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ORBCOMM Inc (NASDAQ:ORBC)

Q1 2013 Earnings Call

May 9, 2013 10:30 am ET

Executives

Marc J. Eisenberg – Chief Executive Officer

Robert G. Costantini – Executive Vice President and Chief Financial Officer

Analysts

Mike Malouf – Craig Hallum Capital Group

Chris Quilty – Raymond James

Noel Atkinson – LOM

Jim McIlree – Dominick & Dominick

Howard Rosencrans – Value Advisory LLC

Operator

Good morning ladies and gentlemen, and welcome to ORBCOMM’s First Quarter 2013 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 will be available beginning at 12 noon Eastern Time today until next Thursday, May 16 at 12 PM midnight. The dial-in details for this 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 conference over to Marc Eisenberg, ORBCOMM's Chief Executive Officer. Please go ahead, sir.

Marc J. Eisenberg

Good morning, and thank you for joining us. 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 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.

It’s been a very busy quarter and while it seems like we just reported year-end results a few weeks ago. We still got a lot to talk about, so let’s get to it. Earlier this morning, we issued a press release announcing financial results for the first quarter ended March 31, 2013.

On this call I will summarize the financial results, give some detail on our first quarter business highlights, progress on OG2, and finally, update you on the recent acquisitions which closed during the first week of April. Robert will then take you through the detailed financials.

In the first quarter, our service revenues increased year-over-year by 20% to $13.9 million with total revenues increasing 5% from the same period a year ago to $16.7 million.

Net income for the first quarter was $1.1 million or $0.02 a share compared to $0.05 a share in the same period last year. Adjusted EBITDA for the first quarter was $3.2 million, $1 million lower than the same period last year. The profitability comparisons of adjusted EBITDA versus last year was skewed by $1.1 million gain in debt extinguishment that was realized in the same period last year.

Adjusted EBITDA was also negatively impacted by approximately $1 million of one-time costs led by around $400,000 of acquisition related costs. After taking these – of these acquisition related costs, adjusted EBITDA was $3.6 million for the quarter. Our subscriber count grew by 19,000 net subscriber communicators or subs and we ended the quarter with approximately 777,000 subs.

Q1 was an unusual quarter. As we had previously described in our last call, there are number of one-time costs in our expense line. In addition to the 400,000 in acquisition related costs, there was 260,000 in costs to combine and relocate our New Jersey offices, including a lease buyout 150,000 and higher fees related to the year-ends audit and public company related expenses mostly relating to adding the prior acquisitions, 100,000 in severance payments, 90,000 in higher product warranty costs, and 100,000 in higher development costs for new products. These costs totaled over $1.1 million.

Service revenues were higher than usual in Q1, which included upside relating through the placements of one customer subscribers in their proper billings plans resulted in a higher run rate, some catchup, and we believe it will have a positive effect going forward.

Cargo revenues were softer than usual as some customers work through inventory which caused them to delay purchases of new hardware we have not seen this so far in Q2. We understand the complexity of trying to analyze these trends, as well as the difficulty of determining the contribution of our two new acquisitions.

So while we typically don’t give revenue guidance for Q2, we will step out of character and guide quarterly revenue to the mid 17 million, made up of about 75% service revenues and the rest being hardware. Our M2M solution services continued to show positive momentum. ORBCOMM’s state-of-the-art ReeferTrak platform was selected by seven new domestic and international transportation logistics companies, including BP Logistics, Classic Carriers, Crowley Maritime Services, Direct Transport, Gangloff Industries, Integrated Airline Services and Jasko Enterprises.

By leveraging the power of ReeferTrak comprehensive temperature of fuel management, maintenance, and logistics application services, these customers can achieve improved compliance, increased efficiency, and improving return on investment. We continue to add customers to our growing portfolio in the cold chain sector and enhance our leadership in the transportation and logistics industry.

Our new acquisition GlobalTrak following a broad open competition was selected its sole source to provide a system for the security and monitoring these satellite of fuel being transported in Afghanistan for the Defense Logistics Agency or DLA. This was a major competitive win against far larger government integrators. This program is rolling out in 2013 and is valued at several million dollars over the next few years consisting of hardware and service.

Service revenues from our Automatic Identification System or AIS were over 700,000 in Q1. During the quarter, we signed four new contracts and issued 13 new licenses. ORBCOMM service currently provides access to vessel tracking information from over 100,000 unique vessels on a daily basis.

ORBCOMM continues its geographic market expansion by successfully obtaining authorizations for the use of the ORBCOMM satellite network in Belize, Cayman Islands, Trinidad and Tobago, Turks & Caicos, and the British Virgin Islands. These countries and territories are especially important for customers [that’s imply] one solution globally. While we typically do not mention the status of individual customers, there has been so much talk around Caterpillar that I thought we needed to discuss it.

It seems many companies are making claims about the Caterpillar business. I would like to highlight a few important points. While ORBCOMM is a large supplier of M2M telecommunications with Cat, we are not their only supplier. There are many reasons a large OEM like Cat would imply different wireless networks.

