ORBCOMM Inc.
Q4 2015 Earnings Call Transcript

Published: 10 Mar 2016

[Operator:]

Good morning, ladies and gentlemen and welcome to ORBCOMM's Fourth Quarter and Full Year 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 today's conference call includes forward-looking statements and that actual results may differ from the expectations reflected in these statements. We encourage you to review our press release and SEC filings for a full discussion of the risks and uncertainties that pertain to these statements. I want to remind you that ORBCOMM assumes no duty to update forward-looking statements. In addition, the financial information we will discuss include non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures is included in our press release. 2015 was a transformative year for ORBCOMM on many levels. There are few reasons why I say this. First, we've got the OG2 launches behind us and are not anticipating to launch again for this foreseeable future. The company is embarking on a long satellite CapEx holiday and the focus turns to execution. Second, after multiple years of making sizeable investments in product development, we’re seeing significant uptake on some of the products we released earlier and multiple new products are just about ready to go. Third, with over 500 employees in 14 countries including 300 engineers and technical resources, we’ve achieved a great deal of scale and are well positioned to execute globally on a growing number of opportunities that are setting the stage for 2016 and beyond. Lastly, we make significant financial progress, showing dynamic growth and impactful leverage in the business. For this call, I’ll kick things off by reviewing the financial highlights for both the fourth quarter and full year 2015 and update you on key areas of the business including our OG2 satellite and the corresponding improved network performance. Then I’ll transition to Robert for more detailed overview of our financials and end the call with your questions. So let’s get started. Earlier this morning we issued a press release announcing financial results for the fourth quarter and full year ended December 31, 2015. Financial results include the acquisitions of SkyWave and InSync which closed in January 2015, and WAM Technologies which closed in October 2015 which affect the year-over-year comparisons. ORBCOMM had another strong quarter with Q4 total revenues of 45 million, increasing 53%, or 15.5 million over the prior year. And record high adjusted EBITDA of 11.9 million increasing a 131%, or 6.7 million over the last year. Breaking this down further, service revenues in the quarter increased year-over-year by 79% to 27.1 million and product sales increased 25% to 17.9 million. Our subscriber counters subs during the quarter by 239,000 net subs, and include over 200,000 subscribers added from the WAM acquisition, ending the year at about 1.57 million subs. For 2015, total revenues were 178.3 million, increasing 85% or 82.1 million over the last year driven by acquisition and strong organic growth of 17% on a constant currency basis. Service revenues increased year-over-year by 67% to 100 million, and product sales increased 114% to 78.3 million. Adjusted EBITDA for 2015 was 42.3 million, increasing a 139%, or 24.6 million over the last year. We see 2016 as the year to further build on our momentum and take our business to new levels. The company's focus for 2016 includes executing on the new vertical markets in which we develop products, using the scale we've build to reduce operating costs, leveraging the synergies of our acquisitions to deliver a host of new products and opportunities and filling the added capacity of OG2. We see the business environment similarly to how we described it last quarter, two steps forward, and one step back. We see continued momentum in transportation and we’re also seeing momentum in AIS backed by our new OG2 constellation. There is significant growth in our MVNO and container and ports businesses, even though it’s of a small base. We’re seeing a growing number of opportunities where customers are benefitting from the blending of our internally designs, proprietary products with technologies we’ve gained from our acquisitions and industry partnerships. There are continued headwinds and struggling economies like in South America, and remaining ForEx concerns in places like Japan and Europe although, recently the ForEx issues seem to be leveling out. Industry data from the global heavy equipment OEMs continue to show new machine shipments trending down double digits. Overall, we don't see changes to our 2016 outlook as our changing strategy over the last 5 years has made us a more diversified business. We’ve got a lot to catch up on based on the progress of our OG2 constellation starting with the successful launch of our final 11 OG2 satellites on December 21, 2015. I know there have been some concern in our decisions to be the first flight after the unsuccessful mission, especially on an upgraded rockets. However, we like the high probability on returns of flight missions and the redundancy of the upgraded rocket based on the recommendations of our engineering staff. I’m guessing that we've not gone first, we would have been pushed back to at least the back half of 2016. That being said, it was nearly a flawless launch, putting ORBCOMM within a fraction of the degree of the intended inclination and within a few kilometers of the projected altitude. The satellite successfully separated from the rocket and the silver panels, and antennas deployed as expected. Just an hour after launch, all 11 satellites established connectivity at our Gateway Earth stations around the world. During these initial contacts, we were able to verify all subsystems we are operating as intended. The initial in-orbit testing on the 11 satellites confirm that the satellite hardware was operating as designed and was completed in just 28 days following the launch. Since then we’ve performed over 350 propulsion maneuvers to position the satellite into their proper initial orbits which include three separate