was higher by about $1.6 million from the OG2 satellites put in service in September 2014 and amortization expenses increased to $1.9 million from the growth in intangible assets. Acquisition-related and integration costs were $0.5 million in the third quarter this year compared to $0.2 million last year reflecting some long-term integration projects and a portion of the costs for WAM. We expect Q4 acquisition-related and integration costs to be slightly higher and includes costs for WAM and integration expenses. Earnings per share in Q3 2015 equals $0.02 per share derived from net income of $1.6 million compared to zero cents per share in the prior year period reversing from a net loss of roughly $33,000 in Q3 of last year. In Q3 this year, the impact of acquisition-related costs lowered EPS by about $0.01 per share compared to zero cents per share in 2014 and interest expense this year lowered EPS by $0.02 per share compared to zero cents per share last year. Looking at the balance sheet, cash, cash equivalents and restricted cash is about $60 million at September 30, 2015 compared to $66 million at June 30, a decrease of $6 million. Cash decreased primarily due to capital expenditures of $9 million mainly related to milestone payments for the OG2 program, offset by cash provided from operations of $4 million. Our total debt outstanding at September 30 is $151 million with an available $10 million undrawn revolving credit facility. As Marc mentioned earlier, we are now targeting a launch date in December. As a result, significant capital expenditure payments will be made in Q4 of approximately $40 million including milestone payments for the final 11 satellites and the related launch insurance premiums. We have the cash to complete this program and also expect to generate cash from operations in Q4. We expect to start generating meaningful free cash flow after the final launch is complete as the company embarks on the satellite CapEx holiday and we will take advantage of this by pursuing the many growth and investment opportunities available to us. The cost savings initiative we announced earlier this year to capture an additional $2 million in annual cost savings is driving towards completion as professional service fees were rationalized, telecom services were streamlined and we leveraged new technology to reduce expenses. This will also help us with our cost containment efforts for 2016. For Q4 we expect service revenues to reach $26 million, total revenues to range between $44 million and $47 million depending on where shipments fall. Service is moving in the right direction, but hardware can be a bit lumpy. If you separate the Hub shipments that can be 8,000 units in a quarter or zero, the rest of the businesses have their hardware trending up in Q4, but 8,000 units is a steep hill to climb. Wrapping up, we had a solid quarter financially as demonstrated by record total revenues and improving profitability as reflected by adjusted EBITDA and net income. Our growth strategy that combines organic growth with growth from acquisitions is driving revenues to new heights. Cost controls and integration activities that capture cost synergies are combining to significantly improve the bottom line with improving adjusted EBTDA and higher margins. We eagerly await next month’s launch of our remaining OG2 satellites and are excited about starting 2016 when we can look forward to the start of meaningful free cash flow generation. We have a lot to look forward to and we have strong momentum carrying us into 2016. At this point, this concludes our remarks and we are happy to take your questions.

[Operator:]

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

[Chris Quilty:]

Thanks. Hey Marc. Can you give us a little bit more details on the WAM acquisition and how that would actually work as they offer that solution to their customers, is that something that they are going to install as standard or do they have to then go out and actually procure orders from customers for that capability?

[Marc Eisenberg:]

So WAM typically closes fleet deals, but deals could be as small as a few hundred units on rail or as big as an entire steamship line. And the WAM subs and ARPUs are slightly different than what we have typically seen. So WAM has two types of deals, some they lead and some AT&T leads. Since AT&T was the lead on Maersk, the overwhelming majority of WAM subscribers are turned upside down from a revenue perspective compared to that of most of our deals. In this case, instead of gross revenues being booked by WAM and cost being occurred against those revenues, AT&T sells the hardware and airtime directly to Maersk and pays a small monthly net service fee to WAM. In addition, delivery of new hardware, a one-time software license fee is paid to WAM as well. AT&T led deals are low ARPU, but they are extremely high margin. The AT&T subscribers are different than a subscriber as we measure it today, but we are still working our way through how to account these subscribers and we expect to have an answer on the Q4 call. On top of that Chris, there is a few thousand WAM led subscribers as well and that part of the business is growing pretty quickly and these are kind of sold like normal ORBCOMM solution subscribers with high single-digit ARPUs and a cost being paid to the terrestrial provider and a hardware component with 25 point margins.

[Chris Quilty:]

Got it. And so would you look to maybe transition some of the selling arrangements with AT&T and does it make sense to also bring in other service providers or does that remain sort of exclusive?