For instance beside satellite or applications that require high bandwidth in locations with territorial coverage, Cat also imply cellular connectivity, each asset class with its different attributes had different needs for connectivity and maybe necessary for these varied asset classes to be supported by different vendors. Geography can play a role in the selection as well.

Let’s look at our business with Cat from three perspectives; our base of subscribers, what we can expect over the next couple of years and what we see in the long-term. First, our installed base with Cat is secured for the foreseeable future. It is very rare an M2M to have large swap outs of fielded units, and these are extremely long life assets.

Second, ORBCOMM has over a 15-year history with Cat. It took years for ORBCOMM to obtain the necessary international regulatory licenses and for Cat to outfit their factories, perfect their hardware, gain approvals in dozens of countries, and install their solutions. For the immediate future, Cat has tens of thousands of units of ORBCOMM hardware in backlog and tens of thousands more still being manufactured. This represents over two years worth of future deployments.

Over the next couple of years, we do not anticipate any material change to our Cat business. Lastly, we are not aware Cat has made a decision to transition away from ORBCOMM on the product lines we serve in the near future. ORBCOMM is focused on getting OG2 launch this year. We believe that an enhanced ORBCOMM network powered by OG2 will keep this installed base running strong and that the new capabilities of the network will enable a very compelling competitively priced offering.

The eminent launch of a fully funded second generation constellation makes ORBCOMM unique in the satellite space. Other satellite networks being considered are also relying on first generation constellations. But they are down to a limited number of in orbit spares and need the holes on until their next constellation is fully deployed, which is scheduled years out. That’s their schedule and ticket from a satellite guy, satellite constellations can launch late.

We have seen other satellite networks loose service prior to their next generation launch. It is not unexpected for a company like Cat who is making technology decisions, affecting the assets lasting more than a decade to hedge their best. In terms of the rest of the heavy equipment OEMs, over the last six months, we have announced agreements with Kobelco, Sumitomo, and another European manufacturer. This is on top of Komatsu, Hitachi, Volvo, Hyundai, and just about every market leader and heavy equipments that already rely on ORBCOMM. In other words, the recent announcements around Cat give us no reason to change our view of the business. While we are on the topic, let me give you an update around next generation satellite program OG2 and some of our future plans.

Sierra Nevada (inaudible) was subcontractor Boeing continued to push satellites through the integration and test process, and on the way to having eight satellites ready to launch later this year. Our launch provider SpaceX has nearly completed all of the qualification testing of their upgraded Falcon 9 rocket, which is planned to have a maiden launch early this summer. We are scheduled to launch in that version rocket in the back half of 2013 and we are very focused on the next SpaceX launch scheduled for July. While the current SpaceX manifest has its launching in September, we believe we will able to hone in on a more exact date on our next call, hopefully after that next Falcon 9 launch takes place.

Due to we are getting close to the launch of OG2, I’d like to spend a few moments getting into more detail about this important milestone and what it means for ORBCOMM. OG2 fills three very important roles in ORBCOMM’s future; one, it short ups the existing constellation by providing a backward compatible network that will support ORBCOMM’s installed base at M2M subscribers, which is the largest M2M subscriber base among all satellite networks.

Second, every OG2 satellite will carry an AIS receiver increasing our space-based AIS network from two satellite 19, making ORBCOMM the undisputed leader in space-based AIS with an anticipated average visibility of more than 100,000 unique AIS equipped vessels at intervals of 15 minutes or less worldwide.

Third and most importantly, OG2 will introduce a host of new capability that we believe are going to be huge catalyst for growth. Today, ORBCOMM competes with a number of voice networks for satellite-based M2M. Those networks are faster than OG1. Typically, they work at higher latitudes, leading to better coverage in places like Canada and Northern Europe and have smaller antennas. ORBCOMM’s advantage has been based on the cost of our service and hardware due to the lower CapEx investment in our constellation.

With the launch of OG2 and the work we are doing around the network not only will we be competitive on price, but we anticipate leapfrogging the competition in terms of service as well. OG2 will offer [message pack] in sizes multiple times greater than other satellite [short-term] services. Each satellite is designed with seven times more receivers, operating at twice the speed [using a] more efficient protocol, all of which lead to capacity for satellite in a millions of subscribers offer even further cost advantages.

To enhance coverage, we are launching at higher latitudes in our first-generation constellation. This will drastically enhance service in Northern latitudes. And because OG2 satellites transmit a greater power and use the latest antenna technology, they will produce much higher gain, which will enable end user equipment to use either antennas that are significantly smaller or to penetrate into buildings better than any existing commercial constellation today.

Multiple features are being designed in to assist GPS and predict satellite locations to drastically reduce power consumption. All of these improvements should greatly enhance the size of ORBCOMM’s addressable markets. The spacecraft [leverage] is part of the story. ORBCOMM has been investing heavily into the products and services needed to fully exploit these new capabilities.

