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Edited Transcript of ORBC earnings conference call or presentation 3-Aug-17 12:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 ORBCOMM Inc Earnings Call

Fort Lee Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of ORBCOMM Inc earnings conference call or presentation Thursday, August 3, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marc J. Eisenberg

ORBCOMM Inc. - CEO, President and Director

* Michelle Ferris

* Robert G. Costantini

ORBCOMM Inc. - CFO and EVP

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Conference Call Participants

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* Andrew Lodovico DeGasperi

Macquarie Research - Analyst

* Howard S. Smith

First Analysis Securities Corporation, Research Division - MD

* Michael Fawzy Malouf

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst & Head of Boston Team

* Richard Hamilton Prentiss

Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research

* Scott Wallace Searle

The Benchmark Company, LLC, Research Division - Research Analyst

* Stephen Andersons

Venator Capital Management Ltd.

* Thomas Michael Walkley

Canaccord Genuity Limited, Research Division - MD and Senior Equity Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to ORBCOMM's Second Quarter 2017 Financial Results Conference Call. (Operator Instructions) A replay of this conference call will be available from approximately 1:30 p.m. Eastern Time today through 1:30 p.m. Eastern Time on August 17, 2017. The web link service details for the replay can be found in today's press release. Additionally, ORBCOMM will have an audio webcast available on its website at www.orbcomm.com, an archive of which will be available for 2 weeks. I would now like to turn the call over to Michelle Ferris, ORBCOMM's Director of Corporate Communications. Please go ahead, Michelle.

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Michelle Ferris, [2]

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Good morning, and thank you, for joining us.

My name is Michelle Ferris, and with me today is Marc Eisenberg, ORBCOMM's Chief Executive Officer; and Robert Costantini, ORBCOMM's Chief Financial Officer.

Before we begin, let me remind you that today's conference call includes forward-looking statements and that actual results may differ from the expectations reflected in these statements. We encourage you to review our press release and SEC filings for a full discussion of the risks and uncertainties that pertain to these statements. I want to remind you that ORBCOMM assumes no duty to update forward-looking statements. In addition, the financial information we will discuss includes non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures is included in our press release.

At this point, I'll turn the call over to Marc Eisenberg.

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [3]

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Thanks, Michelle.

We're pleased with our performance in Q2 and have a good deal of momentum as we head into the second half of the year.

This quarter we achieved record highs in both hardware and service revenue, while shipping an unprecedented number of devices, totaling over 69,000.

On this call, we will update you on new customers and partnerships, our status on large deployments, some detail on our latest acquisition and then shift to operations.

At that point, I'll transition the call to Robert to walk you through the financials, and wrap up with Q&A. So let's get started.

Earlier this morning, we issued a press release announcing financial results for the second quarter ended June 30, 2017. ORBCOMM continues to grow organically as well as through acquisition, as evidenced by this quarter's strong revenue performance.

Total revenues reached a new high of $57 million, growing nearly 14% or $6.9 million over Q2 last year.

Keep in mind, Q2 was by far our strongest quarter of last year. Products continued to build, or product sales, and we're seeing faster conversion through the generation of high-margin recurring service revenues.

Service revenues increased in the quarter by 12% year-over-year to $31.1 million, a company record, and are up nearly $1 million or cap organically just over last quarter. Q2 product sales increased 16% year-over-year to $25.9 million, as we shipped over 69,000 units of hardware.

Our subscriber count or subs grew in the quarter by 62,000 net subs, including subscribers obtained through the inthinc acquisition, taking the base to 1.83 million subs at the end of June 2017.

Q2 adjusted EBITDA of $12 million was negatively impacted by $0.3 million from inthinc, while last year's adjusted EBITDA was positively impacted by a $1.3 million onetime gain from the recoupment of a regulatory fee, making for a tough comparison. Otherwise, adjusted EBITDA would have been well up over last year.

Diving further into our second quarter results, we're seeing strong momentum in nearly every aspect of our business. From transportation, heavy equipment, container and port solutions to AIS, network services and RFID solutions. Our recurring theme to 2017 has been large volume deployments with lower margins, and key counts being installed far quicker than we had anticipated, leading to the compression of overall margins.

We've also been putting additional resources and supporting installations for these deployments that are affecting service margins as well. We do not believe these are long-term trends, as we expect these shipments to taper off later in the year.

If you think about it, this is a pretty good trade-off. Although margins suffer for a couple of quarters, the trade-off is having a quicker conversion to higher-margin service revenues. As I mentioned earlier, we're already starting to experience this trend with large jumps in service revenues quarter-over-quarter, which is core to our strategy and should lead to a great start to 2018.

inthinc contributed 3 weeks to the quarter. As I mentioned earlier, the inthinc contribution let to a reduction in adjusted EBITDA of about $300,000.

When inthinc was acquired, it had a number of customer opportunities, but little to no inventory in the pipeline. Of the $900,000 inthinc contributed to revenue over those 3 weeks in the quarter, $700,000 was service revenues.

In order for inthinc to contribute positively to adjusted EBITDA in the near term, their plan will require a larger share of hardware sales. We are back on our way to delivering product and volume, and inthinc should add about 4,000 subscribers in Q3, and over 13,000 by the end of 2017.

We're excited about the prospects of inthinc, but it's going to take a quarter or 2 to get the business on track. I'll speak to inthinc in more detail in a few moments.

Looking forward to Q3, from a revenue standpoint, next quarter looks to break all new records. J.B. Hunt, the Postal Service and our new heavy equipment OEM, who we recently announced as Oshkosh JLG, expect to receive over 40,000 units. That's nearly 20,000 units more than we shipped these customers in Q2.

With strong organic growth, coupled with a full quarter of inthinc, the third quarter revenue should take another leap forward and reach the mid-$60 million range.

We do, however, anticipate the same short-term margin issues we experienced in Q2, as well as significant shift from service to hardware in the mix for the quarter. So while adjusted EBITDA should be high, adjusted EBITDA margins will most likely be temporarily softer than they have been in the past.

Once again, we look at moving these projects along at a faster pace as extremely positive. We get service revenues ramping faster, we get these deployments completed, and we have a -- we get to move a good deal of our resources to a significant pipeline of opportunities. There's a lot we like about our position.

