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ORBCOMM Inc. (NASDAQ:ORBC)

Q4 2012 Earnings Conference Call

March 14, 2013 10:30 a.m. ET

Executives

Marc Eisenberg - Chief Executive Officer

Robert Constantini - Chief Financial Officer

Analysts

Mike Malouf - Craig-Hallum Capital Group

Chris Quilty - Raymond James

Jim McIlree - Dominick & Dominick

Noel Atkinson - LOM

George Melas - MKH Management

Operator

Good morning ladies and gentlemen and welcome to ORBCOMM's fourth quarter 2012 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 beginning at 12:00 noon Eastern Time today until next Thursday, March 21, at 12:00 midnight. The dial-in 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 the week.

I would now like to turn the call over to Marc Eisenberg, ORBCOMM's Chief Executive Officer. Please go ahead sir.

Marc Eisenberg

Good morning and thank you for joining us. Once again I’m Marc Eisenberg, ORBCOMM's Chief Executive Officer and with me today is Robert Constantini, ORBCOMM’s Chief Financial Officer.

Before I begin, let me remind you that this conference call includes forward-looking statements and that actual results may differ from the expectations reflected in these forward-looking statements. We encourage you to review our press release and SEC filings for a full discussion of the risks and uncertainties that pertain to these statements. I want to remind you that ORBCOMM assumes no duty to update any forward-looking statements.

In addition, the financial information we discuss includes non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures is included in our earnings release.

It’s been a long time since we last reported and as you might have seen from our release this morning there is an awful lot to talk about. So let’ get right to it. This is our first earnings call since we moved to Rochelle Park, New Jersey. I’m happy to report that our move went smoothly as planned. The new space allows us to combine our corporate headquarters with our StarTrak subsidiary while accommodating future growth plans. Our New Jersey headquarters has already moved and we anticipate having the StarTrak team join us next month.

Earlier this morning we issued a press release announcing financial results for the fourth quarter and full year ended December 31, 2012. I will take you through an overview of the financial results, give you some detail on some recent business highlights, walk you through our pending acquisitions and then Robert will take you through the detailed financials.

We were once again pleased to report strong financial results in the fourth quarter. Our service revenues increased year over year by 14% to $1.24 million, with product sales increasing 34% year over year to $3.8 million. Total revenues increased 19% from the same period a year ago to $16.2 million. Net income for the quarter increased threefold from the same period last year to $2.1 million with EBITDA almost doubling to $3.8 million. Adjusted EBITDA was $4.2 million, increasing 51% from Q4 of last year. Earnings per share were $0.05 this quarter compared to $0.01 last year. Our subscriber count grew by 15,000 net subscriber communicators or subs, ending the quarter with approximately 759,000 subs.

Our growth strategy is showing positive momentum with significant events across ORBCOMM’s three main offerings. Our satellite and terrestrial connectivity or network services, our direct channel services and our AIS service.

In network services we had two new OEM partners, expanding our leadership position as the premier source of connectivity among OEM’s in the heavy equipment markets. Sumitomo, one of Japan's leading manufacturers of excavators, asphalt pavers and other construction equipment, selected ORBCOMM to provide global satellite communications services to deliver vital engine and service data to Sumitomo and its customers.

In addition, a premier European manufacturer and supplier of mining and construction equipment selected ORBCOMM’s dual-mode satellite and cellular service for its global telematics application. The robust solution will allow its customers the ability to track and monitor their heavy surface drilling equipment worldwide. In heavy equipment, ORBCOMM is the number one satellite provider across the globe with leading OEM’s from the United States, Europe, Japan and Korea.

Our Automatic Identification System or AIS revenues were $645,000 in Q4 and $2.1 million in 2012. Since Q3 we have signed eight new AIS contracts and issued 22 new licenses. In December, Pole Star Space Applications, a leading provider of fleet management ship security and vessel monitoring systems for the maritime industry, incorporated ORBCOMM's AIS data into its complete range of commercial maritime tracking and fisheries managements and long range identification solutions. Between our two AIS satellites and terrestrial sources, we’re currently seeing over 100,000 ships on a daily basis. While we currently see each ship in average of a couple times a day, we are anticipating nearly 15 minute ship visibility upon the completion of the full deployment of the OG2.

In direct channel services, we’re making steady progress. Since Q3, StarTrak introduced a new version of its Century products capable of monitoring and controlling heated assets. Earlier this year, our first customer for this product, the largest rail network in Canada, began the first broad deployment of StarTrak’s two-way GenTrak and ReeferTrak telematics management systems. These systems provide temperature-controlled services for refrigerated and heated intermodal containers. Together, these solutions will allow the customer to monitor shipping conditions to verify temperature compliance. This is the first of multiple new products StarTrak is expected to release this year.