Our OG2 modem which is approximately two-thirds the size of a credit card make use of the latest technology such as the software defined radio, impressive on-board computing power, network assisted GPS technology and accelerometer and more. The first of these modems has been in testing for quite sometime now. We are successfully passing messages through the existing OG1 constellation. This product is anticipated to launch in concert with the first OG1 – OG2 satellite launch, and we will quickly follow that up with dual mode and complete tracking solutions, many of which are in final stages of development and are being fuel tested as we speak.

On the network services side, we are in the process of upgrading our subscriber portal, which will give our resellers and partners the ability to self provision units, modify price plants, step thresholds based on usage, check coverage, view reports, troubleshoot and do device diagnostics. While some of these offering are available on cellular platforms, when complete, ORBCOMM’s portal with satellite, cellular and zoom out functionality, will be unique.

OG2 and next generation hardware are key components in keeping ORBCOMM as the leader in satellite M2M connectivity, but we are also taking steps to move up in the M2M value chain. We’ve recognized that the network is an important component of an M2M product, but it is not the only component. Beyond connectivity, developers need to choose answers, in other smart devices, they need to interface with legacy system, they require access to mapping databases, they need an understanding of engine protocol access to single yet robust volume platforms and much more.

In ORBCOMM’s acquisitions of StarTrak, PAR LMS, GlobalTrak and MobileNet, we now have the expertise to deliver virtually any component or components of the complete M2M solution, including multiple networks, a diverse range of hard work configuration and sensors, a choice web platform led by a team of engineers that have experience interfacing with most legacy and enterprise software systems. A great example of this could be seen in the recent Berg Insight’s 2013 Container Tracking and Security Report, which listed ORBCOMM as the largest vendor of intermodal tracking solutions containing satellite and cellular technology.

Finally, let me update you on our two most recent acquisitions, GlobalTrak and MobileNet which both closed in the first week of April. So far the integration of these two acquisitions is going as planned, MobileNet continues to operate in its existing Milton, Georgia location, while all GlobalTrak employees have moved towards Dallas, Virginia facility.

As we stated in our last call, we anticipate that these additions in the short-term will add approximately $5 million to $7 million through revenues on an annual run rate and we are working hard on project that will contribute far more.

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

Robert G. Costantini

Thank you, Marc. ORBCOMM’s first quarter included 20% growth in service revenues to $13.9 million. Total revenues increased to $16.7 million compared to $15.9 million during the same period of 2012, an increase of 5%. The increases in service revenue exceeded lower hardware sales.

Adjusted EBITDA was reported $3.2 million and excluding GlobalTrak and MobileNet acquisition related costs incurred in Q1, adjusted EBITDA is $3.6 million. Besides the non-recurring nature of acquisition related costs, Q1 results were atypical in that there were a number of one-time non-recurring items in both revenues and expenses that impacted our profitability higher and lower this quarter.

To sort these out, I will highlight them and then provide some visibility into the potential impact going forward into Q2. Acquisition related costs were $0.4 million in the quarter reflecting the GlobalTrak and MobileNet acquisitions we recently completed and comparable to last year’s first quarter from the acquisition of LMS. There will be some costs in the second quarter, but we expect them to be lower.

Looking at the income statement in more detail, service revenues for the first quarter of 2013 were up 20% year-over-year to $13.9 million, an increase of $2.4 million compared to $11.5 million in the first quarter of 2012. The year-over-year increase included increases in recurring service revenue and AIS revenues. The first quarter also benefited from the revenue back billing adjustments, which will continue – benefit recurring revenues going forward as well. The new acquisitions will impact Q2 and we expect service revenues to be around $30 million in the second quarter. Product sales were lower during the first quarter of 2013 countering the rise in service revenues and coming in at $2.8 million compared to $4.3 million in the prior year period.

The year-over-year decrease of 35% was driven by significant hardware sale in the first quarter of last year to a Japanese OEM customer and the effect of currency translation due to a less favorable U.S. dollar-yen exchange rate this year compared to last year, and pent-up demand for LMS acquisition equipment, which closed in January of last year.

Our product sales are lumpy in nature and do fluctuate between quarters. We think Q2 hardware sales will be stronger than Q1 and between $4 million to $5 million with increases coming from existing businesses and newly acquired businesses. The recent weakening of the yen compared to the U.S. dollar not only negatively impacts products sales but service revenues as well, for services provided by our Japanese subsidiary.

Going forward at the current exchange rate, year-over-year revenue comparisons will continue to be weighed down by a couple of $100,000 for quarter as a result. Selling, general and administrative expenses and product development costs were $7.2 million for the first quarter of 2013 and $1.3 million higher than the first quarter last year, split between non-recurring expenses and expenses associated with our expanding business activity.

The increases related in non-recurring items include the cost per share of about $0.3 million to relocate ORBCOMM’s New Jersey offices, as well as the impact on comparables from a reduction in SG&A expense last year involving the gains of debt extinguishment. They were higher cost of approximately $0.5 million related to activities concentrated in the first quarter such as tax, audit and legal expenses for public company compliance and for the acquisitions done in previous year. Higher costs related to growth in the business totaled about $0.7 billion including stock based compensation of about $0.3 million, employee cost including higher taxes and medical insurance of about $0.3 million, product development of $0.2 million related to new products and marketing expenses of about $100,000. These factors led to a modest decline in income from operations to $1.4 million for the first quarter of 2013, compared to $1.7 million in Q1 of 2012.