[Marc Eisenberg:]

Well, there is – in terms of the WAM led deals there is nothing exclusive there. WAM can sell as they see fit and then something like the Maersk deal had so many components that you would think that the hardware and the firmware that sits aboard those would be the overwhelming majority of it, but there is also the ship connectivity and the picocells that sit on those ships and it’s far more sophisticated than you would normally think, which is why it’s over 200,000 subscribers. But I think there is three ways that the WAM product is going to be sold. I think a portion of it will be sold through WAM. We certainly embrace the AT&T relationship and want to grow with it, but we have got some opportunities with ORBCOMM’s OEMs. And while we have already built the truck-trailer part of those solutions, we also have opportunities to sell through the OEMs as they approach these steamship carriers as well. So you can imagine there is three ways it’s going to be sold.

[Chris Quilty:]

Got it. And shifting to Russia, I am not going to pronounce your partner’s name?

[Marc Eisenberg:]

Morsviazsputnik.

[Chris Quilty:]

Okay, you said it. Were they an existing reseller of the traditional IsatM2M service or is this an entirely new relationship?

[Marc Eisenberg:]

Well, they have been the partner for Inmarsat for quite some time and they are fairly large in the satellite business. I think they are the partner for more than Inmarsat. But each particular thing that Inmarsat sells needs to be licensed separately. So BGAN’s service is different from IDP service or IsatM2M service. So in terms of like the ship connectivity that Inmarsat does, they have been a reseller for quite some time. We got a license a while back for them to be able to sell IDP, but we weren’t allowed to sell it directly. So I think the change here is the ability for us to sell it to our OEMs inside Russia and to other third parties as well. We have very, very little penetration in Russia right now.

[Chris Quilty:]

Great. And how important is this for your heavy equipment customers, I mean is this something that they have been pushing for a while and how do you actually integrate that into your product offering?

[Marc Eisenberg:]

Well, there is a lot going on here. China and Russia, those are the two big ones, right. Other than that, we have got a good portion of the world covered and Inmarsat certainly helps us because they have got a license in both on – for IDP. So, I think it’s a big deal, but as we kind of look out, I think the OEMs that we are dealing with now, they have their products, their sets and they are kind of looking toward their 2018 and 2019 product lines. So, what we have developed already is the ability for them to take a specific modem and then either in the 11th hour plug in the ORBCOMM or the Inmarsat enabled one and just two screws you put it in that box and then you can decide and we have got that ready to go and then the next project, the one we are working on with Inmarsat and this is really cool, one modem that speaks to both networks. How neat is that? I mean, you sit there and if you see Inmarsat first, that’s great. If you have got some issues with line of sight, it backs up to ORBCOMM and in that case, both networks work and it’s the most reliable service that we can think of and we think it’s going to be a killer in this OEM industry, but it starts working with the licenses. So, when we close a Morsviazsputnik deal, it’s a big deal.

[Chris Quilty:]

Great. And can you remind me on your AIS contracts, I think you had talked quite a while ago about having sort of step-ups available in those contracts once the new satellites come online. Is that still applicable?

[Marc Eisenberg:]

Well, some of the step-ups we got when we launched our first one. So, that brought us from the $3 million range, it helps. I mean, it’s not the whole thing. It’s not nearly the whole thing, but it stepped us up from $3 million to the $6 million run-rate that we are at right now. We are $5.6 million run-rate that we are at right now. There are some small improvements that we will get with the next launch, but I think even more important than that there is some new resellers out there that are excited to get launched. I don’t think this is like one of those things where you launch and the next day that $6 million run-rate looks like a $15 million run-rate. I don’t want to lead you to believe that, that’s what we are expecting, but what we are expecting is that $100,000 a quarter of the growth that we have been seeing to kind of jump up to what $200,000 a quarter run-rate or more until we get to that $15 million – $10 million to $15 million.

[Chris Quilty:]

Great. Good quarter, guys. I will back into the queue.

[Marc Eisenberg:]

Thanks.

[Robert Costantini:]

Thank you.

[Operator:]

We will go next to Mike Walkley with Canaccord Genuity.

[Marc Eisenberg:]

Hi, Mike.

[Mike Walkley:]

Good, thank you. My congratulations too on the quarter and certainly a lot going on. Just looking at the lumpiness of the hardware revenue, you have a lot of big deals that you guys executed against in 2015 such as the large retailer in the Hub Group. As you look out longer term, do you think that your hardware revenue could grow in the next year or two off this new run-rate and maybe talk about some of the big deals in your pipeline and if that’s the case?