You may have seen that we issued two press releases earlier this morning announcing two acquisitions, MobileNet and GlobalTrak. These acquisitions are consistent with our strategy of finding opportunities that can leverage our network, distribution and engineering while adding new technologies sales channels and access end solutions in key vertical markets.

MobileNet is a solutions provider of satellite and cellular-based telematics solutions to the heavy equipment in rail support industries. They’re a long-time ORBCOMM value-added reseller with marquee customers, including heavy equipment OEM Doosan North America, a world-class construction equipment company, and leading rail companies Union Pacific, CSX, and BNSF. The company helps manage today approximately 4500 assets which predominantly use the ORBCOMM network for connectivity.

MobileNet’s robust web applications provide customers access to precise near real time equipment data on demand, including location, engine and production hours, mileage, fuel usage, maintenance alerts and asset security. Leveraging MobileNet’s turnkey offering will further enhance ORBCOMM’s leadership position in the global heavy equipment marketplace by providing OEM’s, dealers and fleet owners significant operating advantages as well as savings in development costs and faster time to market for implementing telematics solutions in the fields.

There are more than 25 OEM's with over $1 billion in heavy equipment sales, many of which do not have a proprietary telematics solution. In addition, many heavy equipment fleet owners and rental companies are looking for solutions for mixed fleets. Many of these can be targeted.

ORBCOMM has also entered into an agreement to acquire substantially all of the assets of of GlobalTrak, a division of System Planning Corp. GlobalTrak is an information services company that utilizes satellite and cellular communications and advanced sensors to deliver real-time situational awareness and intelligence from anywhere in the world to improve logistics and security processes and operations. GlobalTrak’s customer base includes military, international, government, and commercial customers. The acquisition of GlobalTrak supports ORBCOMM’s growth strategy by expanding its end-to-end solutions portfolio into new geographic markets, including the Middle East and Asia as well as key vertical markets such as container tracking and new segments such as the government sector.

GlobalTrak’s global container monitoring solutions delivers mission critical data about the location and condition of cargo transiting in the world, from a sleet of onboard sensors and rugged industrial products using satellite and terrestrial data communications. ORBCOMM’s GlobalTrak solution will also leverage synergies with our subsidiary StarTrak, a leading innovator in the transportation related telematics to sell each other’s product offerings into their various distribution channels and geographies. GlobalTrak is currently based in Arlington, Virginia and we expect to move the operations into our Dulles, Virginia facility upon completion of the transaction.

The acquisitions of MobileNet and GlobalTrak give us the opportunity to add advanced products and services for satellite connectivity, increasing revenues and ARPU. We anticipate these transactions to be accretive through revenue and adjusted EBITDA in the near term. These transactions should immediately add approximately $5 million to $7 million to revenues on an annual run rate. Both transactions are expected to close within 30 days. Robert will walk you through the details of these transactions.

Through StarTrak and the subsequent combination with PAR LMS, as well as the anticipated additions of MobileNet and GlobalTrak, ORBCOMM is continuing its evolution from a pure network provider to an end-to-end solutions player in select vertical markets. On January 7, 2013, ORBCOMM announced a $45 million term loan financing with AIG Asset Management. The loan will primarily be used to facilitate growth opportunities such as new services, product offerings, geographic distribution and potential strategic acquisitions into key vertical markets, such as MobileNet and GlobalTrak. The proceeds can also be used as a CapEx cushion.

At this point, I would like to give you an update on our OG2 satellite program. The company continues to make major strides in the OG2 satellite program. Sierra Nevada has completed assembly and functional testing of the satellite bus systems. In February, our first fully-functional OG2 build production payload was shipped to Sierra Nevada Corporation for final integration and environmental testing.

With having moved out of the development phase and into full production, Boeing is scheduled to produce two payloads per month for final integration and testing. We are expecting to have eight satellites complete by the middle of this year in times for a September launch as listed in SpaceX’s current manifest. The satellites will be launched directly into an orbit that combines with OG1 and significantly improves messaging performance.

As a reminder, all our OG2 satellites will be backwards compatible and will all be equipped with AIS. The OG2 constellation has advanced capabilities, including faster communications speeds, improved coverage operator capacity, all of which support larger messages and better power management. We believe it will substantially improve the size of the markets ORBCOMM can sell into.

To sum up, 2012 was a strong year. We grew our revenues 39%, increased adjusted EBITDA 108% and improved net income from breakeven to $8.7 million. Our results in Q4 were solid and we’re starting to see the transformative effect of the strategic growth initiatives in our business. We anticipate that 2013 will be a busy year. On our plate will be the integration of MobileNet and GlobalTrak, launching our new line of StarTrak products, growing our core end-to-end and AIS businesses and getting the launches of OG2 and its related enhanced products and services started. In addition, we hope to continue to give you a few positive surprises along the way.

With that, I’d like to turn the call over to Robert to take you through the financials.