Let's move on to the business highlights, starting with heavy equipment. Over the past few quarters, we have talked about a new OEM using our end-to-end Telematic Solution for their global equipment. Last month we announced that OEM is Oshkosh, a Fortune 500 company and leading manufacturer of specialty vehicles. We are working on providing our solutions to multiple divisions within Oshkosh, starting with the JLG aerial work platforms and telehandlers, to enable them to proactively manage and maintain their customers' fleets.

JLG is operating our solutions as both a factory-installed option for new machines, and an aftermarket option to retrofit machines in the field.

In Q2 we shipped a few thousand devices to JLG, and currently have orders for over 10,000 more that we expect to ship over the rest of the year. JLG is making solid progress on deployments in North America and Europe, and we expect the Middle East, Africa and Asia-Pacific to follow shortly.

Being selected by a world-class OEM like Oshkosh, demonstrates our leading position in providing large-scale, customized solutions for the heavy equipment industry, and we look forward to expanding our telematics program across many of Oshkosh's Equipment Divisions.

We're continuing to execute on large deployments, with both J.B. Hunt and AT&T in support of the U.S. Postal Service, as I mentioned earlier. We're shipping these customers much faster than anticipated. We shipped over 15,000 systems between them in the second quarter and expect that pace to double in Q3.

Our solution delivery and installation teams are fully engaged with J.B. Hunt to help deploy their entire fleet of more than 90,000 assets, we hope to complete the overwhelming majority this year. We're also seeing progress in our shipments to AT&T for the U.S. Postal Service. In Q2, we shipped over 6,000 devices to the Postal Service for their key leasing suppliers. We also begin shipping to their third-party haulers that carry mail on dedicated routes in Q3.

Looking further into our transportation business. In Q2, many of our long-standing transportation customers continued to place renewal orders, such as Walmart, Hub, Hirschbach, Prime, SpartanNash, Meyer, C&S Wholesale, J&J Express and Werner.

We've also closed many new opportunities this quarter, some of which include Allen Distribution, Dedicated Logistics, PSC Metals and Dominoes Pizza.

In addition, our Euroscan Team is providing our dual-mode container monitoring solution to Unit45, a leading European intermodal container OEM. Unit45 specializes in diesel, electrical refrigerated containers, which are uniquely positioned for transporting cargo by rail from China to Russia and Western Europe.

We also had an exciting win on our container and port solutions, or CAPS business. TOTE Maritime, Puerto Rico, a premiers shipping carrier that moves cargo between the U.S. mainland and Puerto Rico, is using our VesselConnect solution to manage their fleet of smart, refrigerated containers at sea. VesselConnect extends connectivity to open water, providing TOTE with seamless visibility and control of its assets along the cold chain. They completed deployment of the ORBCOMM solution in late Q2, and are realizing the benefits of their investments including reduced cargo damage, lower operating cost, better regulatory compliance and enhanced customer service.

TOTE Alaska, another division of Tote Maritime that moves cargo between Tacoma, Washington, and Anchorage, Alaska, is also using VesselConnect along with our asset monitoring solutions for their refrigerated containers, dry containers and trailers to improve the safety and efficiency of their supply chain operations.

TOTE Alaska began deploying in Q2. TOTE is a great example of ORBCOMM's cross-selling success by leveraging our broad portfolio of transportation solutions to meet customer's requirements for multiple asset types, market segments and geographies.

M&A continues to be an integral part of our strategy to add vertical markets, geographies and technical capabilities to our IOT portfolio.

In our transportation business, many of our customers have demand for fleet-vehicle telematics products, and our strategy is to be a one-stop supplier for all transportation needs. The acquisition of inthinc, which we completed in June, provides an excellent entry point into the vehicle fleet market, and helps fill the need in our product portfolio.

We are now able to provide customers who operate a wide range of assets with a more complete solution, offering in nearly every transportation market segment: Reefer, Dry Van, Intermodal, Rail, Chassis, Sea Container and now vehicles.

Based in Salt Lake City, Utah, inthinc has an impressive service offering that provides vehicle fleet management and driver safety solutions to a broad range of industrial enterprises. A long-time customer of ORBCOMM's Wireless Data Services, inthinc's telematic solutions improve operational efficiency, regulatory compliance, workforce optimization and driver safety, through the two-way integration of in-vehicle and mobile devices, web applications and data management.

We're making progress on integrating inthinc's engineering sales and corporate functions, and are working through some challenges to restart their product flow to meet their strong demand.

As we expand inthinc's products to our transportation-heavy equipment markets, we believe there is great potential for cross-selling opportunities, as with every application -- acquisition we've done previously, and look forward to reporting some exciting customer wins in the near future.

ORBCOMM is now one of the largest industrial IOT players, with hundreds of employees worldwide dedicated to commercial transportation, supported by the most technically-diverse engineering team in the industry.

As we grow in size and scale, we're becoming extremely effective at solving customers' problems and meeting their requirements for large customized deployments. We believe this gives us a unique advantage for being selected by some of the biggest names in the industry, such as J.B. Hunt, Walmart, Carrier, Maersk, Swift, AT&T with the U.S. Postal Service, Union Pacific, Prime and Hub Group.

We're making positive strides in opening up new markets for our Satellite Connectivity Services. We recently signed an agreement with Beijing Marine Communication Navigation Company, or MCM that allows ORBCOMM to provide IsatData Pro, or IDP, service in China for our customers, with asset monitoring applications in the IOT markets.

China is an important geographic market for ORBCOMM and our customers. This agreement broadens the reach of our satellites business, and strengthens our service offering to better meet our customers' needs.

We're continuing to win new customers within our government business. Our partners Gov Mobile and Radio Mobile won separate contracts to provide the California Department of Forestry and Fire Protection, known as CalFire, with an automatic vehicle location system that will provide a reliable, constant connection on over 1,200 emergency response vehicles.

The CalFire program is a great example of how we leverage our comprehensive IOT ecosystem and key partnerships to help government agencies improve visibility and management to their assets.

Moving on to our Application Enablement Platform, or iApp, we're continuing to see momentum in the business marked by several new wins in Q2, including Pretium Resources, a precious metals mining company. Pretium will utilize our asset watch solution, in conjunction with Wi-Fi RFID technology, to track their underground miners and vehicles in real-time at the new Bruce Jack Goldmine in remote British Colombia, enabling them to gain production efficiencies and improve miner safety. We've also expanded our opportunity with Lockheed Martin to include an RFID tracking solution for their Space Systems Group, to further improve visibility of their extensive manufacturing process.