drifting planes, while equally spacing the satellites within the planes. Plane T has been raised to a 750 kilometer orbit. Plane R has been lowered to a 605 kilometer orbit. And plane S will remain at the 620 kilometer insertion orbit until the drifting process is concluded. We are pleased to report that these satellites are healthy, and we are not currently addressing any significant issues. As a result, we were able to place the satellite into commercial service for M2M messaging ahead of schedule on March 1. Our Automatic Identification System or AIS service for all 11 satellites was operational within 30 days of launch and customers began receiving AIS data in mid-February. All OG2 satellites are fully backward compatible with our existing OG1 network. So our customers do not need to change or upgrade their fielded devices and are able to use the OG2 constellation to send and receive messages for their applications with their existing platforms without missing a beat. As we continue to fine tune a spacecraft, we are already seeing significant improvements in the networks performance and availability. Today, nearly 60% of the total messages have been processed by OG2 satellites which are overhead about half the day. The network speed has been greatly improved and customers have taken notice. The new OG2 satellite not only translates into a higher level of service and reliability but also provide more opportunities for our expanded global coverage, increased market reach, and the new applications we can support. Today, we have the only fully funded, fully operational next-generation satellite network purpose build for the global M2M industry. Validating our leadership in this sector, Compass Intelligence recently named ORBCOMM the M2M satellite service provider of the year for the third year in a row. With the launch of commercial service of our OG2 network, ORBCOMM now operates the largest space based AIS network. We are processing daily over 18 million AIS messages from about a 150,000 unique vessels, surpassing all other AIS networks and service quality. Combined with our existing 16 Ground Earth Stations around the world, we now provide our customers with mere-real time monitoring of vessels and increased analytics capabilities. With the number of satellite passes per day is as high as 135 and nearly continuous coverage overhead, customers are benefitting from increased vessel detections and refresh rates. AIS revenue was over 1.5 million in Q4, compared to almost 1.1 million in Q4 last year which is an increase of 45%. We expect to see continued growth in the AIS business building on the momentum of our fully deployed OG2 constellation. It’s been an extremely productive period for our satellite engineers getting a new spacecraft and service and sometimes it’s easy to overlook the day to day work that they do. I wanted to share with each of you pretty incredible accomplishments. First, as you all probably remember, last year we wrote down one of the six satellites launched in 2014. L1 had lost contact for over 90 days. In November, we started hearing small bits of communication from L1, mostly diagnostic data and our engineers dove into see what we can learn. Pass by pass, day by day, week by week, they increased the connection times on L1 to the point where it was staying connected for days at a time. In January of this year, L1 started passing AIS messages. And this is quite an accomplishment considering at one point it was communicating just seconds a day. Just in February, it started passing periodically M2M traffic. There continues to be an anomaly onboard L1 which points to a hardware failure that in certain loading conditions causes the payload to become unstable and stop communicating. Recovery from this condition can take days, and sometimes weeks. We are in the process of developing restart parameters to minimize this recovery time. While in operational mode L1's average message throughput is similar to a normal OG2 satellite. If you were to tell me L1 will provide service for a week or another 15 years, neither would surprise me. Again, we do not see this anomaly on any other OG2 spacecraft and we do not expect to, but should something ever raise our engineers are up to the challenge. On another note, last September we regained communications with OG1 satellite D6, which had lost contact in January 2015. After nine months, our engineers reconditioned the spacecraft determined that D6 was healthy following its sabbatical returned to service and have respaced the other deep-link satellite to maximize our coverage. After 19 years from our first launch of OG1, our space group has been working hard to keep this constellation flying while the OG2 program has been underway. I want to take a moment to recognize the team of their hard work. Moving on to the Q4 highlights. Starting with transportation, 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, KLLM, Freymiller, Celadon, Bison, Target, Maverick Transportation, Tyson Foods and Navajo. So far in Q1 we closed an unprecedented number of new opportunities, spending a variety of asset classes including drive end trailers, railcars, tanks, containers and gensets. Some of these customers include Spartan stores, NFI industries, Western Flyer Express, Bay and Bay transportation, Fairchild Freight, commercial trail leasing or CTL and Distribution Solutions. In addition, Swift has selected us to deploy on a new asset class beyond their fleet of refrigerated trailers. We have been working on these as well as host of other opportunities ranging from 500 to 8000 units and expect to close most if not all of these in Q1. With shipments to follow over the course of 2016 and into 2017, we have just these opportunities that adds up to nearly 30,000 subscribers. This will be a nice supplement to make up for any gap from large opportunities shipped last year that will be mostly deployed in early 2016. Clearly ORBCOMM has made name for ourselves with customers that have sophisticated businesses that require more than just tracking assets. If you have a multiple classes of assets, if you need to