Robert Constantini

Thank you, Marc. ORBCOMM’s strong fourth quarter and full year performance reflects continued improvement in both the operating and financial metrics of our business. Increases in revenues as reflected in the growth of adjusted EBITDA and net income from essentially breakeven for 2011 to $8.7 million of net income for 2012, further demonstrates the strength of the operating leverage in our recurring revenue model.

For the fourth quarter, service revenues were up 14% year over year to $12.4 million from increases in our core service revenue, direct channel service and growth in AIS revenue. Product sales were up 34% to $3.8 million from increases in direct channel equipment sales.

We had 15,000 net subscriber additions. Our subscriber base grew to approximately 759,000 subscriber communicators compared to 648,000 at the end of last year. The base of billable subscribers increased 70% year over year.

In the fourth quarter, adjusted EBITDA increased 51% year-over-year to $4.2 million. The margin of adjusted EBITDA to total revenues was 25.7%, up 5.5% from the 20.2% margin in Q4 of last year. The expansion of our adjusted EBITDA margin is also a reflection of the high degree of operating leverage in our recurring revenue model.

Net income for the fourth quarter was $2.1 million or $0.05 a share this year. That’s up from $0.01 a share last year in Q4. Net income for the year was $8.7 million or $0.19 a share versus breakeven last year.

Taking a further look at the income statement, Service Revenues for the fourth quarter of 2012 were $12.4 million, an increase of $1.5 million or 14% compared to $10.8 million in the fourth quarter of 2011. This year over year increase was the result of an increase in core service and direct channel service revenues as well as AIS revenues.

Product Sales were $3.8 million in the fourth quarter of 2012 from $2.9 million in the prior year period. This year-over-year increase of 34% was largely due to an increase in direct channel equipment sales. Our Product Sales are lumpy in nature and do fluctuate between quarters.

Overall, total revenues for the fourth quarter were $16.2 million, up 19% compared to $13.7 million in the same period last year, driven by growth in ORBCOMM’s core and direct channel services, higher AIS revenues and higher product sales. For the full year ended December 31, 2012 total revenues were $64.5 million compared to $46.3 million in 2011, an overall gain of 39%.

Selling, General and Administrative Expenses were $11.8 million and product development costs were $6.2 million for the fourth quarter of 2012 and flat compared to $6.2 million in the fourth quarter last year. The fourth quarter of 2012 incudes operating expenses for the LMS acquisition that were not present in this same period last year since we closed on the transaction in January of 2012. So backing out the acquisition cost and each categories were lower in 2012 compared to 2011 by $0.6 million.

Acquisition-related costs were negligible in the fourth quarter and will pick up again in Q1, reflecting the two acquisitions announced that I will discuss shortly.

Income from operations increased almost threefold to $2.4 million for the fourth quarter of 2012 compared to income from operations of $0.8 million in Q4 of 2011. Income from operations in the fourth quarter of 2012 includes a gain of $207,000 on the write-off of the OG2 prototype satellite. Prototype satellite impairment costs came in at $9.8 million, offset by the insurance proceeds of $10 million, producing a small gain but overall wash. It’s worth noting that the value used for the impairment of the satellite is a result of carving out costs related to the prototype from our multi-satellite build and launch agreements with Sierra Nevada Corporation and (inaudible).

Net Income for the fourth quarter of this year increased 3X from the same period last year. Net Income for the quarter was $2.1 million or $0.05 per share versus net income of $681,000 or $0.01 per share last year in the fourth quarter. For the full year ended December 31, 2012, net income was $8.7 million or $0.19 a share compared to a loss of $45,000 or breakeven last year.

EBITDA for the fourth quarter of 2012 was $3.8 million, almost doubling the $1. 9 million of EBITDA generated in Q4 of 2011. For the full year ended December 31, 2012, EBITDA was $14.9 million, increasing 156% from $5.8 million in the same period last year.

Adjusted EBITDA for the fourth quarter of 2012 was $4.2 million, and that’s compared to $2.8 million in the same period last year, a gain of 51%. The margin of Adjusted EBITDA to total revenues was 25.7% and again that’s up 5.5 percentage points from the 20.2% margin in Q4 last year. We believe further Adjusted EBITDA margin expansion will continue as revenues scale up. For the full year ended December 31, 2012 Adjusted EBITDA was $16.7 million, increasing 108% from the $8 million in the same period last year.

Taking a quick look at the balance sheet. Cash and Cash Equivalents, Restricted Cash, and Marketable Securities were $64.9 million as of December 31, 2012 and that has decreased from $84.3 million at December 31, 2011. The decline of $19.3 million is mainly due to milestone payments for our next-generation satellites, $4 million for the LMS acquisition and that was offset by insurance proceeds of $10 million received for the loss of the prototype satellite and also cash provided from operating activities of approximately $14 million. The net proceeds from the AIG term loan that was completed in early January of 2013 are not reflected in the 2012 yearend cash balance.