The iApp business was acquired about 2.5 years ago, and we're seeing this group hit its stride with a growing pipeline in a number of cross-selling opportunities with many of our current customers.

Turning to AIS. Q2 set another record high with over $2.3 million in revenue driven by steady growth. We're now collecting over $28 million messages per day from over 200,000 unique vessels, both milestones that we're well ahead of our competitors. We continue to expand our AIS business, through our established contracts, including a new order through our partner LuxSpace, from the European Maritime Safety Agency, to add an official European country to receive our AIS data, starting in September.

Leveraging the new AIS products in our portfolio and our extensive network of channel partners, we expect to see continued growth in this business through the second half of the year.

Let's move on to our Satellite Constellation. As a reminder, we launched 17 OG2 satellites, between 2 launches in July 2014 and December 2015, of these 17 satellites, 12 are working without issue and performing as expected, 2 are written down in prior years. We disclosed one with a solar ray anomaly in Q1 that is struggling with a loss of connectivity. And 2 other OG 2 satellites are experiencing loss of connectivity as well. One was our prototype. There's been little effect on message delivery times, and no impact on message throughput and revenue.

We've established a comprehensive investigation team that includes independent consultants, as well as ORBCOMM engineering and OG2 contractors to determine root cause and associated corrective measures. Each satellite carries a book value of about $10 million, and our goal is to recover all 3 satellites.

As I mentioned on previous calls, each OG2 satellite has the capacity of over 6 OG1 satellites, and the resiliency of the entire constellation increased capacity enables us to reposition the satellites in the events of these circumstances, which reduces the impact on network service.

OG2 satellites process about 80% of the network's message traffic, which now totals approximately 1.2 million messages per day.

Overall, our customers continue to be pleased with the network's performance and quality of service.

Our diverse network offerings of lower-orbit geostationary and terrestrial services enable us to provide the broadest set of connectivity options in the industrial IOT.

For customers with latency-sensitive applications, our MR SAT based IDP network meets their requirements by offering the highest payload and lowest latency of any satellite IOT service.

We're also near completion of our dual-mode satellite modem, leveraging the complementary technologies of the IMMARSAT Geostationary Network, with ORBCOMM's low-earth orbit network to provide customers with the most capable satellite connectivity. The result of these 2 powerful satellite networks working together on a standardized platform will enable ORBCOMM to offer the best combination of geographic coverage, the most regulatory authorizations, the fastest service, and the largest message payloads. We expect to start shipping our modem in small quantities over the next couple of quarters.

Let's wrap up with a product update. In Q2, we continued to ship IDP terminals that utilize our new Radio Frequency Integrated Circuit, or RFIC, to a large fishing buoy OEM, and completed our first shipment to a large fleet management company in South America.

As a reminder, the RFIC is a custom chip that reduces the part count by 600 components, thereby, reducing cost. The RFIC terminal will be available to all customers in Q3, and we expect to start seeing the benefit of cost savings and efficiencies as we ramp up to full production.

We also shipped the first of our LTE-enabled cold chain monitoring devices to 2 large refrigerated transport companies in North America. The RFIC and LTE Cold Chain Solution are just 2 of the more than 140 active projects our engineering team is working on.

Innovation is by no means slowing down at ORBCOMM. Between now and 2018, we plan to roll out more than 20 new products and solutions, ranging from feature enhancements to sensors and peripherals to product configurations to user-interface designs. These projects span every aspect of our business, as well as several new product categories.

We believe the substantial investment we're putting into our in-house innovation is paying off. Let me reiterate. We shipped a record 69,000 ORBCOMM devices this quarter, and it could be as many as 90,000 in Q3.

Summing up, with the first half of the year behind us we feel good about the business. It was a strong revenue quarter and we're positioned well in our markets. We're focused on a number of priorities, including the integration of inthinc, executing on our large deployments, closing multiple new opportunities, rolling out several new products and working toward building our pipeline for 2018.

We're seeing increasingly strong demand for our products across the business, and we're excited about the host of new customers and markets we're now able to serve through inthinc.

At this point, I'll turn the call over to Robert to take you through the financials.

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Robert G. Costantini, ORBCOMM Inc. - CFO and EVP [4]

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Thank you, Mark. Good morning, everyone.

Our second quarter top line results were excellent as ORBCOMM generated new highs, with total revenues of $57 million, up 14% over last year. Service revenues were up 12% to $31 million and product sales were up 16% to $26 million, both at record level.

Contribution margins came in lower than anticipated, 45.7% of total revenues, as both service and product margins were lower, affected by the rapid delivery and installation of large, previously announced orders, and a dramatic increase in lower margin product sales reflecting volume pricing.

The rate of shipments for these large deployments are pacing faster than anticipated, resulting in higher production and delivery costs.

Related installation costs are also running higher, to convert them quicker to service revenues. We anticipate that contribution margins will improve as these impacts lessen.

Adjusted EBITDA for the second quarter totaled $12 million, essentially flat to last year, and was impacted by the lower contribution margins, as well as $0.3 million of negative adjusted EBITDA from the inthinc acquisition.

Adjusted EBITDA margin for Q2, at 21.1% of total revenues, is down from 24.2% compared to last year. That benefited from a onetime recoupment of a regulatory agency fee.

Growth in service revenues is mainly attributable to the growing subscriber base from several quarters of higher product sales and installations, along with growing AIS revenues.

Service revenues for the second quarter grew 12.2% or $3.4 million over last year to $31.1 million, with organic growth at high-single digits, spread across almost all service offerings.

AIS revenues continue to grow, coming in at $2.3 million for the quarter, almost $10 million on an annual run-rate basis. And sequentially, service revenues were $1.6 million higher than the previous quarter, and just under $0.7 million was contributed by the recent acquisition.

Our contribution margins for service revenues, net of direct cost of service in Q2, were 65.7% of total service revenues, a decrease of 50 basis points from last year, partially due to the installation cost running higher than installation revenues, as we are actively involved in the installation of a large deployment to meet our customer's delivery schedule, a process typically left to the customer. This effort to accelerate highly visible, long-term, recurring service revenues has long-term benefits.

Another impact to service contribution margins is lower service margin from the recent acquisition. That should improve with increased scale over the next several quarters.