[Marc Eisenberg:]

Absolutely. I honestly believe that the Hub and the Doosan and the work we did at Wal-Mart are just kind of scratching the surface. Those were the big deals that we closed that are starting to lead to big deals. Unfortunately, it’s not like a month in between. Every deal starts with an RFP and then it starts with a pilot and then it starts with – and then it proceeds to larger deployments and if you remember, the Hub deal took 2.5 years to get fully deployed and get rolling. That being said, if you look at the Hub deal, there are pilots rolling with almost every large player in the intermodal space and wow, that’s exciting. We have got other bids into other heavy equipment OEMs as I kind of alluded to. We are shipping in Q1 to our OEM for cold chain. We think that, that’s going to get us to verticals or to customers in cold chain that we were never able to see before. We are great at closing 6,000, but the bulk of these assets out there are in fleets of 50 or less and gee, we don’t know how to find them, but this OEM’s huge global dealer network does. So, we have got opportunity there. I think we added it up the other day. We are bidding on nearly 1 million units right now, 1 million units, but the timing is funny right. They kind of ship in one quarter and then they don’t in the next and then they do the quarter after that, but lots of enthusiasm here.

[Mike Walkley:]

Great, thank you. And then just looking at some of these opportunities, if you look at say the cold chain market with your partner and there is some things like the Food Safety Modernization Act that can help spur growth. How penetrated you think that market is and how much growth do you think you have left over the next couple of years?

[Marc Eisenberg:]

I think that market – well, it depends what you consider that market to be right. So, if we are talking about like truck trailer, then that market is a few 100,000 units out there and it’s about 50% penetrated in the United States and it’s nearly 0% penetrated in the rest of the world. So, you could see when we continue to grow our distribution globally and do deals like Morsviazsputnik or others and we get this distribution globally. Only a small percentage of these refrigerated units are in the United States. And then when you get out of truck trailer, there is about 1.4 million units that are out there on the container side, the sea container side and this is again just for refrigerated. And Maersk is basically fully penetrated, but beyond Maersk there is like another 12 steamship carriers that have over 50,000 units out there and the penetration on those units is basically zero, hence the thinking around the WAM acquisition and the relationship with AT&T. So, it’s still small, but we are hoping it’s going to grow. I am like a huge believer that within five or six or seven years, everything is going to be tracked, every container, every refrigerated container. And all of these pieces that we are putting together, our OEM here, the CIMC thing in China, the Maersk stuff, it’s all kind of coming together, where the interconnectivity can fit and it’s coming along quite nicely.

[Mike Walkley:]

One last question for me and then I will pass it on. Just as you look to the refrigerator market, ORBCOMM certainly developed a lot of patents and core competency there. Could you just discuss – it’s also a big growth market drawing in some competitors just how you see the competitive environment and how you might build these IP portfolio to protect your position longer term?

[Marc Eisenberg:]

Yes, it’s a great question. I think I was doing the math this morning. I think this is my 36th call and no one has ever asked that before, but it’s a great question. The company is sitting on nearly 40 patents and those patents protect us around containers, around the ROI when it comes to monitoring diagnostics, we are monitoring refrigeration on containers and also monitoring heavy equipment over satellite. That’s the strengths of the ORBCOMM patent portfolio and we don’t typically speak about it too often publicly, because it has not been a revenue driver for us, but we have engaged in three situations off the top of my head and maybe it’s four, where we thought that someone had come into the market and was violating our patent and we have been pretty successful in defending our patents.

[Mike Walkley:]

Great, thanks Marc and best wishes for a successful launch in December.

[Marc Eisenberg:]

Hope to see you there.

[Mike Walkley:]

Yes, that will be great.

[Operator:]

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

[Rajesh Ghai:]

Yes, thanks and congratulations on the strong results. I wanted to kind of dig deeper really into the OG2 launch that’s been pulled forward into December. Can you quantify how much of an impact could you see in terms of the business that you could channel from your partners, such as AT&T and others that could be pulled forward as a result of this getting launched in December?