integrate with third party systems, if you need unique sensors, if you need more visibility in that limited access to power, if you need extreme reliability, if you have customized installation needs ORBCOMM can help and it is now the clear choice. The integration of the WAM business is going well. We are seeing an increasing number of genset and refrigerator container opportunities and our joint customers are excited about having access to an expanded portfolio of solutions due through the incremental products that are available as a result of this acquisition. We have been working on a private-label product for AT&T that spends multiple types of assets and is already being marketed through the AT&T distribution channel. The installations at Hub Group grew to more than 18,000 into mobile containers and we've received an incremental PO to outfit a significant portion of their rest of their fleet. Walmart continues to grow their install base. They have installed over 15,000 of more than 22,000 units shipped comprised of both cold and dry assets. Despite Q4 being a traditionally tough install period for retailers, Q1 went well. In the Heavy Equipment Solutions business, Terex Materials processing has officially begun offering the factory-installed deployment of ORBCOMM's dual-mode telematics systems on its Powerscreen and Terex Finlay machineries. They expect to standardize the solution across several different models that ship from its primary factory in Irelands. Working with an industry leader like Terex is a great opportunity for a comp to showcase our broad range of technical capabilities and comprehensive product and service offerings, which further solidifies our leadership in the heavy equipment telematics market. Turning to our government business, [Kavidai] [ph] has deployed the first phase of hardware and dual-mode connectivity to support a U.S. government agencies, transportation service as part of a three-year government contract that will equipped approximately 12,00 vans and shuttle buses when fully deployed. This project is a great example of how we leverage various components from across the business to build the best-in-class solution for our customer. We recently announced that we are provided Lockheed Martin's Aeronautics Division with our iApp platform as a replacement to their existing RFID-based data collection solution. This project has been initially deployed at Lockheed Aeronautics site in Fort Worth, Texas where more than 300,000 individual parts come together to produce the F35 fighter jet at their mile-long manufacturing line. ORBCOMM's iApp platform will provide continuous visibility into Lockheed's manufacturing process by tracking all of these components 24x7. The platform is expected to be replicated at other sites as well. We are excited about this customer wind since we'll be providing a mission critical solution for an industry leader like Lockheed. iApp is a configurable web portal that we acquired is part of the InSync acquisition. iApp can support 100s of different applications and is even more powerful when combined with ORBCOMM's hardware and connectivity options. In addition to great opportunities that InSync leave like Lockheed Martin and Iron Mountain, they are also a key building block to a number of ORBCOMM solutions including enterprise connect or wireless fail-over product. viaFleet, our new fleet-tracking products as well as multiple other products under development. Transitioning to product development, we are excited to announce the commercial availability of our new OGI modem which has a footprint to two third size of a credit card and is the smallest and lowest cost modem built for the Inmarsat satellite constellation. The versatile design provides customers with unrivaled ease of use, flexibility and quality of service based on their unique application needs, including message size, delivery speed, geographic coverage and regulatory requirements. Both OG2's -- I'm sorry. Both ORBCOMM's OG2 and OGI modems use the same electrical and application interfaces including connectors, power input and programming environment. This interchangeable format enables OEMs to plug and play satellite connectivity using the ORBCOMM VHF network or the Inmarsat L-band network. This exciting milestone brings the satellite industry one step closer to creating a truly standardized satellite M2M platform. A number of customers, including CIMC, the leading supplier of cargo containers have already begun integrating both the OG2 and OGI modems into a wide variety of M2M and IoT hardware solutions. Just yesterday we received the Mobile Satellite Users Association's 2016 M2M Mobility Innovation Award for our ground-breaking OG2 modem at the satellite 2016 conference. As we have continued to expand our team of engineers, technical resources and customer support staff around world; we have not only focused on adding more capabilities and diversity, but also more operating efficiencies. Last quarter, we begin the transition of our SkyWave IDP product manufacturing to a Tier 1 facility in Mexico. In Q1, we started shipping these products to customers. We intend for SkyWave to be completely transitioned in Q2. In addition, we have already initiated the transition of our transportation products, which we expect to complete in the latter half of this year. We will continue to take advantage of our scale and take cost out of the business. Summing up, 2015 was our most significant year-to-date not only based on our strong operational performance and financial results, but also our leading market position as a global provider of M2M and IoT solutions. In 2016, we are off to a fast start adding new customers as we see solid demand for our products. With our new satellite constellation in service, many more new product is about to hit the market. A heavy deal flow in the pipeline and a growing number of opportunities to cross sell our products across our distribution channels, 2016 is shaping up to be good year and our focus is on execution. With that, I'd like to turn the call over to Robert to take you through the financials.