Income before income taxes for the first quarter of 2013 was $1.3 million compared to $2.9 million in last year’s first quarter. Income before income tax in Q1 last year was higher largely due to the $1.1 million gain on extinguishment of debt discussed earlier. Net income was $1.1 million or $0.02 per share for the three months ended March 31, 2013, compared to $2.4 million or $0.05 per share for the same three months period in 2012.

EBITDA for the first quarter of 2013 was $2.5 million, compared to $3.8 million in the first quarter of 2012, and adjusted EBITDA for the first quarter of 2013 was $3.2 million, compared to $4.2 million in last year’s first quarter. Adjusted EBITDA less acquisition related cost was $3.6 million this year.

On a comparable basis to last year’s first quarter, both EBITDA and adjusted EBITDA last year included a $1.1 million gain on debt extinguishment. So excluding the gain from debt extinguishment of last year and the cost of the office relocation this year, on a comparable basis, the adjusted EBITDA increased about a 11% for the first quarter of 2013 over the prior year period.

Looking at the balance sheet; cash, cash equivalents, restricted cash, and marketable securities were $92.8 million as of March 31, 2013, increasing $27.9 million from $64.9 million at December 31, 2012. Cash increased from the net proceeds received from the $45 million five-year term loan from AIG, offset by repayment of existing debt as part of the loan transaction and $11.9 million use for capital expenditures including OG2 expenditures for our satellite scheduled to launch later this year. Cash used in operating activities with $0.4 million for the quarter ended December 31 2013. Total equity is approximately $184 million on March 31 2013.

So wrapping up ORBCOMM’s first quarter results included growth and service business subscribers but also included some non-recurring items that are expected as the company prepares for an OG2 launch and transition purely from a wholesale business to full end-to-end solutions provider.

We expect these events unbalanced have a positive impact on the business going forward. We successfully closed our acquisitions of MobileNet and GlobalTrak and are busy integrating the companies. We also expect to see continued growth for the remainder of 2013 and recurring service revenues and product sales.

With that we’d be now happy to take your questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions). Our first question is from the line of Mike Malouf with Craig Hallum Capital Group. Please go ahead.

Mike Malouf – Craig Hallum Capital Group

Hi guys, thanks for taking my question.

Unidentified Company Representative

Hi Mike

Mike Malouf – Craig Hallum Capital Group

Can you guys, based on this guidance it looks like revenues are going to be down organically, so the base ORBCOMM business is down, so I am just trying to get a sense of why sub growth, even though you have sub growth that the revenue per sub as it’s down so much based on your expectation for next quarter can you give some color and insight on that?

Unidentified Company Representative

Are you talking about our service revenue?

Mike Malouf – Craig Hallum Capital Group

Yes

Unidentified Company Representative

OG I don’t see that it all Mike, there must be something in the map so.

Mike Malouf – Craig Hallum Capital Group

Well, based on your guidance, you are looking at around $13 million…

Marc J. Eisenberg

Yeah.

Mike Malouf – Craig Hallum Capital Group

In service revenue. Last year, you did $12.4 million, and you have obliviously service revenues from the acquisitions included in that June quarter, so, call it flat, call it down 2%, there’s obviously a degradation in the revenue per unit (inaudible)?

Marc J. Eisenberg

I don’t see that, Mike. So if you take the $13 million and you assume on a service revenue basis that the acquisitions are going to do somewhere between 400 and 420, and then you subtract from that fact that 50,000 of it is service that’s duplicated, because we’re already supplying them the wholesale part of that service. That would bring you down to the $12.7 million, which would be an increase, certainly over the $12.3 million that we did in Q4. Q1 was a little confusing, because we had some catch up on that customer, but we see we’re guiding up.

Mike Malouf – Craig Hallum Capital Group

Okay. So you have a little bit of growth, but still the revenue per unit is going to be down pretty significantly, can you talk about that?

Robert G. Costantini

Yeah, no, I think, just looking at because the substantial part of the basis still on our wholesale part of the business, so we have some usage based customers there, there could be some fluctuation there. But they’re feasibly still growing. There might be some fluctuations quarter-to-quarter. I don’t see this ramping down, but on a per unit basis, there could be some fluctuations quarter-to-quarter.

Mike Malouf – Craig Hallum Capital Group

Okay. And then how much was AIS revenue for the quarter?

Robert G. Costantini

$700,000

Mike Malouf – Craig Hallum Capital Group

Okay, $700,000. And are you expecting that in the June quarter to be up sequentially from that based on your guidance?

Marc J. Eisenberg

We’re expecting in the next quarter that AIS would be up about a 100 grand.

Mike Malouf – Craig Hallum Capital Group

All right, guys, thanks.

Operator

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

Chris Quilty – Raymond James

Just a follow-up on that last item with the AIS business, have you been adding new customers or is the growth really stalled out until you get the OG2 constellation up?