[Marc Eisenberg:]

Sure. So, we might see a small uptick in service revenues after launch. We do have our usage based customers and sometimes there is hole in the sky, but I wouldn’t know how to size it and it shouldn’t be a huge impact quarter-over-quarter. I think the thing that you are going to see in terms of OG2, the first is AIS should grow faster than the $100,000 per quarter run rate, maybe as much as double, but the real growth from OG2 comes as the new services are being deployed. CIMC is a great example. We needed an OG2 launch in order to sign opportunities like CIMC because the new spacecrafts and the associated improvements in latency, significantly improved battery management. So I don’t think again, it’s like one of those turn the light switch on and service revenues change, but I think the outlook over a year or over a couple of years should show a pretty good improvement.

[Rajesh Ghai:]

Great. And a couple of metrics, ARPU ticked up a little bit versus last quarter and OpEx was down, as far as ARPU is concerned are you beginning to see the benefit of the way coverage performance afforded by OG1 in terms of higher data rates being reflected in that metric. And as far as OpEx is concerned, how should we think about the trend going forward?

[Marc Eisenberg:]

You want me to take ARPU and you will take…

[Robert Costantini:]

Yes.

[Marc Eisenberg:]

Okay. So on the ARPU perspective, I think service revenues from our legacy satellite business grows mid single-digits on an annual basis and the solutions business is growing kind of leaps and bounds. And I think the disparity there is really around the new network and getting these new features out there. But the positive benefit from that is that the solutions’ ARPUs are higher, which kind of lead to higher ARPUs. Now let me warn you, in Q4 and I don’t know how you are going to model it, but there is – it is likely that 200,000 subscribers are going to be dumped into our subscriber count over the next quarter at very low ARPUs. So there might be a tick down, but that’s just math, it’s not going to represent where the growth in service revenue is headed. Rob, are you are going to handle the other half?

[Robert Costantini:]

Yes. So with respect to SG&A you can see that our cost savings initiative has kicked in over the last couple of quarters. We were reducing SG&A by about $400,000 in the quarter from one, two and into three. And we probably have a little bit more there to go for Q4, but with respect to 2016, depending on all these new opportunities that we are looking at including adding WAM, SG&A were I think at this point projecting maybe an 8% to 10% rise including WAM going into 2016 off of the levels of 2015.

[Rajesh Ghai:]

Okay. And just to have some clarity as to how we should model the hardware revenues and product revenues for Q4, you have mentioned a few moving pieces, not to expect anything from Hub, but expect the rest of the business to grow, just so that we are all clear, how do you expect that product line to behave in Q4?

[Robert Costantini:]

Yes. So again the mix is roughly the same, but we already talked about $26 million in service revenues is where it looks like it will be and depending on where those shipments fall. So, you are – we are going to be in 17 or 21 depending on what you can do, but that mix is still roughly like 55-45 and that’s what it should look like.

[Marc Eisenberg:]

The maintenance – almost like I don’t know if you call it maintenance, but the maintenance number for our hardware shipments, just customers redeploying and the way they take orders is in like the $15 million to $17 million a quarter range. And then we grow on top of that when some of these large customers take large deployments.

[Rajesh Ghai:]

Okay, thank you. That’s very helpful. Congratulations, the good work.

[Marc Eisenberg:]

Thank you.

[Operator:]

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

[Mike Malouf:]

Great. Thanks guys for taking my questions.

[Marc Eisenberg:]

Good morning Mike.

[Mike Malouf:]

Can I just expand a little bit on what Rajesh was saying, when you take a look at 2016 and sort of as you project over the next couple of years, where do you see ARPUs, which have been just under $6 right now, where do you think those can trend given the OG2, of course taking aside the $200,000 that you are going to add in at very low numbers, can we just have sort of the static number apples-to-apples?

[Marc Eisenberg:]

I think we should focus more on something like a 15% service revenue growth or 15% growth. The ARPUs, whether it comes in bunches of big deployments or smaller amounts with higher ARPU deployments, I don’t know that it really matters. So when we kind of build out our business plan, its one customer and one deal at a time. So honestly, ARPU is the outtake of it.

[Mike Malouf:]

And so you think sort of that mid double-digit number for service revenues is a good target to look at?

[Marc Eisenberg:]

Yes.

[Mike Malouf:]

Okay, great. And then with regards to CIMC, I mean that’s a pretty large pilot of 1,000, what are they telling you with regards to ultimate penetration within their containers that they are seeing?