[Robert Costantini:]

Thank you, Marc, and good morning everyone. Overall, the fourth quarter of 2015 marked another high performance quarter for ORBCOMM underscored by the successful final launch of a 11 OG2 satellites. This not only helps our momentum into 2016, but allows us to focus our resources and some great opportunities. The financial highlights in Q4 included a 53% increase in total revenues over Q4 last year to about $45 million led by service revenue growth of 79%. GAAP net income in the quarter was $0.2 million versus a loss last year and adjusted EBITDA was a compelling $11.9 million up 131% from the year earlier period and out of 26% margin. The business is showing strength in multiple areas. The fourth quarter's 53% increase in total revenues over the prior year was led by both organic growth and services revenues in total revenues from our acquisitions. Service revenues were robust reaching a record high of $27.1 million in Q4 up 79% or $12 million over Q4 in 2014 and $2.1 million higher than Q3 this year. Service revenues increased the organic growth in data services and AIS showing signs of catching up to the growth in product sales. AIS revenues now over 1.5 million per quarter are over $6 million on an annual run rate as expected. Organic constant currency growth was 10% in Q4 over the prior year and this was up from 9% in Q3 and 5% in Q2 indicating service revenue growth is benefiting as we continue to install and activate the record levels of hardware units sold throughout 2015. We had higher than usual installation and professional fees in the fourth quarter of about 400,000. That will most likely not repeat in Q1 and we will see the impact in this sequential growth and services revenues which we expect in Q1 to be just over 26 million. Products demand was strong across major product categories and geographies with product sales of 25% year-over-year and totaling almost $800 million despite no large shipments in the quarter to Hub or Walmart. Revenue mix was service revenues of 60% and product sales of 40% in the quarter versus the recent trends of service 55% and product 45%. 2015 total revenues were $178.3 million increasing 85% or $82.1 million over last year. Service revenues amounted to $100 million increasing 67% or $40.3 million over last year with contributions from acquisition and organic constant currency growth of 7%. Products sales was $78.3 million and increased 114% or $41.8 million over the prior year driven by acquisitions in solid organic growth of 34% on a constant currency basis. The higher Q4 in full year 2015 revenues, contributed to our best adjusted EBITDA performance to-date in terms of the underlying operational components and overall earnings quality. Q4 adjusted EBITDA of $11.9 million to $6.7 million or 31% over the $5.2 million in Q4 last year. Q4 adjusted EBITDA also benefited from cost reduction initiatives and synergies achieved from acquisitions. Adjusted EBITDA for 2015 was $42.3 million growing 139%, an increase of $24.6 million over the $17.7 million in 2014. The adjusted EBITDA margin of 26% in Q4 improved nearly 900 basis points over the prior year and by 250 basis points over the previous quarter reflecting our operating leverage and ability to scale the business as we have high margin service revenues and gross profit from product sales. The company generated net income of $0.2 million in the fourth quarter of 2015 improving from a net loss of $5.6 million for the same period last year. For 2015 the net loss was $13.3 million compared to a net loss of $4.7 million in 2014. On an ex-items basis excluding the satellite impairment charge of $12.7 million in 2015 and acquisition related cost of $4.8 million, the company's net income is $4.3 million which was the significant improvement over the net loss of $0.3 million in 2014 calculated on the same ex-items basis. Foreign exchange rate fluctuations had a relatively moderate impact in lowering our reported revenues in Q4. On a constant currency basis, our Q4 revenue growth was pressured by a weaker yen and euro versus the U.S. dollar, lowering reported revenues by approximately 400,000. Well still a negative impact, the effect was less than prior quarters. For all of 2015, the weaker yen and euro lowered reported revenues by approximately $2.4 million. Operationally, we are doing well in our markets and see in the majority of our large customers continue growing. All of which is generating higher levels of gross profit from services and products at healthy margins. Gross profit of $23.4 in the fourth quarter improved by $11.6 or 97% over the prior year period due to increases in both service revenues and product sales. For 2015 gross profit increased $40.2 million or 85% over 2014 to $87.8 million. Service gross margins for the fourth quarter of 2015 was 66% improving 1% over the prior year period. For 2015, service gross margins were 66% and were in line with last year as we did well in integrating the service platforms from acquisitions. Product gross margin for Q4 was 31%, higher than our typical 25% margins. Product gross margins for all of 2015 were 28% overall, improving 560 basis points over 2014. Depreciation and amortization increased by $2.8 million in the fourth quarter to $7.1 million mainly due to a $2 million increase in amortization expense related to the growth in intangible assets. We expect to incur an additional $1.4 million of depreciation in this quarter and an additional $4.3 of depreciation per quarter thereafter related to the OG2 satellites that are now in commercial service since March 01. For 2016 we expect depreciation and amortization to grow to over $41 million mostly due to new satellites put into service last week. Acquisition-related and integration costs were $0.7 million in the fourth quarter this year compared to $2.2 million in the same period last year and include cost-related to the WAM acquisition. Acquisition-related and integration costs were $4.8 million for 2015 compared to $3.8 in 2014. Interest expense for 2016 is anticipated to be about $8 million for the full year. Cash, cash equivalents and restricted cash totaled $28 million at December 31, 2015 compared to $60 million at September 30, a decrease of $32 million. Cash decrease primarily due to capital expenditures of approximately $38 million mainly related to milestone and insurance payments of the OG2 program and the acquisition of WAM Technologies of approximately $9 million offset by cash provided from operations of $15 million. Our total debt outstanding at December 31 is $151 million with an available $10 million undrawn revolving credit facility. We ended the year with cash balances higher than anticipated mostly due to the timing of the payments for the December 21, OG2 launch. About $6 million of the required payments fell into January 2016. With the vast majority of our satellite CapEx behind us, leaving the in-orbit incentives in 2017 of around $5 million we expect to generate increasing free cash flows as a company embarks on the satellite CapEx holiday. We are extremely focused and disciplined around the use of this cash flow. We will evaluate all opportunities available to us to grow our business and maximize shareholder value. For 2016 these conclude investments in new products and services, acquisition and paying down debt. While Q1 is typically our softest quarter of the year, we expect to see total revenues of approximately $45 million with service revenues coming in just over $26 million with the remainder being product sales. Adjusted EBITDA will reflect the additional cost. We typically are experiencing Q1 for public company and employee cost coming off of Q4, so adjusted EBITDA could be slightly below Q4 levels but well ahead of Q1 2015 comparisons. For the full year of 2015 we are comfortable with the $200 million in total revenues and the 25 point margin for adjusted EBITDA that are analysts are modeling. Our key aspect in achieving those numbers will be the ability to close roughly $85 million to $90 million in annual product sales. You have to give it a little flexibility in how it breaks up by quarter. So wrapping up for 2015 was a record year for ORBCOMM, highlighted by strong financial performance. We expect the momentum to continue in 2016 driven by product innovation, incremental new customer opportunities and generating free cash flow. That's clearly a lot to look forward to and we hope you are as enthusiastic as we are. So this concludes our remarks for this call and we're happy to take your questions now.

[Operator:]

[Operator Instructions] And we’ll take our first question from Chris Quilty of Raymond James.

[Chris Quilty:]

Thanks. A quick clarification first. I think when you had mentioned, Marc, 30,000 incremental units, was that just associated with primary customer or was that talking more generically of other things you have in pipeline - per square feet.

[Marc Eisenberg:]

The 30,000 in my script – that's - I want to say its 11 different companies between 508,000 units that make up to 30,000. But that's just a quarter's worth of what we have closed. So I think the question that I'm answering there before it even got asked - what I was trying to get to is I just came from the Raymond James conference and Robert just came from the Jeffries conference. And one of the questions we had is, when Hub is done and it's really just a service revenue relationship and the units get installed, where do we make up the hardware revenues? So that's kind of what I'm getting out there.

[Chris Quilty:]

Great. Can you give an update on what's happening on the intermodal side specifically?

[Marc Eisenberg:]

I think a lot, right. So on the intermodal side, you've got a couple of - there is about - I want to say about 200,000 units out there that are made up of only four companies. And the first one is Hub. The second one we kind of announced a little bit in this call today which is Swift, that is using us for intermodal containers and that's a good deal. And then the other two don't have deployment plans yet. But they are actively out there looking and we hope they choose us.