Unidentified Company Representative

No, we’ve been adding a lot of new customers and contracts. It’s been offset by the U.S. government business. So commercially, it’s growing and as part of the difficulties grabbing or getting revenue by the U.S. government that shrunk a little bit. We’re hoping when they work their stuff out, we’ll be clicking on both cylinders and that should be the next jump.

Chris Quilty – Raymond James

Okay. And a follow-up on earlier question, you are looking at about a $300,000 year-over-year pickup in AIS, if we back that out of the service revenue, I’m kind of drawing the same conclusion that either you are going to lose some subscribers or your ARPU is going to go down and so, is there something we’re missing that’s singular item that’s causing a one quarter effect or is it simply seasonal issues that you are predicting?

Unidentified Company Representative

No, I think, again, I think we’re giving the number that we’re comfortable with. We’re certainly trying to beat it. We’ve got usage based accounts, which are very, very difficult to guess what the usage is going to be over the next two months, but we’ll see service revenues continuing to grow.

Chris Quilty – Raymond James

Okay. And Robert, can you touch on the back billing adjustment and the accounting nature of that? And can you give us a size of the positive contribution in the first quarter?

Robert Costantini

Yeah, so again, this was related to a number of units that were sort of in the wrong billing account. We recalculated and sent the customer new points, so there was a Q1 effect. And there will be an effect going forward, which will benefit growth. The effect is a couple of $100,000 per quarter. So that would also have applied to Q1. So the back billing component is over a $1 million.

Chris Quilty – Raymond James

Okay. So that would reflect part of the reason why Q2 is, excuse me, the first quarter was a little bit higher than I would have projected?

Robert Costantini

Right.

Chris Quilty – Raymond James

And perhaps the sequential downturn, because you’re not going to get a $1 million benefit in Q2?

Robert Costantini

Yeah.

Unidentified Company Representative

No, that’s why we were comparing it to Q4.

Chris Quilty – Raymond James

Okay. So it was sort of a one-time $1 million benefit in Q1 and then it becomes a $100,000 to a couple of $100,000 benefit on a go forward basis?

Unidentified Company Representative

Yes.

Unidentified Company Representative

Yeah.

Chris Quilty – Raymond James

Okay. The announcement you had the other day on the ReeferTrak customers, was that mere coincidence that seven of them lined up like that or have these been signed over some period of time and can you give us a sense of what the lead time has been on these accounts?

Unidentified Company Representative

All right. There’s 265 different customers that StarTrak has. We wanted to give you some insight as to what the business looks like this quarter. There’s customers that we put on almost every quarter, but I heard you asking what the lead time is in StarTrak getting new customer?

Chris Quilty – Raymond James

Yeah, as a secondary question.

Unidentified Company Representative

StarTrak is leader in the business, they’ve got between StarTrak and the mail elements being merged. I think the other day they had, I looked, they had between 70,000 and 80,000 subscribers. They’ve got a huge portion probably greater than 80% of the installed base in North America of the refer installs and they continue to grow the business, they sign new contracts all the time. I think that’s a terrific business and the existing part about StarTrak is not only are they growing from in the refer businesses, which is what we are showing you this quarter, As their dry van products is now in deal testing and we think, we are going to get some major wins on that as well. and then there are dry end or mobile product is also being fielded in the fields with various customers, and we think that there is going to be some big wins there, so as apposed to just kind of growing on, on one lag there we’re going to grow on three

Chris Quilty – Raymond James

Gotcha. Switching to the more recent acquisitions MobileNet and GlobalTrak I think you said that there would be a sort of $4 million to $5 million that would contribute to about $4 million to $5 million in Q2. Is it fair assume that, the delta between kind of what you reported in Q1 and what you are projecting in Q2 gives us a sense of their revenue or you expecting a big….

Unidentified Company Representative

We said $5 million to $7 million on our run rate for the year, so you will take that $5 to $7 million divided by 4

Chris Quilty – Raymond James

Gotcha,

Unidentified Company Representative

And that’s the quarterly run rate.

Chris Quilty – Raymond James

And that’s equipment and service?

Unidentified Company Representative

Yes.

Chris Quilty – Raymond James

And what’s the break down?

Unidentified Company Representative

That the service is just added between 4.00 and 4.50 that they do in airtime between the two of them, but there is about $40,000 that gets pulled of that which is the service that ORBCOMM was selling them.

Chris Quilty – Raymond James

Elimination?

Unidentified Company Representative

So yes, so you would eliminate that math of the service portion and the rest is the hardware. We think there is some substantial hardware that these guys are rolling out and the struggle that we’re having around in the guidance is some of these installs are in Afghanistan and there has been a different, each one has a different types of rules around when you recognize the revenue. So we’re going shift a lot of hardware this quarter, but we don’t know when it’s going to get recognized. It needs to get accepted. These are installs a long way from home and so it’s just tough to hone in on how much you recognize in the quarter?

Chris Quilty – Raymond James

Okay. And specifically, with GlobalNet and a large contract with two shipment in Afghanistan and given the fact that we are pulling out of Afghanistan, can you talk about the revenue risk around that particular opportunity on a go forward basis?