Excluding these 2 items, service revenues contribution margin would be 68%, and trending higher than prior year and previous quarter. The underlying service contribution margin is in line with our long-term projections and an increasing service contribution margin, and the short-term impacts described are not signaling a change in our long-term view.

Product sales in Q2 were $25.9 million, growing $3.5 million or 15.7% compared to last year. Demand across multiple product lines drove the increase and the acquisition added about $200,000. Q2 product sales also saw shipments to our new OEM customer JLG. Overall, we shipped over 69,000 devices in the second quarter, and the company is expecting additional increases for Q3.

Contribution margins for product sales, net of direct cost of products for Q2, were at 21.6% of total product sales, decreasing 150 basis points compared to last year and reflecting higher production and delivery costs, coupled with already lower pricing for large volume orders.

These factors are meaningfully impacting margins, and we expect this compression to continue for the next couple of quarters. The contribution margin issues driving higher production, delivery and installation costs are connected and represent short-term activity cost that we believe will eventually taper off, but will likely continue to hamper margins over the next couple of quarters.

SG&A expenses were $13.3 million versus $11.1 million last year. The increase in Q2 this year was due to the additional cost to operate the new acquisition and the prior year benefit from a onetime recoupment of a regulatory agency fee.

Sequentially, the increase from Q1 is about 11%, reflecting higher SG&A for inthinc.

Likewise, product development costs are up sequentially over Q1, due to the addition of inthinc as well.

Depreciation and amortization in Q2 was $11.4 million. Interest expense, including amortized financing fees, was $4.8 million versus $2.4 million last year, higher due to the new debt offering.

Interest expense for Q4 should be about $5.2 million including amortized financing fees.

Acquisition-related and integration costs for the second quarter were $1.3 million, due to the acquisition of inthinc completed on June 9.

Last year, costs were $0.6 million for the Skygistics acquisition.

In the second quarter of 2017, we reported a net loss of $10.7 million compared to a net loss of $4.2 million last year, with the increased loss due to the higher interest expense of $2.4 million, and a noncash $3.9 million write-off of deferred financing cost and an early payments fee associated with the debt settlement in April, as well as the added operating cost for the recent acquisition.

Looking at the balance sheet. Cash totaled approximately $84 million at June 30, 2017, compared to $25 million at December 31, 2016, increasing $59 million. Cash increased from the issuance of $250 million senior secured notes, partially used to refinance $150 million of debt and $50 million was provided by the private placement of common stock.

Cash used in operations in the first half of 2017 was $2.3 million, for increases in working capital from higher product sales receivables and inventories to meet product demand.

In the second half of 2017, we expect operating cash flows to increase -- to continue to reflect these increases in working capital, reporting receivables and a higher product sales, as well as inthinc's bundled pricing model for product sales and financing.

For investing activities, $34.2 million was for the inthinc acquisition, and $14.2 million for capital expenditures.

In the first half of 2017, capital expense was at $14.2 million, included $2 million for OG2 milestone payments, $3.7 million for sustaining CapEx for existing infrastructure and $8.5 million in investment CapEx covering our in-house innovation of new products and services.

For the rest of 2017, capital expenditures are expected to be about $6 million per quarter. Breaking down that $6 million quarterly capital expenditures further, $1.5 million is for sustaining CapEx and about $4.5 million for investment CapEx.

Our total debt outstanding at June 30 is $246 million, net of debt issuance costs.

Moving now on to Q3 guidance. Our total revenues for Q3 2017 are expected to be in the mid-$60 million range, divided nearly equally between service revenues and product sales. Product contribution margins are expected to be in the mid to high teens, given the margin pressures discussed earlier.

Adjusted EBITDA margin, as a percentage of total revenues, is expected to be around 20%. This is softer than it has been recently, given the significant increases in hardware and short-term margin pressures.

For the full year 2017, we are now guiding total revenues to the very top of the range for both service revenues and product sales, between $230 million and $235 million without inthinc, and $240 million to $245 million with inthinc.

Adjusted EBITDA margin for 2017 is now expected to be in the 20% range for the full year, due to the higher mix of hardware and total revenues, and should return to higher levels in 2018.

This concludes our remarks for this call, and we're now happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Rick Prentiss with Raymond James.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [2]

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I want to start with a couple of questions. First, in the quarter you mentioned 62,000 subs and 69,000 units shipped. How should we think about that trending out as far as shipment versus turning into subscribers? And how much did inthinc include in the 62,000 in the quarter?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [3]

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Yes. So there's a couple of factors moving that back and forth. The 62,000 is a net number. So that is after churn. So if we're churning 6% or 7% a year, you've got to take those subs off in the quarter. So that's why the numbers don't match up. And in addition, when subs go up -- when units get shipped, it may take a quarter for them to turn into subscribers when they get installed.

So the timing is not perfect. Now I'm really going to confuse you. On inthinc, there were so many factors that went into the inthinc subs. First of all, there were -- some were single-mode, some were duel-mode. A good portion of these cellular ones were already on the ORBCOMM network, so they didn't affect subs. There was so much give-and-take in the inthinc subs. They have 35,000 subs, but I don't know that 35,000 made it. Looking at subs, subs are definitely ramping. And looking at Q3, I just was checking before this call. We didn't quite get there, but we almost got 20,000 activations just in July. So subs are definitely ramping.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [4]

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Great. And then I think you mentioned inthinc would have 4,000 in third quarter. And then the 13,000, was that for the year in which you own them? Just trying to understand what the 13,000 meant?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [5]

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Yes. So the -- imagine 4,000 pieces of hardware shipped in Q3, and 9,000 more in Q4. So I think if we had all 13,000 we can ship them tomorrow, or the overwhelming majority of them. But there is a process to get them built. And there were 0 in the manufacturing pipeline when we bought the company, which was why in the first 3 weeks that we owned them, which was 3 weeks of last quarter, they contributed next to nothing in hardware. And it's tough for them to be profitable with hardware being 0. It would be tough for ORBCOMM to be profitable if hardware were 0. So that's kind of what we experienced. But you can imagine, you take this company and you add 13,000 more devices to their 35,000 units of -- that are out there reporting at these higher ARPUs, and this thing becomes pretty really quick. It's just going to take us a quarter or 2 to get there.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [6]