Cash provided by operating activities was $13.9 million for the year ended December 31, 2012. For the full year of 2012, cash of $36.6 million was used for capital expenditures, including our OG2 satellite program and $4 million was used for the purchase of LMS. Total equity is approximately $183 million at December 31, 2012.

Looking at our recent financing activities, our term loan from AIG is a five year, 9.5% fixed term loan. Interest is payable quarterly and there is no required principal amortization. To maintain covenants in the loan, we have to either maintain minimum liquidity of $10 million, inclusive of any revolver, or have a maximum total debt to adjusted EBITDA ratio of 4.5.

Looking at the two acquisitions, I will first discuss MobileNet then. GlobalTrak. Before getting into the economics of the deals, our anticipated closing for both will be over the next few weeks. This is aggressive, but we want to get the AIG financing award as quickly as prudently possible.

For MobileNet, we will acquire substantially all the assets and certain liabilities for $5 million. This includes a cash payment of $3.5 million and we’ll issue ORBCOMM common stock for $1.5 million to the purchase price. The deal also includes additional consideration in the form of an earn-out upon achieving certain service revenue targets over the course of the next two years. The earn-out for each year will be based on the incremental service revenues. We anticipate that MobileNet will be accretive to revenue and adjusted EBITDA excluding the transaction expenses in the near term as we leverage our existing operating capabilities.

Regarding GlobalTrak, we will acquire substantially all the assets and certain liabilities for $2.75 million in cash. There will be no further consideration related to this transaction. We anticipate that GlobalTrak will also be accretive to revenue and adjusted EBITDA as it gets absorbed into our existing operating structure also in the near term. The seller operates GlobalTrak as a division within a larger entity providing support services. So from an operating perspective we expect it to run within our existing infrastructure as well. We’re moving GlobalTrak’s operations into our facility in Dulles, Virginia and most of the incremental cost we’re adding are for the eight new employees that will be joining us from GlobalTrak.

But before wrapping up, let me give you an idea of these activities could impact Q1. We expect our expense growth in Q1 to be higher than Q4. On the cost side, you should be aware that Q1 will include several significant non-recurring expenses as well as costs that typically weigh more in Q1. These non-recurring items include new office relocation expenses, including a lease buyout, product development costs related to new product rollouts and acquisition related costs.

Costs that typically fall in Q1 include higher audit fees related to the yearend audit and public company expenses like our proxy filings. We believe all these incremental costs will total over $1 million in Q1. In addition, the strengthening of the Japanese Yen this year will impact comparables in revenue and expenses from last year. We hope to close on both of our pending transactions shortly and should see nearly a full quarter of incremental sales in Q2 for these two pending acquisitions.

So wrapping up, ORBCOMM's solid fourth quarter profitability driven by increases in revenues, underscores our focus on growth and profitability. We have added liquidity and the extra resources from the AIG loan give us added flexibility to support our growth opportunity which includes new services, product offerings, geographic distribution and strategic acquisitions into key vertical markets. Our ability and desire to put these funds to work is demonstrated in our two recently announced acquisitions, MobileNet and GlobalTrak. The added scale, coupled with the inherent leverage in our operating model should enable us to continue to improve on our Adjusted EBITDA and expand our Adjusted EBITDA margins.

So with that, we’ll be happy now to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Mike Malouf with Craig-Hallum. Please go ahead.

Mike Malouf - Craig-Hallum Capital Group

I’m wondering if you could give a little bit of color on the subscriber growth, particularly with just on an absolute basis and is there any competition increasing and just a little bit of color on the environment out there and then maybe you can also address the revenue per subscriber because that seemed to be a little bit below trend. Thanks.

Marc Eisenberg

Sure. I’ll start with the subscriber number, Mike and Rob could follow up with the service revenue. Overall Q4 tends to be a slower quarter and the reason why is, transportation assets tend to be on the road. So when styles are difficult and in addition heavy equipment factories are typically closed three of the 13 weeks. So we’re expecting that sub add and should be up in Q1. There is some noise out there where OEM’s are reporting a slower start to 2013 than 2012. Maybe we saw just a little bit of that in Q4 and then there was a little bit of inventory that some of the OEM’s were holding that we saw in Q4 or that they reported in Q4, but it’s nothing like we experienced in 2008 and we think we’ll get through that pretty quickly. We’re still optimistic.

We’re very optimistic in 2013 and we’re seeing a lot of positive momentum in the end-to-end portion of our business which in addition of the higher value subs. And it’s one of the things that I’m struggling with, with subs in that not all subs are created equal. We’ve got all kinds of subs and we struggle to give you a look at some of those subs and the subs range from $1 to and some of these global track subs are going to go all the way up to $180 per subscriber. And we’ve got sat subs, we’ve got terrestrial subs, we’ve got end-to-end retail looking subs, we’ve got wholesale subs, we’ve got high usage subs, we’ve got low usage subs, we’ve got single mode subs, we’ve got dual mode subs, we’ve got OG1 subs and the OG2 subs, we’ve got skyway subs. We’ll soon have GlobalTrak subs.