[Chris Quilty:]

Robert, the integration of WAM obviously caused the one-time down tick in ARPUs. And I think you were saying to expect that could to be generally flattish on a go forward basis. How does that mix out with the positive contribution you should be seeing from the growing base of solutions?

[Robert Costantini:]

Yes. So there are a lot of puts and takes in ARPU these days. Our new diversified business has been expanding into multiple asset classes. They are different ARPUs. So, all subs are accretive and scalable on our platform so we have increases from solutions and things like SkyWave as you pointed out. The neutrals will be the drive ends and the containers and things that are sort of low within the average will be network connectivity satellites subs, let’s say threshold and 2G swap out. So we never met a sub we didn't like and I think you guys need to model that flat. So there will be puts and takes and I think that's how you should look at it for 2016.

[Chris Quilty:]

Can you also just comment on - I think you did on OpEx in the first quarter, but in terms of cost of service as the new satellites come online should there be any kind of step up from cost that were previously being capitalized?

[Robert Costantini:]

No. Again, some of those costs will - there will be a step up, there will be a little bit, but it's not going to be significant. You are going to see low-low single digit bump up there. Mostly it's running the new platforms as we expand the other capabilities. Services are still going to be built out with respect to satellite. We mostly have a fully-functional operating system as it is, so we are not going to add to it now that the satellites are operating. So again, there will be a little bit of an increase there, Chris, but not anything - the margin is probably a better way to look at it. I mean we are still planning on being in the high 60 point margin range after those service revenue, so work with that and we are showing again a little bit of strength on the product margins, but I would still model in those 25 point margins or thereabout.

[Chris Quilty:]

And what were the factors helping the product margins in the current quarter?

[Marc Eisenberg:]

What we experienced versus last year is we shipped a huge portion of products last year to two guys, Walmart and Hub and when you ship such high volumes to a couple customers, you ship it at lower margins and then this year it was really to -- you didn't have these big one-time shipments. So you felt like every ORBCOMM business shipped lots of units to lots of customers and when you do that, the margins typically rise and that's what we saw. We just saw a broadening base of customers.

[Chris Quilty:]

Got you. And have we seen the full impact of some of the cost production efforts in the margin at this point or is more of that on a go-forward basis?

[Marc Eisenberg:]

I think you've scratched the surface because maybe we shipped something like 40,000 to 50,000 units on a quarterly basis and what you've seen so far is in Q4 maybe a couple of thousand of them. Even if we started manufacturing Q4, what you do when you move production is in your old plant you build up a real large inventory probably that in the inventory number and that's your insurance policy right to make sure that it goes smoothly. And then you sell off that product, which is still product that you've built at higher cost and then once you blow through that inventory, in Q1 and Q2 you really start to see the results of the new inventory and then we haven't transitioned yet the ORBCOMM transportation products. So you take the 40,000 to 50,000 and then you split it in two. Half of that is SkyWave manufacturing and then the other half is the ORBCOMM solutions and OG2 modem business and roughly 40% of that business is also moving to that same Sanmina plants in Mexico when we'll get some advantages there. It won't be as big like the $50 a unit that we guided to at SkyWave, but it will be $20 or $30 and then the last 10% is the stuff that Euroscan builds in Europe and that stays.

[Chris Quilty:]

Got you. And final question Robert, what do you have embedded in your internal forecast for FX?

[Robert Costantini:]

You mean in terms of, well it's going to be country specific right. So we -- I wouldn't want to size that as a number because we don't really know how that's going to turn out, but we do have -- we're in the ranges now. So we're not seeing that we will be outside of our ranges especially the way we see foreign currency snapping back over the last quarter. So we're again operating well within our internal plan both in South Latin America with respect to the Euro and the Yen. We don't -- I think the only currency that's major, that's moving in the other direction, is the pound.

[Marc Eisenberg:]

We focus on FX because everyone focuses on FX, but 2015 from an FX perspective was a tough year and the entire -- the entire effect on ORBCOMM was $2.4 million. So we're preempting the question and just laying it out there, but the overwhelming majority of the stuff ORBCOMM does is in dollars. I think the bigger impact on FX doesn’t show up like FX. It's the stuff that happens in South America where you're actually trading in dollars and your customer is upside down and you certainly don't want to put your customers in trouble. So you rework some of these deals and it ends up looking like a discount more than it looks like FX and I think that's actually a larger impact to us than FX itself.

[Chris Quilty:]

Got you. Thanks and congratulations on a good quarter.

[Operator:]

And we'll go next to Mike Walkley of Canaccord Genuity.

[Mike Walkley:]

Okay. Thanks. Congratulations on strong results to close out a busy year for your guys. Marc, just going into the pipeline here, you've talked about Hub and Walmart still being strong in the Harbor side to the start of 2016 and you gave some examples to the back half of 2016 with some new customers. Can you just walk us through maybe your visibility on the hardware side in the back half of the year with some of these new customer opportunities and are you still bidding, I think you shared last call and over in different units?