Unidentified Company Representative

We love the GlobalTrak business because most of their product is around moving assets. So we understand that the government business is particularly weak around the, for all integrators, but the portion of the government business that you really like is the moving assets part of the government business because your business actually picks up as they move in and out. So we’re pretty optimistic about the GlobalTrak business in terms of the fuel monitoring, we think we’ve got three years of life on that project.

Chris Quilty – Raymond James

Okay. Very good, and can you also talk about the mix of cellular versus satellite technology and how much opportunity there is for increasing the penetration of satellite?

Unidentified Company Representative

Increasing the penetration of satellite in terms of?

Chris Quilty – Raymond James

To the degree that they are using primarily cellular technology.

Unidentified Company Representative

Yeah, well GlobalTrak mostly uses dual-mode technology, and MobileNet only uses or 90% something only uses ORBCOMM technology. So those guys are already using that in terms of StarTrak and PAR. The dual-mode of OG2 enabled next generation product is just about ready for field trials.

Chris Quilty – Raymond James

Great. All right. That’s it from me, gentlemen. Thanks very much.

Unidentified Company Representative

Thank you.

Operator

And your next question is from the line of Noel Atkinson with LOM. Please go ahead.

Noel Atkinson – LOM

Okay. Hi, guys. I am wondering if we can just talk a little bit about Caterpillar situation or lack thereof. So can you talk about whether you are involved in some sort of RFP or a renewal process at Caterpillar's against Iridium?

Unidentified Company Representative

We’ve been with Caterpillar 15 years. I mean, Caterpillar is always looking a few years out at the next generation products. We don’t know who you bid against on that products and they don’t share that with you, but there was a particular product that there was – that we were looking at, that was way too high usage for our network. It really couldn’t use any shopper service. It needed to use an open channel almost like opening up the voice network and sending data through it. It kind of reminds you of the old AOL days, linking up and transmitting it as fast as you can and then closing it down. That product is 100s or single digit 1000s of units if not a particularly big project. So we were kind of no bid on that and I’m guessing that is probably one of the wins at our competitor.

In terms of the next couple years, our products, there’s 10s of 1000s of units that are built waiting to go out. We see no change. And then in the long range, we’re happy with our business with Caterpillar. They’re on calls with us. They’re still helping us get international licenses, their factories are setup with ORBCOMM repeaters and they’re evaluating OG2 ORBCOMM hardware. So the lack of business that you’re talking about, I don’t necessarily understand it.

Noel Atkinson – LOM

Okay. So just reiterate, so you’re stating that for your existing business with Caterpillar in the majority of the applications and geographies used, you do not expect Iridium to replace you in the new installations.

Unidentified Company Representative

We’re not aware that they’re installing. Let me be clearer that they are for you. In the near-term our subs are secure. In the medium term, they are ready to go have the units and rolling them out. And then past a couple of years, the reason you’re getting confusion is, I don’t think they know yet. I mean like I said, they’re always out there a couple of years and I don’t think they know. I don’t think Iridium knows. I don’t think anyone knows. I think this – I listen to their earnings strips, their conversation and I got to tell you, to me it was confusing and optimistic.

I mean, some other words that they used, I just know Cat, right, I’ve known Cat for 12 to 15 years; 15 years of ORBCOMM, 12 with me being here. And they don’t do things like that I am aware of like guaranteed contracts and stuff like that. So when someone says that they have a large contract, I don’t know what a large contract means. Does it mean a contract with a large customer; I didn’t see it, in case, did you? I mean, does it mean that was done in a large bond? Does it mean that it was done on post to Board that it’s a large contract? Does it mean match a large guy? I am not quite sure what a large contract means, what a primary provider, Cat doesn’t sign you to be a primary provider, they sign you to have the ability to sell your product and that’s it.

So primarily, they are not guaranteeing from my knowledge that there is anyone that’s a primary product, and well Watershed Agreement, I don’t even know what a Watershed Agreement is. I mean, maybe you can explain that to me? So I think they are overly optimistic and I think they are confusing the market and I understand the pressure that they are under. Their business has been contracting for many quarters in a row, I understand that, but I hope I am being a little clear and more definitive than they are.

Noel Atkinson – LOM

Okay. Good, and then on, how about your outlook for CapEx for Q2?

Unidentified Company Representative

Yeah, so, again, I think we’ve sort of guided a little bit around that. I think Q2 will probably as we headed for the launch, working around $25 million.

Noel Atkinson – LOM

Okay. Great. And then just following up on the previous question in terms of those ReeferTrak customers that were announced, what’s their – give a sense of their combined Reefer fleet?

Unidentified Company Representative

I am sorry, whose – primary Reefer fleet?

Noel Atkinson – LOM

For the seven ReeferTrak customers that you guys announced, what would be the total Reefer fleet between the seven?

Unidentified Company Representative

I am not a 100% sure. I haven’t added them up. But these guys are anything from a couple of hundred units to a thousand units each.

Noel Atkinson – LOM

Okay, all right. Thank you.

Marc J. Eisenberg

Welcome.