We have 18G subs, Roger subs, Verizon subs, Telenor subs and Vodafone subs. We have usage based subs and we’ve got some flat fees. So the combination of all of those things can sometimes confuse that sub number. But as we go forward we think subs in Q1 are going to be Q1 are going to be subs over Q2. We think this is going to be a pretty good sub year, but I think it’s going to be a pretty good sub year with a lot of end-to-end solutions there. You take a look at some -- I’m sorry to go on so long, but if you take a look at like this railroad thing that we did that we snuck in this earnings release, that’s a great example.

If you take a look at that deal between hardware and the increased ARPU of an end-to-end sub, the opportunity there is something like 3,900 subs and you say to yourself 3,900 subs for ORBCOMM, what’s that? That’s barely a month’s worth or even less. But this particular deal, because of the sale of the offering is projected to be a $5 million deal over three years. So looking forward subs are important, but I think we need to look at more than subs. Rob, you want to talk about ARPU?

Robert Constantini

Yeah. As Marc pointed out, the subs are a variety of flavors if you will now. But our model is pretty simple. It should be more subs should continue to add service revenues in the long term. In quarter to quarter, there’s some small impact and I think we saw that in the fourth quarter. There’s some usage case customers that had an impact. They might have related to a part trailer or some dock fishing vessel that would have been a seasonal element in the fourth quarter and you have some cash-based customers that might also impact that. If you look at it overall, there was some of that going on in the fourth quarter, then you have other small things that are happening.

There was the strengthening of the Yen that has a small impact and the timing of some of the AIS revenue contracts renewals. But overall we think the model is poised to show consistent growth and we’re not overly concerned by these slight deviations quarter to quarter because we’ve seen those in the past. With respect to AIS, as I mentioned there was some timing around that with respect to contract renewals, but we believe 2013 is going to be a good improvement in AIS revenue over 2012.

Mike Malouf - Craig-Hallum Capital Group

And then just on that AIS revenue, we should see a pretty significant sequential increase in that due to new pricing in the first quarter? Is that still going to come through or is that delayed a little bit?

Marc Eisenberg

You’re going to see a little bit of it in the first quarter and the full effect in the second quarter. If you remember we launched the second satellite in the middle of the first quarter last year. So, some of those screenings got done towards the middle to the end of the quarter.

Operator

Our next question comes from the line of Chris Quilty with Raymond James. Please go ahead.

Chris Quilty - Raymond James

A question for you on the ARPU trends of what you’re seeing and a second question on the acquisitions. Can you give us a sense of how many subs they’ll bring onto the network?

Marc Eisenberg

MobileNet is approximately 4500 subs that are already on the network. So you remember when we did the StarTrak deal, it wasn’t really a big change in subs, but it was more of a change in the ARPU. So MobileNet will look like that. Of the GlobalTrak acquisition, those will look like subs and very similar in size to MobileNet in that we expect four to five, closer to 5,000 range.

Chris Quilty - Raymond James

And the ARPU’s for both of those companies?

Marc Eisenberg

I haven’t figured out by ARPU. But maybe I can turn it around on the side and give you some different visibility to it. We expect those businesses combined to do something like $5 million to $7 million on a run rate to start off in terms of revenues, of which it’s 65% hardware and 35% service revenues. That help you with your model?

Chris Quilty - Raymond James

It does. Well, I guess to explain that you think between StarTrak and PAR, there was a pretty big differential from them both. PAR was more like $10 ARPU’s and StarTrak was $10 or so higher than that. Where do they fall in the scale in terms of having an integrated solution and billing at the retail level?

Marc Eisenberg

I see. Okay. So MobileNet is between the 20 and 30 range and GlobalTrak is all over the place and I need to explain that a bit. Some of the stuff that we’re doing is things like monitoring fuel in the Middle East for the governments and it’s constant recording and the ARPU is very, very high. And then they do these other applications that they’re basically based on trips. So it’s very, very high usage for a month because there’s container going over to the Middle East and that could be parked for a while and then it gets reused. So there’s a little bit of starts and stops with that aspect of their business as we move goods in and out of the Middle East based on the U.S government. But overall it’s probably average and similar to the MobileNet business.

Chris Quilty - Raymond James

Okay. And is there an intent to pull some of the OG2 hardware that you’ve developed into those two companies or do you think that there are some product in either of the two that you just acquired that may go in the other direction?