[Marc Eisenberg:]

Yes and that's exciting right. We get to throw something at you every week. Some deal that we -- some deal that we close and you may not think, they're significant, but they're significant. You look at like Bay and Bay, who is an absolute leader in refrigeration and not only do you get somewhere between 500 and 1,000 units from them. But that is quite an endorsement when a company like that chooses you or CTL, CTL looks like there are a leasing company and a maintenance company and CTL has 10,000 units fielded out there from -- not from an ORBCOMM perspective. That's so many trailers that they -- to have out there and our initial deployment with CTL was 1200 units for the U.S. postal service. And just a huge company, you can go to their company right here in the State of New Jersey really respected and just a great feel. So we've got a number of those. We've got a number of bigger stuff. In that 30,000 number there is two or three container things that were just about contracts are going back and forth and we're looking to close as well. And thank God, it's just a quarter's worth right. It's just a quarter's worth. So we're excited about it. Nothing has dolled our enthusiasm. We're looking at more and more opportunities. Some of them are like I said 500 and some of them are tens of thousands and we're just going to keep knocking them out.

[Mike Walkley:]

Great. Thanks. And just building on that, which sounds like aborting of the customer base, which impacted gross margins favorably on the product side in Q4. Is there something with your OEM install deals or some mix that lead you to believe product gross margins stays at 25% because with your B design mode and you're manufacturing cost consolidation etcetera, I would have thought to maybe this broadening base could be an uplift to product gross margin later in the year.

[Marc Eisenberg:]

I bet it does. So when you sit there and you lay out a number there, you're comfortable with it right. You know what the floor is and it gives you time in case there is a hiccup in moving the -- in transitioning it over. It gives you a little bit of leverage with -- as you're renegotiating with your customers that if you want to pass some of that out for higher volumes and trade a little bit of the incremental margin for higher volumes you can do that. So we just kind of throw out a number that we're comfortable with and then I hope you beat it.

[Mike Walkley:]

Okay. No, that's helpful. And then just on areas you hit your $6 million target, now would you do up and running. How should we just think about the trajectory it has over the next one to two years?

[Marc Eisenberg:]

What it's going to pick up I think? I think it's going to pick up -- I think we're working on a lot of cool stuff, but we never pre-announced that. I think the way to -- the way I would model it if I were you was it's been work right, when we said that six satellites is $5 million to $7 million, we're just like it's ticking up a 100,000 every quarter the run rate which makes the annual run rate 400,000 higher every quarter. And I think that's going to bump up to 200,000 a quarter or more until we get to that $10 million to $15 million. That's a number that we're comfortable with you modeling and I think you're going to start to see some of the deal flow from an announcement perspective as to where some of those opportunities are coming from.

[Mike Walkley:]

Okay. Great. Thanks. And one last question for me for Robert, just on the balance sheet, can you just walk us through the cash cadence? It sounds like maybe Q1 it bottoms on the $6 million payment and do you have any expectations to either repay debt or refinance your debt during 2016?

[Robert Costantini:]

Yes so that's exactly right. So just a timing issue with respect to the $6 million. The expectation for paying down would something we would look at later in the year. So we have tremendous opportunities for embedding right now to continue to grow the company. And those are the things we're mostly focused on. It makes more sense to do that at this time.

[Marc Eisenberg:]

Yes we're not -- and Q1 typically is a quarter that if you look historically it has not been the most robust quarter from an operations perspective because we have a lot of Q1 expenses that we pay, but that will probably be the low point in the year and then we'll continue to grow from there typically like we've done in the past.

[Mike Walkley:]

Great. Thank you.

[Operator:]

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

[Rajesh Ghai:]

Yes, thanks and I'll add my congratulations too. Couple of questions on the outlook, considering you ended Q4 '15 with 26.4% EBITDA margin and your incremental margins and service revenue is I believe in the 90s for satellite and 70s for terrestrial. How should we think about the EBITDA margin in the long term? I know you said 25% for '15 that appears to be conservative, but longer term how do you look at it there they kind of go?

[Marc Eisenberg:]

Right. So we expect it to grow. We expect it to grow like we saw as we scale the business, we saw the platforms add an incremental increase in let's say service revenues and product sales that will translate down. So as we move out in the years, we expect it to grow a couple of points every year. We would like to see it continue to scale up. There is no reason why we can't sustain that for a good number of years where we just keep on adding scale in the business and see that translate into higher profitability. So when we look at it the analysts for the consensus for 2016, it looks like they're very comfortable is coalescing around pretty much the same thought and we think that's an achievable number. So we'll likely go with that, but continue to signal higher growth as we see it come through.

[Rajesh Ghai:]

Okay. Sounds good. And as far as your full year revenue guidance for '16 is concerned, so if I back out the $85 million to $90 million that you believe could be harbor revenue, you're looking at about $110 million to $115 million for services, which isn’t a significant uptick from the $108 million run rate that you achieved in Q4. I understand there is some one-time special services revenue. What are you baking in as far as full year numbers are concerned in the puts and takes? Is that conservative?

[Marc Eisenberg:]

What we guided to was a 55-45 breakdown between service and hardware and the service believe it or not there isn’t, I am not -- I am sleeping pretty good at night on that. I am comfortable with the AS pipeline. We've already had a pretty significant jump in Q4, may step back a little bit in Q1 and then you're kind of off to the races based on the timing of professional fees and stuff like that. But the reason that in Robert's portion of the presentation, we point to that $85 million to $90 million in hardware is -- that's -- even no one cares about hardware because to generate service to hit your plan, you got to sell some hardware. And that $85 million to $90 million we called attention to it because it is the risk of the plan and it's also the upside to the plan.

[Rajesh Ghai:]

Okay. Great. And my last question is on the marine containers market, now that the WAM acquisition is closed, have you had any discussions beyond Maersk and we know how it is going?