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Okay. And then I think one of the more exciting things in the last couple of months was the JLG acquisition. You talked a little bit about it as far as units shipping. How should we think about the ability to ramp in -- over the next couple of years? And what would that impact be, as far as on service margins and overall margins?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [7]

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Yes. JLG is shockingly huge. Seriously guys, when you're driving home and you see these aerial lifts or -- sometimes they're called scissor lifts, go and take a look and you'll see the JLG logo. I mean they're everywhere. And they make tens of thousands of these per year. I think the 10,000 that we guided to for the rest of the year is super conservative, because we expect to ship all of them in Q3. And we don't expect Q4 to be 0. But there is a little bit of how quick do they get the factory installs done. And then now that they're out in the market bidding on some of the units that have been fielded or, I should say, the retrofits. I don't want to steal their thunder, but I think they're doing really well. And I think it's -- tens of thousands of units in the really short term. What's really cool about this deal is the deal was struck 1.5 years ago. It's not a when is it coming story. It's a, gee, we did this a really long time, and it's -- they waited till they were ready to make the announcement. And we had shipped 3,000 or 4,000 units before we even made the release. So this one is coming quick.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [8]

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And final question for me is on that same line is, obviously, Oshkosh has other divisions. How do you see that playing out your ability to penetrate deeper into them? And how long would that sale cycle take?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [9]

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Ooh, that's a really great question. Think inthinc. Think inthinc. They have a couple of products that it's a really good fit. I think we're a quarter or 2 away.

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Operator [10]

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And we'll go next to Mike Walkley with Canaccord.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD and Senior Equity Analyst [11]

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Robert, just digging more into the gross margin. I understand your big customers are ramping. But can you kind of walk us through gross margin maybe for the rest of the year? Obviously, it's not going to be the 23% you thought with the Q3 guidance. And then how do we see that maybe recovering, once you get through some of these big rollouts?

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Robert G. Costantini, ORBCOMM Inc. - CFO and EVP [12]

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Yes. That's exactly the story. So the faster delivery and installation efforts has added those pressure, and we want to meet their time line. So that's -- it's like a couple of quarters that we are looking at. And if we can continue to meet those delivery schedules, we should rebound. When you pull out some of this larger dynamic. When we look at the [resin] business, oddly enough, all that is trending well over 25% margin. So we see the rebound coming once we get through this kind of effort that we're dealing with now. So we like the rest of the business. That's our target. Sometimes we do even better than that, sometimes we don't. But the large volume pricing is going to be an impact, along with the additional cost for just the next couple of quarters. I like the way 2018 would look in terms of what we've traditionally targeted, on that score. And that's kind of how we're thinking about it.

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [13]

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I think there is -- just to kind of add to that, there's 2 dynamics here. Number one, you've got more lower margin stuff being averaged into the hardware that shipped. But there's a second part that is -- caught us a little bit by surprise. And that is some of these guys are demanding, like J.B. Hunt is receiving a container a week. And they fit almost 2,000 units in a container. And pushing us to 5 containers a month instead of 4. And just being caught a little bit flat-footed, you need to expedite some of the product. So the costs that you're having there weren't what you were expecting, plus the mix isn't what you were expecting. And it's lightning striking twice. But this is really short term. This is going to be done in a quarter or 2. And then all that's going to left is hundreds of thousands of units between the few big deals of service revenues kicking in, and you're already starting to see the subs ramp. Service revenues shooting higher, and this is going to be a really pretty picture. We just have to swallow our pill a little bit here.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD and Senior Equity Analyst [14]

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Great. Just building off that, as it gets to 2018, maybe just look out, can you just remind us your longer-term model where you see the adjusted EBITDA margins once you get through these issues just to help us in longer-term modeling? Given the step down in the short term?

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Robert G. Costantini, ORBCOMM Inc. - CFO and EVP [15]

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Yes. So again, we've looked at margin expansion on adjusted EBITDA, primarily driven by service contribution margin expansion, which we see impacted by these short-term pressures. So we expect to sort of resume on that original ramp. So if we were originally guiding to 24, 25 point margin this year. I'm expecting it to go back into that range with growth. We're not ready to give you guidance for 2018. But again, we see this thing getting back on track. If you look overall long-term growth, this is not unusual for us as we acquire new companies and we continue to take these step ups. Remember, subs used to be in the 20,000 quarter range. And then we went into the 30,000 and then we went in to the 40,000. Now we're in the 60,000. So there is always like this step up that we take and then we continue back on our growth -- resuming our growth. But our long-term view on that model has not changed from conversations we've had in the past.

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [16]

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But to what Robert said before, Mike. If you pull out those deployments, you're over the 25 point hardware margins, which means that you're well over the 25 point EBITDA margins. So these deployments are a quarter or 2 away from being completed. This thing should just snap right back into place.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD and Senior Equity Analyst [17]

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Right. That's helpful. And just on the model, Robert, can help us with the OpEx with the full quarter of inthinc? What are you thinking about for sales and marketing and product sales sequential growth?

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Robert G. Costantini, ORBCOMM Inc. - CFO and EVP [18]

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Yes. So I think we've got some rightsizing to do there, around the organization anyway. So the number that we're sort of looking at, above, let's call it 13 5, 13 7 for SG&A. It's probably the new norm there. And the $1.9 million for product development, along with $11.5 million for D&A. Seems like the right number. We'll have product -- I'm sorry, we'll have acquisition-related costs as well moving into Q3, as we wrap this up. So that would also be part of the story. But those are generally the range that -- you've got to give me a little bit more time to operate this thing. But I think those will be comfortable levels to use.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD and Senior Equity Analyst [19]

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One last question for me and I'll pass it on. Mark, maybe just talk a little longer-term on the pipeline. Once you get through these very big installations, how do you kind of see the pipeline as you look into 2018 on, do you continue to add subs at these strong levels the last couple of quarters?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [20]

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We see a lot more deals. I can't tell you anything that's closed and concrete. But I think we may have a little less reliance on transportation, but we're seeing the rest of the business drastically step up. If you look at our heavy equipment group, the guys that closed JLG and stuff. And funny enough, we bought a company that had 3,000 subs, and they're going to do something like 14,000 this quarter. There is -- it's coming from everywhere. The momentum is really just awesome, which is why the company is kind of growing in engineering and we keep investing in it. I can't tell you the date, but GI could see $75 million quarters and $85 million quarters not too far off.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD and Senior Equity Analyst [21]

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Sorry, I'll ask one more question. Just with the inthinc acquisition, you talked about the up-selling and cross-selling opportunities into your base. Do you think inthinc's enough for the vehicle section of your offering? Or do you think with your strong cash in the balance sheet that, that's where you could bolster sort of other verticals?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [22]

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I think you kind of hit it. You've been watching us a long time. When we got into the transportation space, it kind of started with StarTrak and we put LMS in there and Euroscan in there. And boom, all of a sudden you're a market leader. I think kind of the way we do it is, core to our strategy is taking different types of assets and pulling them together and gaining scale. And I think that's worked for us. It's also a way that you can get relatively affordable assets. We love broken and subscale and turn them into -- you couple them together and you build these powerful organizations. And I don't know that our best skill set is picking these, as much as it is managing them and gaining scale and putting the pieces together. We're probably better operators than buyers.