Operator

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

Jim McIlree – Dominick & Dominick

Thanks. Good morning.

Marc J. Eisenberg

Hey, good morning.

Jim McIlree – Dominick & Dominick

Hey, Robert, on the CapEx in Q2, you said $25 million assuming the launch takes place in Q3, what would the Q3 be?

Robert G. Costantini

So Q3 will probably be pretty much paid going into that. Q3 CapEx would probably – I’m guessing the insurance – so maybe $10 million. And then we start looking more towards the end of Q4 and Q1 before you start more significant numbers.

Jim McIlree – Dominick & Dominick

Okay. Okay, great. Looking at the Q2, if my math is right, it seems like the ads in Q2 will be similar to what you did Q1, is that reasonable estimate? And excluding the ads from the acquisitions?

Robert G. Costantini

That’s kind of what we saw in April.

Jim McIlree – Dominick & Dominick

Okay. And on the SG&A for Q1, I know that you listed out all of things that were special in this quarter. Are there any special things that are expected in Q2? I know you said you have further acquisition costs, but that’s not in the SG&A, is there anything else that we should be aware of that’s going to kind of impact the Q2 SG&A?

Robert G. Costantini

No. I think when – as we get closer to the end of this CapEx cycle, I think you’re going to see more investment of ORBCOMM into our network around the stuff that surrounds our network, building functionality at our end-to-end acquisitions. If you go a little bit dormant, waiting for the end of your constellation, and then if the constellation turns over to new constellation, you wake up and you start marketing heavily and you start developing more products, and I think you are seeing some of that in some of these increased costs. So I don’t think you’re going to go back to where we were like 2Q of last year in terms of expenses.

Jim McIlree – Dominick & Dominick

Yeah.

Unidentified Company Representative

We are going to invest in getting OG2 rolled out. It’s a huge event for us. Our customers need to know about it. There are some expertise we need around developing these applications and getting the modems done. It’s hard to quantify. I don’t think that there’s going to be a big bump of non-recurring like there was in Q1. It’s definitely going to be trimmed down, but we’re not going to tell you it’s going to zero either.

Unidentified Company Representative

Yeah, I mean, the differences increases, so there’s going to be some pressure there. We guide and we see things are more spotty about coming into play. You need to get after these things as we move into, up to the launch and so there will be some of that, but we have a pretty good multi-year track record managing our expenses. So we’re on it.

Jim McIlree – Dominick & Dominick

All right. Okay. Thanks a lot.

Operator

Thank you. Our next question is from the line of Howard Rosencrans with Value Advisory. Please go ahead.

Howard Rosencrans – Value Advisory LLC

Hi, guys. A little more clarity in terms of the launch, there is an, I know, there is an upcoming launch I believe in July by SpaceX and if that gets pushed, I'm sure to what's your confidence level that even if – that it's going to happen in September, October, November, December, is it fairly high that, we're looking at sometime before the end of the year that it happens?

And the second question is what is your remaining spend that you have from the Q1 – from the end of Q1 to get the constellation launched or the -- I guess, between both the first launch and the second launch? What is your estimated spend now, has it changed?

Marc J. Eisenberg

So, I will take the first half and Robert will take the second half.

Howard Rosencrans – Value Advisory LLC

Yeah

Marc J. Eisenberg

I think, we really are relying on SpaceX and I think our satellites are in pretty good shape. So we are very focused on that launch, that launch has slipped from June to July, from what we’ve been able to see, and we kind of see like what you see it. And we think that there is a probably is day for day slip for everyday, past July, that this thing, this rocket doesn’t launch.

I think if it goes off without a hitch in July, I think we’ve got a really good, I think we are going to launch in Q4 if this thing is delayed a couple weeks, I think we’re going to, I don’t think we’re going to have an issue in launching. If this been gets delayed in 90 days, I think it could slip the first quarter next year, which is why we’re going to get real service at the date on the next call.

Howard Rosencrans – Value Advisory LLC

Okay. And the balance of the dollars that you are assigning the two constellations?

Robert G. Costantini

Yeah, I want to do the math on my head, I want to say, it’s around $90 million

Howard Rosencrans – Value Advisory LLC

Very good. Thank you.

Robert G. Costantini

Okay

Operator

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

Chris Quilty – Raymond James

Thanks, Robert. Just wanted to circle back one final question on the back billing issue. What would have been the EBITDA contribution from that $1 million one-time revenue hit?

Unidentified Company Representative

Yeah, there’s some slight cost associated with it, commissions, but it’s mostly a $1 million, something that – let’s call it 8.

Chris Quilty – Raymond James

Okay. So if we exclude that, I mean, the EBITDA was off quite a bit here in the quarter?

Unidentified Company Representative

There was a number of costs that were in that quarter as we had signaled to you, there was a number of costs and there are one-time costs and we think for the majority of that.

Unidentified Analyst

Sure. But your gross profit on product sales was off by a good – almost $0.50 million?

Unidentified Company Representative

And if you are comparing it to the year before, Chris, there was a $1.1 million debt extinguishment gain that we took the year before.