[Marc Eisenberg:]

That is a really cool business. That is a really cool business. We need to do some operational work right. So the first thing about WAM's business that you understand is that WAM's customer is AT&T, AT&T's customer is Maersk. So now the WAM business is selling direct to some of these steamship carriers and also selling through AT&T as well and one of the first things we did from the WAM business, WAM was great on the device and great on the firmware and understand the OEM protocols really well from a perspective of the refrigerated units and the ORBCOMM platform from a web platform was night and day more advanced than what WAM had. So Q1 we thought WAM devices to speak or to be translated on an ORBCOMM web platform and then AT&T comes and says I don't want this. I want that. So we private label it and build that. I think you're going to see WAM add more devices in Q1 or in Q2 than they did all year last year.

[Rajesh Ghai:]

All right. Thank you. Congratulations.

[Operator:]

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

[Mike Malouf:]

Great. Thanks guys. Can you -- I know you talked a little bit about the debt, but maybe Robert you could talk what are the opportunities to refinance and what are you seeing out there with regards to the markets especially now that you've gotten out of the risk out of the way with regards to the launch?

[Robert Costantini:]

Yes, so the company has de-risked the plan significantly so that in the past where we've taken our rates down when we had to do the first launch and we refinanced. The market has been a bit unstable, I think its staging a comeback in terms of the debt market so the opportunities that may coming to focus later this year. So we are going to be looking at, we’re looking at everything with respect to the opportunities available to us and I will just be one of them. So again we are focused on it but we want to make sure we do the right thing for sustaining our growth going forward.

[Mike Malouf:]

Okay. And then Marc, can you talk little bit more about really the revenue per service, especially when you look back at some of your legacy subscribers, I know that they had - not had the ability both on a wait-and-see and on a throughput basis to send may be what they would have liked to send to the information that they like to send. And so now that you’ve opened it up with OG2, have you seen any of them start to open up the amount of traffic that they are sending over OG2 or at least talking about it to where I know that a few years ago we always used to talk that RevPAR could actually accelerate quite a bit once OG2 was in place.

[Marc Eisenberg:]

Yes, it comes in stages right so, OG2 has had a higher inclination and we’re seeing parts of the earth that we haven’t seen before and this last launch of 11 - part of the reason it took another year and half to actually have a little bit more gain on them then the five that we launched last year. So the five – we drilled with the five or that we launched in - I think it's 2014, we’re even more throughout with the 11 that we launch now and I kept saying the first, we’re going to get a bigger jump in traffic when the five launch because you’re filling in the whole in the sky and not so much when the other launch that’s really about the sustaining the constellation and getting new products out there. And in March we’re seeing a lot more traffic. This is some pretty cool space craft, so drilled beyond where we thought we thought would be drilled with the operation of the spacecraft so let’s start with that. On our OEM business, I think you're going to see more business and you're going to see more products. It's just - they don’t move the first day, they move in these three and four year cycles. So it may not blip in the first day. You're going to see a big benefit soon in AIS that one comes first. You may see a little higher throughput in March then we did in January, we’re already seeing it and that’s going to help us as well. You are going to see more subscribers because there are two new types of service that we’re going to put out and then you are going to see the OEMs, start to roll out new services in 2017 to 2018. So it's going to come in a lot of steps and I can tell you how thrilled the OEMs are with the quality of service and the sense of relief that the huge basis of subscribers that they have, have 15 more years of life you can underestimate what they are feeling today.

[Mike Malouf:]

That’s great. Thanks a lot for the color. Appreciate it.

[Operator:]

And we'll go next to Howard Smith of First Analysis.

[Howard Smith:]

Yes, good afternoon, good morning, thanks for squeezing my question, and congratulations on a strong year. I think you kind of confirmed this in your remarks, but I just want to make sure, it’s great that you are spreading out the customer base with these 508,000 units and it’s a great broadening. I think you said though some of these mega deals in refrigeration and intra model that you have been working on for a while are still ,there you haven’t lose them - you can never predict the timing by quarter or by year for those.

[Marc Eisenberg:]

I think we're going to close some big ones. I think we already have meeting our refrigerated OEM and stuff like that. There is nothing has changed in terms of last quarter and those 500 to 8,000 that’s each right that’s - 508,000. One thing that I’ve learned in this business, I think it is almost my 40th call, but one thing I have learned in this business and one thing that you always - you're going to give me criticism, this is the one. No matter how long I anticipate the development cycle of either a satellite or a deployment in the M2M business, no matter how long that cycle is I’m wrong, and it's even longer. I used to think it was a quarter and it was a two quarters and I thought was two quarters and it was four quarters and it takes a really long time but once you have a base of almost $1.6 million subscribers that’s not a bad thing but these things take time and then in some cases there is deals that we’ve already won that we just can't announce yet.

[Howard Smith:]

Right, okay. I just wanted to confirm that. Thank you so much.

[Operator:]

And we’ll go next to Jim McIlree of Chardan Capital.

[Jim McIlree:]

Yes, thanks, good morning. Its sounds like you are going to end this year with about $1.8 million subscribers, is that in the ballpark?

[Marc Eisenberg:]

For 2016?

[Jim McIlree:]

Yes.

[Marc Eisenberg:]

So I think the projections are everywhere between like 145,000 and 170,000 that's the top of the bottom.

[Jim McIlree:]

Got it, okay and -

[Robert Costantini:]

Jim, we are coming at that from a lot of directions that the company has never done before.

[Marc Eisenberg:]

So just a little bit below your number?