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Operator [23]

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And we'll go next to Andrew DeGasperi with Macquarie.

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Andrew Lodovico DeGasperi, Macquarie Research - Analyst [24]

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So first, I guess, with -- given these large deals that probably had ARPUs that were below your average, but then JLG had this inthinc solution, that's likely above your average. I was just wondering how -- can you maybe map out where do you think ARPU sort of grows for the next few quarters?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [25]

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I think ARPUs are fine. I do. I think the mix is -- ARPUs are going to go up. Let me start with that, and let me tell you why. ARPU is going to go up because you need to get a full quarter of inthinc, and I think ARPUs are 3x or 4x of what ORBCOMM's ARPUs are. So ARPUs are going to go up. So separating inthinc from it, I think we're in the mid-single digits, as you average everything together. So I think it's not going to help or hurt.

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Andrew Lodovico DeGasperi, Macquarie Research - Analyst [26]

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Got it. And then on the production. Obviously, you're building a lot of devices and it's having an impact a little bit on margins. But I was just wondering, how much can you actually build in a single quarter, realistically? And can it be sustainable, like the 90,000 mark you're potentially having in 3Q, could you see that going forward?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [27]

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So good news. First quarter, I have not talked about issues in manufacturing and stuff sitting on the dock and shipped to the wrong place. I think we've got a handle on it. And do you remember last quarter? I said that we're building 90,000 and we shipped 69,000. We're building 90,000 and we shipped 69,000, because this is the 90,000 quarter. So we continue to ramp up there. Let me give you a feel for how much we've grown. So if you look at the last 8 quarters, and I just looked at this, this week, our low quarter in terms of manufacturing devices was 33,000. So we had a 33,000 unit quarter. I think it was a first quarter. It was maybe 2015, first quarter. And last quarter, we built 90,000 devices. So we've tripled our capacity in a year while moving to a new contract manufacturer. And we had some bumps and bruises, but overall if I can kind of -- a year ago, I'd say this is the run rate you would take, would you take it? Absolutely. With a year's worth of notice, we could probably go to quarter million. I mean Sanmina is huge, Sanmina is absolutely huge. And we're not even the biggest customer in that factory. I think Motorola is, or the old Motorola. So I think we're -- I think it's just a fraction. But where we struggle is when we're sitting there at 90,000 and then all of a sudden, you put an order for 140,000 and you don't give them any notice. But we do that.

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Andrew Lodovico DeGasperi, Macquarie Research - Analyst [28]

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Got it. And last question for me. Are you seeing any increased competition in any of your verticals at this point? Or has it been relatively steady?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [29]

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Gee, there's a lot of verticals, right? But the overall trend is, yes there is smaller guys that enter the market. But at the same time, there is a massive amount of consolidation out there, right? You get consolidation from private equity guys that put a couple of assets together. You get some consolidation from some of the big players that are looking for IOT strategies.

So I don't know if you guys saw, there was a transaction yesterday, CR Wireless bought NumerX. So perfect example of what I'm talking about out there. So we're going to get some competitors from industry to industry. There's no one that's kind of has the breadth that we do across all the verticals. But there is certainly competition, and it's here to stay. I think we run faster and harder than anyone out there. I look at the competitors, the little guys that are coming in with their 6 or 7 engineers against my, gee, it's over 400 now. And the stuff that we can do and the things that we can accomplish that the smaller groups can't. I think it's pretty overwhelming, and I think we're situated well. But we're going to have competitors.

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Operator [30]

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We'll go next to Michael Malouf with Craig-Hallum Capital Group.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst & Head of Boston Team [31]

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Robert, can we go through that service margins one more time? And where the pressure is coming from? And then when do you think we'll start to see that recovery, on the service side particularly?

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Robert G. Costantini, ORBCOMM Inc. - CFO and EVP [32]

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Right. So you've got -- the 2 factors are the upside-down nature of installation costs versus installation revenues. This is not -- this is never a big part of our quarterly picture. So service revenues are reported -- installation revenues are reported in service, and we're just running cost ahead right now, trying to increase the pace and improve the efficiency around that. So that's going to end with these -- the end of these large deployments. The other factor impacting that is just this new acquisition. So when you look at their margins -- with their layered in margin contribution is lower than ours. And again, it's just purely because of subscale. And getting back to what we talked about whether it'd be SG&A, product development, I need another quarter to really kind of work this -- get through the integration pieces and rightsize the place. But that's going to only improve with scale because again, like every platform you buy you've got to increase the scale and you've got it back to volume and growth. So those are the 2 factors. So I think after the effort to get through these large scale installations, that things should snapback similar in concept to what we talked about for product margins.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst & Head of Boston Team [33]

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Okay. Great. And then you're guiding to about 20% adjusted EBITDA margins for the year. So that would imply basically kind of like around the 18% for the back half of this year, and that's versus say 26% where it was last year?

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Robert G. Costantini, ORBCOMM Inc. - CFO and EVP [34]

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Yes. So it's more like 19% to 20% for the back half. But like I said, I'm trying to move aggressively on those SG&A costs and product development and so I'd run this thing for another quarter. Wouldn't really be able to give you much better guidance than that.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst & Head of Boston Team [35]

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Got it. And then it looks like CapEx is a little bit higher than what we are looking for and then the guidance, because I know that previously you had guided to about $10 million in...