Marc Eisenberg

I think this transaction, a lot of this is about the other direction. With MobileNet, because most of this stuff is specific to heavy equipment, there is an awful lot of hardware that we think we’re going to be selling through with our partner Quake. So they use an awful lot of Quake products. And the GlobalTrak one, I think you’ve hit it right on the head. If you look at what ORBCOMM is able to do in the transportation business, we’ve got some intermodal stuff that looks like rail stuff, a lot of over the road trucking stuff and the container things that they do is just a perfect fit for StarTrak to be able to have full end-to-end solutions for transportation providers and then to take the StarTrak products and have the GlobalTrak guys sell it to its international and government customers. From a distribution perspective it’s amazing. They each do what the other one doesn’t and they’re each missing exactly what the other one doesn’t have in terms of the whole transportation markets. So this thing is a great bit from that perspective. It just adds distribution. It adds products and we expect to even do a good job cross selling these.

Chris Quilty - Raymond James

Got you. And both these companies are transportation and heavy equipment as the key vertical market they serve?

Marc Eisenberg

So GlobalTrak is basically all transportation. There’s a lot of fleet trucking and even more containers and their specialty is the stuff that’s really hard to do is you’re on a ship or something else and you’ve got RFID tags and RFID tags that report to long range systems and that’s their specialty. And MobileNet does two things. Number one, they do heavy equipment and they also do a lot of heavy equipment in other assets that support the rail. So when we say they’re in the rail business, they’re not monitoring the rail cars which is okay because that’s what StarTrak does, but it monitors the vehicles that support the rail industry.

Chris Quilty - Raymond James

And in terms of acquisition related costs that you expect there to close these two transactions, Robert can you give us a ballpark of what you expect?

Robert Constantini

Yeah. If you look at what happened over 2012 I think we spent just around $700,00 over two quarters for elements and I think right now we probably cite both of these combined at around that number. I’m thinking it may be half it will hit the first quarter a little bit more and the remainder in Q2 as we …

Chris Quilty - Raymond James

And just to clarify, if I remember, you do not exclude acquisition costs from your definition of adjusted EBITDA?

Robert Constantini

Right. If you try to the flow of cash, yeah. (inaudible) cash flow so we do a cash suspense so we will not exclude that. That’s right.

Chris Quilty - Raymond James

And one final question on the P&L for you. With all the products that you’ve got in the pipeline here I’m surprised that the product development R&D costs weren’t higher. Is it fair to expect that we should see an uptick going forward into ’13?

Robert Constantini

Yeah. I think we’ll see some of that activity and those costs will be reflected in the P&L definitely in 2013 as we get ready for the OG2 launch and several new products.

Operator

Our next question comes from the line of Jim McIlree with Dominick & Dominick. Please go ahead.

Jim McIlree - Dominick & Dominick

Robert, I’m sorry but I missed what the acquisition price for GlobalTrak was.

Marc Eisenberg

$2.75 million.

Robert Constantini

Yeah, $2.75 million.

Jim McIlree - Dominick & Dominick

And Marc, when you commented about the $5 million to $7 million contribution from both acquisitions, you’ve said on a run rate basis. Does that mean that at the end of next year you expect the revenue contribution from these guys to be about the $5 million to $7 million on a run rate basis, that is Q4 times four it will be?

Marc Eisenberg

Oh no. I’m hoping it’s higher than that. When I say $5 million to $7 million I’m expecting you to take that number, pull out one quarter of it for Q1 and flow the rest of it through for the rest of the year. These are businesses that we expect to grow and when we look at these businesses, these are guys that have been ORBCOMM resellers. But we constantly speak to our resellers and we say, you’ve been growing at a good rate, you’ve got to these sizes, but what’s missing? How could we get you to grow quicker? And almost like the StarTrak acquisition, you typically get the same answers.

We’re lacking scale and then you do diligence on their customers and they’re like gee, they’re not big enough and before I’ll spend X million dollars deploying this thing, we need to know how many engineers they have to support it and with these acquisitions we’re taking a relatively small amount of employees. But as we continue to add companies like this to that base structure at StarTrak and power and you look and before these acquisitions there were over 50 technical people that supported these applications and you do your diligence and you say that so this big well that you’re trying to chase, we’re adding all these assets and you were intrigued before. What do you think now? And we’ve got really positive responses. So I’m hoping it’s a lot more than $5 million to $7 million in 2014, a lot more.

Jim McIlree - Dominick & Dominick

Okay, great. I just wanted to make sure I understood exactly what you were saying.

Marc Eisenberg

I wasn’t going to give you a short answer.

Jim McIlree - Dominick & Dominick

No, I appreciate it. And were both of these companies individually and combined, were they EBITDA positive on a standalone basis for 2012?

Robert Constantini

Yeah. The way both of that was -- so we’re one company and they work. GlobalTrak was operating as a division. So it was actually hard to tell what actions related to the operation in terms of how we’re going to be able to look at it and we need to run it for a quarter or two to give you a little bit more visibility on that. But we think as we plan to integrate it and how we’re going to run it based on our experiences with the last two acquisitions we did, that in the near term we can get that to EBITDA positive as long as we see them produce the revenue streams that we expect that Marc just was reading.