Chris Quilty – Raymond James

Oh absolutely. The other question, I guess, the OpEx this year was up about $1.25 million over last year and with the addition of couple of more acquisitions, should we expect that OpEx being at least SG&A and product development picks up from this level or should you be able to hold it steady?

Unidentified Company Representative

Yeah, I think we’re, as Marc mentioned earlier, we after doing some things, some of them are newer things, so it’s going to not dramatically increase. If you look at the numbers if you want to, say that product development probably will be in the $700,000, $800,000 range for quarter, SG&A in the fix and change range. I think we can hold up.

Chris Quilty – Raymond James

Great. All right. Thanks, guys.

Unidentified Company Representative

Okay.

Operator

Thank you. Your next question is from the line of John Kercheval with Vulture Capital Fund. Please go ahead.

John Kercheval – The Vulture Capital Fund

Good morning. My question relates to the balance sheet. On your 10-K, in your satellite network and other equipment net of depreciation of $101 million from $200 million and looking to Bloomberg term I got that broken out as property planned equipment $136.1 million and the depreciation of minus $34.9 million. Can you give us some additional detail on that with three to four biggest components are to get this either $101 million or $136 million? Please.

Marc J. Eisenberg

The net $101 million is related to the building of our next-generation satellite. So the bulk of it is [ran or due to] constellation as we start making payments for that and the balance would be related to our infrastructure on the network on the threshold side.

Chris Quilty – Raymond James

Right. And so when you say the bulk of it that number is in the balance of it that number would be approximately…?

Marc J. Eisenberg

I don’t have the breakdown in front of me, but I want to say almost $100 million of that is related to the constellation satellites.

Chris Quilty – Raymond James

The new constellation or the existing ones?

Marc J. Eisenberg

The existing constellation is appreciated. So it’s further new one.

Chris Quilty – Raymond James

All right. Okay. All right. That’s it. Thank you.

Operator

Thank you. Our next question is from the line of (inaudible). Please go ahead.

Chris Quilty – Raymond James

Good morning. I’m new to your company, but reading your releases the agreements with the folks like Sumitomo seem to suggest that while they’re becoming customers they’re also going to become resellers. Am I reading that correctly?

Marc J. Eisenberg

Yeah. So, there is three portions of ORBCOMM’s business. There is our OEM business, which includes guys like Sumitomo and Hyundai and things like that, they typically buy service direct, they create their own products, their own hardware and their own web portals. And we just – for the most part we sell them wholesale service. And there is other parts of our business like in the press release that talks about StarTrak's customers and those seven new customers. And in that instance, they are buying a full M2M solution from us, that includes just everything.

Chris Quilty – Raymond James

Okay. And then, in the Berg Insight announcement, of the 137,000 existing intermodal containers, how many – would you have a guess on your share of those at the moment?

Marc J. Eisenberg

I think it says exactly, it's 20-some – it's below 20,000, I think.

Chris Quilty – Raymond James

Okay. And then, as you get the OS2 constellation up, there have been folks guessing that you will see a tsunami of new interest from customers. I would guess that folks pretty much know that you're doing this, and as you said, Caterpillar is already testing new solutions and whatnot. Are you expecting a huge wave or just an increased number of phone calls or not much happens on day two?

Marc J. Eisenberg

I think, it’s going to comment two phases. So today’s constellation it’s getting towards the end of its life and we’ve got gaps in our coverage, so there is literally holes in the sky, so sometimes, ORBCOMM services is very quick, and then sometimes it can take 25 minutes because there is literally a hole in the sky, so when we launched this next bunch of satellites, you fill the holes, and it’s going to strengthen the whole constellation, it’s going to be quicker.

So today there are customers like the heavy equipment OEMs that if it takes five seconds or 20 minutes doesn’t mean that much, but there is a whole group of other customers that require more real time data and it will get us into those markets.

There are some customers that require bigger data package, so we’ll be able to grow from 100 bytes all the way up to 1000 bytes and that leads to a whole different group of customers and you’ve got guys that want to shrink the antenna as you’ve got guys that are worried about power management, the m-to-m business is an awful lot like the phone business, the phone business gets really exciting the more, the more time that your iPhone can go without a charge, then the m-to-m business is the same. And there is a number of different features to conserve battery power ORBCOMM transceivers in the next generation network.

We think it’s substantial and not only we are going to be ready with the next generation constellation but we’ve been putting a hole, the stuff around and just putting a constellation up is exciting and it leads to growth, but it’s only part of the story. You need the transceivers, you need the web portals, you need the applications, and we are ready to hit the plan running. When OG2 launches we are going to have that ready.

Chris Quilty – Raymond James

Okay, thank you.

Operator

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

Marc J. Eisenberg

Thank you. In summary, we are off to a good start in 2013. Our business continues to grow. We continue to expand our international distribution. With OG2 right around the corner, we are focused on launching satellites and rolling out new and exciting products and services. Thank you all for joining us today and for your questions. We look forward to speaking to you again next quarter.

Operator

Thank you. Ladies and gentlemen that does conclude our conference for today. We’d like to thank you for your participation and you may now disconnect.

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