[Jim McIlree:]

Yes right. And Robert can you help me a little bit with the operating expenses for 2016 if I combine SG&A and product development last year is about $50 million, did you make some comment about what you thought that was going to grow or would you telling about something else or you said low -

[Robert Costantini:]

No, I think we said on in the past that SG&A is a little bit more manageable. We have lot more employees now so we put on some platforms and that’s going to grow less than service revenue growth but it will grow. And we were targeting like high single digits growth there. We always do our part to find ways to take cost out of the business. Product development will be a different situation. You are going to probably see that grow more because we have a lot of engineers working on stuff and that’s probably going to grow – also the small number right, so we’re running let say a million 8 a quarter, it's probably going to be like 2.2 or something like that per quarter for 2016. So that moves up a little bit as a reflection of that great engineering talent that we’ve gathered.

[Jim McIlree:]

Right, okay. I’m just - I’m struggling with the math then on how you can do 25% EBITDA margins if you have your OpEx growing that much and 25% hardware margins it's just for - the math just has been working with -

[Marc Eisenberg:]

Yes, so we could - I’ll take a look at your model I guess I can perhaps point out some of those things but in our internal model it works and you are seeing a little bit of an increase in service margins, your product margins again this 25 points should be helpful. As we do better with some of the cost savings that you're going to see seminar and sizably expands our product sales that will generate more gross profit, we will see those come to the bottom line you are going to hit those 25 points, I mean we’re pretty comfortable with that.

[Jim McIlree:]

Okay. And that was it. Thank you.

[Operator:]

And we’ll go next to Daniel Amir of Ladenburg.

[Daniel Amir:]

Hello, thanks a lot. So most of my question have been answered but one questions as you mentioned that you have additional - you obviously have more free cash flow this year, what type of opportunities would be you looking on the product side in terms of expanding into potentially new areas or going deeper into your credit product portfolio. Thanks.

[Marc Eisenberg:]

Sure, there is - I want to say that over thanks last three years we spent something like $25 million in products, if we didn’t spend it then it was an acquisitions that was spent this part of it and you got your next generation refrigerated product coming out, your next generation heavy equipment product coming out, you’ve got a SkyWave product coming out that is going to take 80% of the size out of it, a ton of cost out of its, there is some incremental markets that we're looking at like fleet tracking and may be a couple of others that we're not willing to talk about yet. ORBCOMM Connect which is our MVNO platform just came out and you’ve got 5 million 2G subs coming back to the market that we would like to bid on them. We think we’ve got the best platform to do so. You’ve got our router product coming out. We already sold 100 of those in Q1. I wouldn’t say thousands yet but we’re certainly building up. As I just said to Jim, we are throwing an awful lot of different things at 2016. When we do put our might beyond, we tend to be successful.

[Daniel Amir:]

All right. Thanks a lot.

[Operator:]

And we’ll go next to Mike Latimore of Northland Capital.

[Vijay Dev:]

Hi, this is Vijay Dev speaking for Mike Latimore. Couple of questions. Could you talk a little bit about opportunities in Russia and China? I believe you have CIMC, a pilot program announced last quarter. I mean, if you can give us some update on that that will be interesting.

[Marc Eisenberg:]

Russia is top market right now. We just recently got a license there for our SkyWay product. We’ve got some opportunities specifically on rail coming in and out of Russia but from a currency perspective, it’s a difficult market. And a lot of our peers, a lot of their comp decreases are coming out of Russia these days. So let’s just dumb luck that- we don’t have comp decreases because we never have any business in Russia, because we never got licensing. China is something different. We are doing barely any business in China, and I don’t know that we ever properly explained the relationship with CIMC. Not only CIMC is going to believe – to be what I believe a huge user of ORBCOMM products, but they are also on the ORBCOMM side going to sponsor us with their partners for regulatory approvals in China which is really the might that we needed for something that we’ve been chasing for quite some time. Then I think China becomes a really good market for the ORBCOMM network. We just recently got the SkyWay product through in China and that’s something that we can sell there relatively quickly. So the good news is with some of these struggling economies, the good news is there is no bad news because we are off a very small base, but we think that there could be decent markets as we continue to grow but it starts off with a license.

[Vijay Dev:]

Okay. With OG2 launch complete, do you see any change in the competitive landscape with AIS business, at least?

[Marc Eisenberg:]

Do I see any change in the landscape? Basically from a space perspective, there is only two companies that you see out there bidding, number one is the Canadians. That’s quite a story. The parent that they had was acquired. Now they are, kind of, on their own. They did do a deal with Harris that they are potentially going to put some payload on some Iridium satellites. We’ve got 17 satellites of our own. I don’t know, if I were you guys, I’d be confused. Some guys are out there saying AIS, it’s a couple hundred million dollar euro business and then you’ve got ORBCOMM saying, we can get to 10 to 15. Maybe the right answer is somewhere in the middle. I don’t know but we can’t give you numbers that we are comfortable, that we can hit. That’s kind of where we are heading. If these guys can help us, if Harris can help us in creating a larger market that’s $200 or $300 million a year, we will get our share and that’s a great thing for ORBCOMM. What I see, I see 10 million to 15 million. So that’s kind of where we are.

[Vijay Dev:]

How are the margins in this business? I’m sorry.

[Marc Eisenberg:]

I’m sorry, say that again.

[Vijay Dev:]

What about the margins in AIS.

[Robert Costantini:]

There is no incremental margins on AIS really.

[Vijay Dev:]

Okay. Thank you.

[Robert Costantini:]

There is no incremental cost. AIS is a team of 7 or 8 employees. We get some terrestrial links that we add to our satellite links, and those are flat. They don’t scale with the incremental revenues. They stay flat.

[Vijay Dev:]

Thank you very much.

[Operator:]

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

[Marc Eisenberg:]

Well, thank you very much for your questions. We look forward to speaking to you again in May and thanks for participating on the call. It's been a long one. Thank you.

[Operator:]

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