[Marc Eisenberg:]

So they are pretty aggressive. So we have been reluctant to tell you what they have been saying, but just to get into that deal, there are two parts to CIMC. First, there is a one-time license fee for them to use our modem technology. You see at first, they are going to buy modems from us, but eventually they are just going to buy chips and they are going to license our modem technology and build their own modems. So there is a one-time fee there. And then it’s an airtime deal, so we will get some airtime on the OG2 network. I imagine they are going to offer this service to their entire customer base, which is it’s almost everyone. And they will have more success with some customers than others. But I am really optimistic that they are going to be successful. I mean first off, in the long-term as I said before, it seems to me that all containers are going to be tracked and whether it would be for logistics purposes or safety purposes or expedited entries or it seems like the momentum is moving in the right direction and CIMC is clearly the right partner with the right scale. When the service is offered with the containers, it helps with the financing, it helps with the accounting. They solve the toughest problem in M2M, which is getting to the containers and installing them because they do it right off the factory line and they have the best distribution model and that they see all the customers. And just from what I see, if this does not seem to be like a half-hearted attempt from them like we have seen with some other OEMs in other industries they have tens of people dedicated to the project. They are invested – they have invested a great deal of capital. They are focused on the right things. They are focused on price points that they can get on there that can drive penetration. And to your point, pilots usually start in the five to ten unit range. Their first order is for 1,000 modems, that’s their pilot, until they have designed their own modem. They are actually building their own modem as opposed to buying ours because they believe with their volumes and manufacturing capabilities, they believe they can achieve lower price points. If these guys once fully deployed if it was 10,000 a year or 100,000 a year, I wouldn't be surprised at either.

[Mike Malouf:]

Interesting, okay. Great. Thanks a lot and good luck next month or next quarter.

[Marc Eisenberg:]

Thanks.

[Robert Costantini:]

Thanks.

[Operator:]

We will go next to Howard Smith with First Analysis.

[Howard Smith:]

Good morning, as always a lot going on there. Two numbers questions for you. The first retrospectively, the service revenue, I think you said on the last call you were running about $25 million run rate in June, July kind of came in at that for September, can you walk us through some of the gives and takes, is it continuing weakness in Latin America offsetting the installations or kind of what – walk us through that?

[Marc Eisenberg:]

So the thing that’s driving service revenue growth are the installations on the solution things that we are putting out the Hub Group and Wal-Mart and others and they do 1,200 activations between the two of them on a weekly basis. And you multiply that times their ARPU and that’s growing and that’s doing really well. And then it’s kind of offset a little bit as we said on the last call in that some of the stuff in Brazil and it’s the SkyWave business that is down a little bit and that there is trucks parked on the side of the road because they are not delivering goods and new deployments are slowing down and these guys are kind of struggling for relief. So it’s like I keep saying right, you are taking two steps forward and one step back and that’s what you are seeing with that $1 million increase.

[Howard Smith:]

Okay. And then on CapEx, you mentioned $40 million as you kind of complete assuming the December launch and then you get the holiday and I just want to know are there any drag carryover CapEx that would go into ‘16 or how should we think about ‘16 in terms of CapEx, assuming a December launch?

[Robert Costantini:]

Yes. Okay. So I will give you both sides to that, maybe the D&A and also the CapEx. So looking at the opportunities we got, we are targeting like a $6 million to $7 million range for CapEx in 2016. There is just smaller little things that are going to happen until the 1 year post launch in order of incentives that would come around roughly at the end, probably spill into 2017, which is around – it’s around $7 million or $8 million in 2017, but that is further out. On the D&A side, the launch will add about another $13.5 million of expense to D&A into 2016. So you are looking at roughly $40 million.

[Howard Smith:]

Perfect, I appreciate that. Thanks much for answering my questions.

[Operator:]

We will take our next question from Jim McIlree with Chardan Capital.

[Jim McIlree:]

Thanks. Good morning. The Hub shipments, are they expected to start again in Q1 of next year or do you have visibility into that?

[Marc Eisenberg:]

So the – most of the incremental Hub shipments are going to be shipped as they build new containers. So the idea was there is 28,000 containers out there, you ship the 20,000, which represent 75% of the fleet that is the younger part of the fleet. And then you add the last 8,000 as you buy your new products and then they get installed at the factory. By coincidence, they get installed at CIMC. So I don’t know if there are orders in Q1 or Q2, but it’s in that timeframe.

[Jim McIlree:]

Alright. But we are past the point where you are going to be shipping these large batches of equipment to Hub?