Jim McIlree - Dominick & Dominick

Okay. And so we should see I think Chris or somebody else was asking about the ARPU uplift. So you see an ARPU uplift but no subscriber uplift from one of them and then from the other one you see both a subscriber and an ARPU uplift.

Marc Eisenberg

Yeah. You’re going to add a couple of million dollars a year in service revenues with only 4500 subs against it or so.

Jim McIlree - Dominick & Dominick

And can you give us just a ballpark either dollar amount or in comparison to the prior acquisitions that you’ve made on how much this would add to the operating expense line?

Robert Constantini

There are basic way to describe it without rolling out a number. If you look at the mix that Marc was talking about, 55% hardware, 35% service revenue the market should be very consistent with our own margins. So if you get out there we’ll probably be looking at modest accretive numbers to operating income once you factor in those margins because you can take out the employees and you can have the costs associated with. But that would be just as we go through the integration process because as we normally do we look for cost savings. You can see we’re still capable of finding areas in which we can save money.

Jim McIlree - Dominick & Dominick

No, I understand. That’s helpful. And will there be significant incremental amortization charges associated with this?

Robert Constantini

No. you’re going to have to go through your fair value of the assets prior and those types of things which are going to be disclosed. So that will come more in view. But that still remains to be seen. The size of these deals are not going to add significantly to that equation.

Operator

(Operator Instructions). Our next question comes from Noel Atkinson with LOM. Please go ahead.

Noel Atkinson - LOM

I was wondering, you’re almost through Q1. If you could talk a little bit about your sub growth for Q1, whether it’s going to be expected to be modestly above Q4 or whether you’re getting back closer to the levels of Q2, Q3.

Marc Eisenberg

We think it’s going to be higher than Q1. Probably not as high as Q3 and Q3 and Q4 may have been a little bit of Q4 falling into Q3.

Noel Atkinson - LOM

And in terms of ARPU, are you seeing any seasonal again low seasonal usage and that sort of thing so that the ARPU we should be thinking about should be somewhere close to where it was in Q4?

Marc Eisenberg

Yeah. I think…

Robert Constantini

We’re not providing guidance on that. But the seasons are going to stand a little bit at the end of Q4 and a little bit in the beginning of Q1. But like I said there are a number of factors there. The one that’s still going to be in play, so the Yen exchange rate issue. But that’s -- I wouldn’t expect, these deals are not going to have any positive uplift like we’ve seen in the prior acquisitions. You’re going to have to wait for Q2 for that.

Marc Eisenberg

Let’s be clear. There has not been any contractual changes. It’s not like someone has renegotiated their rates. When the quarter comes you do your revenues, use a good part of your base piggy’s that same monthly amount that they had and then you wait to see what the usage is from the usage guys and then beyond that you’ve got your cash based customers and you’ve got your little tiny things that flow quarter to quarter, but I don’t think long term there is any change there from the base, but these acquisitions and as StarTrak starts to roll out with its rail customer and everything else, we think ARPU’s going to rise.

Noel Atkinson - LOM

I saw that the gross margin was up in Q4 on the hardware. Are you shipping dual mode? Is it product mix otherwise and do you expect it to stay at those higher levels going forward?

Marc Eisenberg

It’s probably somewhere in the middle. It depends which customer or which product you ship every quarter.

Noel Atkinson - LOM

But it isn’t really shipping the OG2, so you’re getting some higher…

Marc Eisenberg

We’re not getting that yet.

Noel Atkinson - LOM

Okay. Can you just go over the AIS? You’ve mentioned a number of new contracts. I just didn’t quite catch all of that.

Robert Constantini

Yeah. It was just the timing of some renewal sub contracts. So AIS revenue was down slightly…

Noel Atkinson - LOM

I’m sorry. The number of new contracts that you were signing. It was like eight new contracts signed and then you mentioned another number right behind it.

Marc Eisenberg

There are contracts that expiring get picked up and service gets dropped and then re-picked up. We had a lot of these significant customers, but there’s timing differences.

Robert Constantini

Back in Q4, but as he pointed out, 2013 is going to be a good improvement over the numbers we’ve reported in 2012.

Noel Atkinson - LOM

Sorry. I think you had mentioned that you had signed a bunch of new contracts and new resellers or something like that and I just didn’t quite get the numbers.

Marc Eisenberg

It was eight new contracts and when you sign a contract some of them are resellers because you’ve got license agreements. So a contract looks like a new reseller and a license agreement looks like an end user for a reseller. So you had the numbers right, 22.

Noel Atkinson - LOM

And then can you talk a little bit maybe about your CapEx activity over the next couple of quarters?