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Robert G. Costantini, ORBCOMM Inc. - CFO and EVP [36]

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To $12 million, yes.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst & Head of Boston Team [37]

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So that's -- and that's up this year? Just because of some of these implementations or...

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Robert G. Costantini, ORBCOMM Inc. - CFO and EVP [38]

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No, no. It has nothing to do with that. It's just the sheer breadth of the opportunities in front of us and this in-house innovation that we are doing and everything from the RFIC to that new dual-network effort, trying to address all of these opportunities around JLG and that type of stuff. So that's what's driving it, and it's helping us win these large deals. And we're going to continue to be rolling out product over the next couple of quarters. Can't make any announcements now, but that's what's driving it.

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [39]

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We said in the script there's 20 new products coming out within the next year, so each one of them should have its own revenue stream. I don't know Mike, it's just I think we changed gears a little bit and that we see a pretty thrilling market opportunity in front of us right now, and we've kind of shifted a little bit into higher revenue gear to get as much market share as we can, get as much service revenue on, get this base of subscribers up as high as we can with these really low churn applications before we slow down a little bit.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst & Head of Boston Team [40]

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Got it. And then one quick follow up on the 2 OG2 satellites. Can you go over that real quick again? Are they -- do you think you can you get them back up and running, is that what you said?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [41]

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Yes. That's the plan, to get them back up and running. I don't know, the service that we are providing, even like the satellites is fine. We are performing really well, there is not a penny's difference in terms of the revenues that we're providing, but the goal is certainly to get them back. Our plan for satellites, we kind of went into this launch and as opposed to a backup plan being more satellites, the backup plan became an Inmarsat plan, right? And we kind of moved into that and it became the OG3 plan where OG3 is this mix of the 2 constellations and we went in put millions, I mean this CapEx, a good part of what you're talking about is $10 million into this dual-mode RFIC that sees both networks. So you're saying to yourself, do you want to pay $10 million in a modem or do you want to put another $300 million in spacecraft? Well take your pick. So we end up putting the money into the modem. So within the next year, you're going to be seeing the Inmarsat spacecraft overhead and then for difficult to reach positions and everything else, you've got the backup of the ORBCOMM stuff, a good portion of the low latency stuff has moved toward the Inmarsat stuff. The ORBCOMM is phenomenal because it's kind of cost reduced for people that don't have immediate latency constraints. And the plan is basically on track.

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Operator [42]

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And we'll take our last question from Howard Smith with First Analysis.

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Howard S. Smith, First Analysis Securities Corporation, Research Division - MD [43]

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And another busy quarter. I wanted to follow up. It's kind of related to the conversation we just had. First of all, on the dual-mode, I hadn't expected kind of shipments in the next couple of quarters. I thought it was still a little further out, is that accelerated in any way? And should we still think about in terms of material impact of the business more of a '19 than an '18 phenomena?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [44]

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Sure. So when I read it, our script, it kind of jumps into a dual-mode RFIC. And then we start talking about an RFIC. So our fault, we confused you. There's 2 separate products. One of them is an Inmarsat-based IDP, RFIC that we co-built with Inmarsat. They're using it for began, we are using it for IDP, but it's the same front-end RF portion on both. And you take 600 components out and you take out, I don’t know, $60 or $70 in products and you replace it with a $5 chip and it's as cool as can be. That project started years ago and we started shipping in Q4 of last year to one customer. We added our second largest customer. And by Q3, we're going to start pushing all customers towards that. We're going to end production of the product that uses the 600 discrete parts. That is one thing. So we go to the same manufacturer of the chip in Ireland and we say, "Okay, can you add ORBCOMM to this chip to become the dual-mode RFIC?" And we do a study to show that we can do it. We start spending silicon, we get a pretty good spin in the last quarter and now we expect to start shipping those in prototypes really small quantities this year. So we are going to start shipping it this year, and it's really hard to plan that. Are you going to do one spin or are you going to do 2 spins, are you going to do 3 spins? So really tough to time it, but I think we're going to start shipping pretty soon.

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Howard S. Smith, First Analysis Securities Corporation, Research Division - MD [45]

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Well, that's helpful. And then on the OG2 satellites, can you just remind us. Your intent is to recover these and have them working, but if you can't, where are we in terms of insurance and would this be kind of a coverable event should you not be able to work it out?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [46]

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It's not an insurance event, it's not an insurance event. We were covered for 1 year in orbit and then the launch. And when we went to extend it, just recently, the deductible was large and we wouldn't have gotten -- let's say if we were to be unfortunate and not recover the 2 satellites plus the T3 1, but if we weren't to recover it we wouldn't have gotten a dime anyway. So it just wasn't an insurance event. I think there will be a couple of satellites over the next couple of years, like a kind of dumbed down OG2, OG3, a few satellites which will supplement the constellation, which will be in a polar orbit because it supplements Inmarsat and those satellites. So we're kind of looking at that, but not an insurance event.

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Operator [47]

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And we'll go to Mike Walkley again with Canaccord Genuity.

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Thomas Michael Walkley, Canaccord Genuity Limited, Research Division - MD and Senior Equity Analyst [48]

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Robert, just a quick housekeeping question to follow for me. Just on the OpEx again, with the full quarter of inthinc, do you still think it's just slightly up sequentially and does that imply your product gross margins closer to 10% for this quarter to get to that 19%? Or should OpEx be a little higher than those numbers you gave me where you target it to come down to over time as you do some cost cutting with the inthinc team?

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Robert G. Costantini, ORBCOMM Inc. - CFO and EVP [49]

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Yes. Those were the ones that I was hoping to achieve. I mean, if you want to just kind of layer it in, be more conservative about it. You're probably looking at 14.5 for SG&A, and north of $2 million for product development, and let's call it Q3. That hasn't been the m.o. at ORBCOMM ever, for acquisitions. I was giving you what I felt would be a really good number. I think that's what you're asking. If that's the question, I think if you want to just kind of roll it up on a run-rate basis, you're probably at 14.5 and change for product development. I'll have to go back and think about your second part of the question in terms of the margin, but I think when you run service margins level to where they are, the product margin guidance that we give you -- we provided in the low -- I'm sorry, the high teens for product margin and then you put in those costs, like I just described without any synergies, you'll probably get to your about 20% margin. I mean that's what our model's showing. I can get back to you off-line and see what you have there, but that's how it rolls up for us.