[Marc Eisenberg:]

No, I think that typically they buy their hardware in either one or two installments over the year. So I think we are still going to be in the lumpy zone. In addition the Wal-Mart shipments have also been lumpy. In that, there was a big shipment in December, there was a big shipment in January on the drive ends, but on the reefer side, in that case it’s very consistent. It’s a few hundred a month until their fleet of 6,300 gets filled up. So it still continues to be lumpy. But what you are going to see from the other OEMs like – I am sorry from the OEM like the cold chain OEM, that’s going to be smoother. They will take shipments every quarter.

[Jim McIlree:]

And can you size relative to Wal-Mart or Hub, how big the cold chain OEM is or how big their shipments can be?

[Marc Eisenberg:]

Let me give you a range. I would say the range is like a downside of 6,000 a year and an upside of 15,000. But it’s not like a fleet sale where after you are done with the fleet, then you are really in the airtime business, it’s no other than new builds, it’s just kind of – it’s running for the life of the program.

[Jim McIlree:]

Got it. Okay. And Robert, are there any special incremental costs associated with the launch that we need to be aware of for Q4?

[Robert Costantini:]

You know what we are anticipating a smooth one-time attempt. I think the last time when we talked about it, there was a five or six attempts and that adds it a little bit, but no, I would say it should be minimal.

[Marc Eisenberg:]

It’s the finance guy telling you that it’s one attempt though.

[Jim McIlree:]

Okay, fantastic. Thanks a lot. Appreciate it.

[Operator:]

We will go next to Daniel Amir with Ladenburg Thalmann.

[Daniel Amir:]

Thanks a lot and congratulations on a good quarter and your upcoming launch here. So, a couple questions here. First of all, in terms of the SkyWave acquisition here now that we are almost 3.5 quarters I guess, are we pretty much done you think from the cost savings that we could get out of the SkyWave now that we are transitioning the shipments in Mexico or there is additional cost savings that we could still see next year on this front? And then I have another follow up. Thanks.

[Marc Eisenberg:]

Well, they haven’t seen the hardware yet.

[Robert Costantini:]

Yes, that’s still coming with the move to the manufacturing to Mexico. We got after that integration pretty well. And I would say the initiatives that we had to take out cost across all the platforms right now will come to fruition. We will restart that. We will take another look. So, I don’t want to overstate the case there. I think we are pretty much done at that point. There is so much opportunity in front of us. We are not sort of going to shrink ourselves to success, but we want to do the right thing and look for legitimate cost savings and synergies.

[Marc Eisenberg:]

But you haven’t seen the hardware improvements yet. So, you are going to – in terms of Q3, the financials that you are looking at almost every unit shipped was shipped from the original manufacturer. Even the stuff that’s built in Q4 probably won’t ship until Q1 of next year. So, even though the build was done, you are going to get the decreases in cost in the first quarter. And then based on their scale, it’s going to help the ORBCOMM business in that we are moving a good portion of our manufacturing to the same plant. So, you will see maybe something around $20 a unit. We build about 100,000 a year. Now, it will probably tail off and the project will be done in about June.

[Daniel Amir:]

Okay, great. Alright. So, the second is you guys seem to have a lot of opportunities on the plate, which is great and also with this new WAM acquisition, can you try to give us kind of in terms of how you look at the opportunities for 2016, in terms of what your priorities are in ranking, I guess the different areas that you see for growth?

[Marc Eisenberg:]

Gee, I don’t know how to rank them, because I love them all. It’s like picking a kid right, but I think we are in a flat outrun in the transportation business. We have got our OEM we have got to get them active. And then we are in sales mode with these guys. We are chasing steamship carriers with WAM. Every deal we have ever done, there has been some large opportunity that we have had in mind that we end up telling you what it is a couple of quarters later, if you remember back chasing some of those on the intermodal business like Hub, multiple opportunities that we are chasing there as well. We have got some international opportunities. Gee, if we can get CIMC rolling quickly, that one is incredibly interesting. We have got a double or at least double our AIS business. When you kind of open up the shades and look inside of ORBCOMM, the business is kind of, even though the engineering is one big engineering force, the distribution gets broken into four different groups and each one of them, have their own priorities. I think we are going to have some pretty cool news for you over the course of 2016.

[Daniel Amir:]

Okay, thanks.

[Operator:]

[Operator Instructions] Mr. Eisenberg, there are no other further questions at this time. I will turn the floor back to you for any closing remarks.

[Marc Eisenberg:]

Great, thank you for your questions. This is our last call for 2015. So, we look forward to speaking to you again in March. Thank you for participating on our call and gee, go SpaceX. Speak to you soon.

[Operator:]

This does conclude today’s conference. Thank you for your participation.