Robert Constantini

Yeah. So we’re thinking for 2013 the spend will be roughly $55 million around those programs, $50 million to $55 million as we prepare for the launch this year. So I would say a significant amount of that is going to be paid up through the end of Q3. I could take 80% of it between now and the end of September.

Noel Atkinson - LOM

And then my last question is, for MobileNet in the rail activity you’ve got some big customers there, Union Pacific going to Northern. I was wondering if you could talk a little bit what they’re doing on the rail. Are they on a locomotive? Are they on a rail car? What they’re doing in there?

Marc Eisenberg

Most of them are on construction equipment or power generators that support the rail industry. They’re not actually on the rail. They’re supporting the rail and then there’s some new stuff that they’re building which it’s basically different assets that are in that rail yard that support the rail industry, but it’s StarTrak that supports on rails and then MobileNet does the interface for rail.

Noel Atkinson - LOM

Operator

Our next question comes from the line of Chris Quilty with Raymond James. Please go ahead.

Chris Quilty - Raymond James

I’m sorry, but just a clarification again. Are all of the subs on both of the acquisitions currently ORBCOMM or are there other satellite based solutions or other terrestrial carriers that you don’t currently support?

Marc Eisenberg

So 90% of MobileNet is ORBCOMM and there is a couple of hundred that are terrestrial. I don’t remember which terrestrial providers, but it’s a couple of hundred. I don’t think it matters. The other subs, GlobalTrak uses maybe a tiny bit of [radium], a tiny bit of ORBCOMM and a whole lot of GlobalTrak and terrestrial.

Chris Quilty - Raymond James

So there will be some incremental subs on that acquisition?

Marc Eisenberg

Yeah. Like I said MobileNet from a financial perspective will look like a change in ARPU and the other one will look like a change of subs, but subs at a higher ARPU. So it’s going to affect both.

Chris Quilty - Raymond James

And the first SpaceX launch is going to be eight satellites this summer and have you contracted for an additional satellite from the one that was lost?

Marc Eisenberg

We’ve not contracted for that satellite yet. We’re looking at opportunities to do other things, maybe look at OG2.5 or some other opportunities. There may not be an AP of both, but there may be something else.

Operator

Our next question comes from the line of Jim McIlree with Dominick & Dominick. Please go ahead.

Jim McIlree - Dominick & Dominick

Hey Robert, you said $50 million to $55 million for CapEx in 2013. Did I hear that right?

Robert Constantini

Yes.

Jim McIlree - Dominick & Dominick

And about a similar amount in 2014?

Robert Constantini

A little bit less, but yes.

Marc Eisenberg

So I think it’s $180 million and $70 million has been spent. So it’s $110 million, $65 million and then the rest after.

Operator

Our next question comes from the line of George Melas with MKH Management. Please go ahead.

George Melas - MKH Management

Can you talk a little bit about the two OEs that joined you guys? Were they using -- did they have a telematics solution where they’re using a different pipe? Are you retrofitting some of the existing equipment that’s in the field and how big could those be?

Marc Eisenberg

Great. So for Sumitomo, they had a system in Japan only and the system in Japan only was using ORBCOMM and the change and now they’re going through a global system. So they did not have a corporate sponsored global system. Sometimes you hear of a dealer that’s selling something that’s aftermarket or something like that, but the OEM themselves did not have a global telematics system. And what’s surprising of those 25 OEM’s that we talked about, how many of them were still on the fence and don’t want to build a proprietary system and that’s some of the theory around MobileNet and some of the wells as I said that they were chasing. The impact of Sumitomo, they sell thousands of pieces of equipment. So they’re certainly a large supplier. They’re a top 20 guy in heavy equipment. These OEM’s typically start off slow.

So, maybe hundreds to a thousand units or a couple of thousand units the first year and then many thousands of units going forward, but not tens of thousands. The other one is a European provider of mining equipment and mining equipment is -- as you look at the world of heavy equipment it’s the most expensive, largest equipment. So the opportunity there is more in the hundreds to a thousand or two per year than it is thousands per year. But that one is a dual mode solution and we’ll be selling both terrestrial and satellite. So depending on whether -- and we don’t know how we’re going to do it yet. Depending on whether we account for those together or separate could be -- it’s more revenue per unit. I don’t know if it’s coming in one unit or two.

George Melas - MKH Management

And then on retrofitting, what’s in the field? Is there…

Marc Eisenberg

Typically they don’t. that’s the thing about them that we love and we don’t love. Once a unit gets fielded it’s out there and it’s very rare to swap out what’s on a fielded unit. Very tough to find which when you have a large phase is great, but it also makes a retrofit difficult.

George Melas - MKH Management

And with the European company, were they using another telematics or pipe before?

Marc Eisenberg

No.

Operator

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

Marc Eisenberg

Terrific. Thank you all for joining us today and for your questions and we look forward to speaking to you again next quarter which turns out in just a couple of weeks.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect

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