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Operator [50]

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And we'll go next to Stephen Andersons with Venator Capital Management .

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Stephen Andersons, Venator Capital Management Ltd. [51]

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I just have two quick ones. So the lag between installs and that upside-down installation cost versus revenue. If you installed, you said over 15,000 for J.B. Hunt and AT&T and U.S. Postal Service last quarter. How many of those would be turned on by this point?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [52]

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From the ones last quarter? Probably all of them.

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Stephen Andersons, Venator Capital Management Ltd. [53]

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So it's less than a quarter lag?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [54]

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For those 2 accounts, yes.

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Stephen Andersons, Venator Capital Management Ltd. [55]

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And then the second one was, obviously you're going to see large scale deployments in the future. Hopefully, more and more of them. How do you get better at this? Is this just a fact of life and business or do we see the same margin impact over time or is it more of a bigger base business, you don't notice it as much?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [56]

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Well I think first of all, this is the biggest deal not only that we did but the biggest deal anyone's ever done. So I think we're kind of learning, but it is not unlike us to get a new product and a new market to invest, over-invest a little in the first customer. And then you kind of get it back through the scale in the second, third, fourth and fifth customer. And then specific to J.B. Hunt, this particular product, it uses components from other products but it's basically a new product. We've never done it before. So all of that investment and everything is kind of in that product and in those margins.

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Robert G. Costantini, ORBCOMM Inc. - CFO and EVP [57]

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And you're supporting an organization that's larger to do that. So that cost will then be -- or that infrastructure will then be available to handle the next large volume. We believe the large volumes are something that we do well and we are moving into an unprecedented level of being able -- of capability to do it. So the infrastructure built around that. And it's a matter of efficiency. You've just got to learn to be more efficient about it, and we're learning what it means to do 90,000.

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [58]

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Go right ahead.

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Stephen Andersons, Venator Capital Management Ltd. [59]

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You're just saying that you guys are dedicating more of your resources to the installation side, which I take it is a bit of a surprise to you. Is that consistent with what you expect to happen in the future was it more just [betting the butter]?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [60]

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The answer is no. We don't expect it to happen. J.B. Hunt is a huge customer for us, not just on the container side but across almost everything they do. And these guys had a business plan that required them to field as many of these as they possibly can while these things are kind of sitting there, ready for the big fourth quarter push. We kind of jumped in, the way we bid it we had to put our resources there to help this customer get it across the line, they're our reference customer. For any of you that have called them, I'm sure they had 99.5% great things to say about us. They're a phenomenal reference customer, it's a new product that we've never shipped and we invested in this project.

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Operator [61]

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

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Unidentified Analyst, [62]

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This is [Rasheid] for Mike Latimore. I have a question on guidance. Can you please confirm the full year guidance, including inthinc?

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Robert G. Costantini, ORBCOMM Inc. - CFO and EVP [63]

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$240 million to $245 million.

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Unidentified Analyst, [64]

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Great. And the second one ...

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [65]

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The inthinc guidance is $10 million. So if you want to do it without inthinc, $230 million to $235 million, which is right at the very top end where the company guided to, but we didn't want to stick inthinc in and kind of make it look like it's organic growth or that we were planning on that as part of the guidance. So the organic guidance is very high end and inthinc is about $10 million more.

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Unidentified Analyst, [66]

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Okay. Sorry, I might have missed the -- I know the gross margin guidance for the services segment in the third quarter, is it like around -- can you repeat that again?

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Robert G. Costantini, ORBCOMM Inc. - CFO and EVP [67]

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Yes. So all-in gross margin will be around 50%, but I'm suggesting that people use the margin for Q2 to service but bring product margin down to the high teens. So when you blend that all in...

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Unidentified Analyst, [68]

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Okay. Just one more question. What is the status of the large pilot with CIMC that you announced in the last couple of quarters?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [69]

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Yes, CIMC is still moving along. They're piloting with large customers. We're hoping to get some stuff closed. They started forming the global smart container alliance with some of their partners. They're moving from a marketing and from a pilot perspective. I can't say that we are fielding tens of thousands of deployments yet, but gee, we're as anxious as you are.

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Operator [70]

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(Operator Instructions) And we'll go next to Scott Searle with Benchmark.

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Scott Wallace Searle, The Benchmark Company, LLC, Research Division - Research Analyst [71]

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Just a couple of quick follow-ups on inthinc. I want to make sure I've got some of the correct numbers, from a subscriber standpoint. We are coming in at 35,000, and you're looking at adding 4,000 in the third quarter and another 9,000 or 10,000 in the fourth quarter, is that correct?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [72]

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4,000, 9,000 because we guided to 13,000.

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Scott Wallace Searle, The Benchmark Company, LLC, Research Division - Research Analyst [73]

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Okay. Very good. And then just Mark, I think you hit on this a little bit but looking at the installed base, how much of that do you think is addressable in terms of the inthinc product that you can go back to now and try and resell, upsell the inthinc solution? So basically, kind of the opportunity if you will attempt in 2018 and beyond for conversion?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [74]

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We think inthinc is a asset that on the high end could add as much as 50,000 a year, and at the low end, 15,000 or 20,000.

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Scott Wallace Searle, The Benchmark Company, LLC, Research Division - Research Analyst [75]

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Got you. And then just last item, looking at your guidance and that $240 million to $245 million implies also another strong quarter in December. I just want to make sure I'm collaborated properly, looking at overall net add somewhere in the 60,000 to 70,000 range in both the third quarter and the fourth quarter?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [76]

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Well we'll see where churn comes in. But from a gross perspective, gee we're adding like 100,000 a quarter.

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Scott Wallace Searle, The Benchmark Company, LLC, Research Division - Research Analyst [77]

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Okay. And just lastly, on the RFIC, what is the total BAM impact on that?

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Robert G. Costantini, ORBCOMM Inc. - CFO and EVP [78]

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It could be, if you go -- we're reducing $60. And what's my cost? I can't tell you that. There's too many people listening.

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Operator [79]

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And there are no other questions in the queue. At this time, I'd like to turn the conference back to the speakers for any additional or closing remarks.

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President and Director [80]

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Thank you for your questions and for participating on our call. We look forward to speaking to you again when we report our Q3 2017 results in November.

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Operator [81]

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Thank you. That does conclude today's call. We do thank you all for your participation, and you may now disconnect.