ORBCOMM's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.13.14 | About: ORBCOMM Inc. (ORBC)

ORBCOMM, Inc. (NASDAQ:ORBC)

Q4 2013 Results Earnings Conference Call

March 13, 2014 10:30 AM ET

Executives

Marc Eisenberg - Chief Executive Officer

Robert Costantini - Chief Financial Officer

Analysts

Mike Walkley - Canaccord Genuity

Jim McIlree - Chardan Capital Markets

Ross Licero - Craig-Hallum Capital Group

Chris Quilty - Raymond James

Beth Lilly - Gabelli Funds

Howard Rosencrans - Value Advisory

Anthony Cambeiro - Anthology Capital

Operator

Good morning, ladies and gentlemen and welcome to ORBCOMM’s Fourth 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 from approximately 12 noon Eastern Time today through 11:59 pm Eastern Time on March 27, 2014. The dial-in details for the replay can be found on 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 two weeks.

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

Marc Eisenberg

Thank you. Good morning and thank you for joining us. I am Marc Eisenberg, ORBCOMM’s Chief Executive Officer. And with me today is Robert Costantini, ORBCOMM’s Chief Financial Officer.

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

This has been another busy quarter and we have a lot to talk about. On this call I would like to share some exciting news including further details on our recent acquisition of Euroscan, our plans for the first OG2 mission, new product releases and some insights across our various business segments.

With that said, lets get started. Earlier this morning, we issued a press release announcing financial results for the fourth quarter ending December 31, 2013, and I am pleased to report that we had another strong quarter. For Q4 of 2013, our total revenues were $19.2 million and adjusted EBITDA was $4.4 million, which is in line with the guidance we provided as part of our equity offering that we completed in January.

Service revenues increased year-over-year by 20% to $14.8 million with product sales increasing 16% to $4.5 million. Total revenues of $19.2 million increased 19% from the same period a year ago. Net income for the fourth quarter was $0.8 million or $0.02 a share compared to $2.1 million or $0.05 a share in the same period of last year.

Adjusted EBITDA for the fourth quarter was $4.4 million, $0.2 million higher than the same period last year. Adjusted EBITDA includes acquisition related expenses of $300,000. Our subscriber count grew by 36,000, net subscriber communicators or subs ending the quarter at 863,000.

For the full year 2013, service revenues increased year-over-year by 14% to $56 million and product sales increased 18% to $18.3 million. Total revenues of $74.2 million increased 15% from the same period a year ago. Net income for 2013 was $4.5 million or $0.10 a share compared to $8.7 million or $0.19 a share in 2012.

Adjusted EBITDA for 2013 was $15 million compared to $16.7 in 2012 and includes $1.7 million in acquisition related costs. As we look back in the full year financials, revenues were up year-over-year, adjusted EBITDA was slightly lower due to a acquisition related cost, integration cost and cost to develop customized solutions for significant customer opportunities such as Doosan and Hub in which we barely saw any of the associated revenues in 2013, but we expect to start in 2014, I’ll expand on this in a few moments.

2013 was a pivotal year for our comp focused on future growth. We completed three acquisitions and released a number of new products into the market. GlobalTrak and MobileNet were acquired in April 2013 and Comtech’s Sensor Enabled Notification System or SENS operation was acquired in October 2013.

These acquisitions support our long term growth strategy by adding vertical expertise, technologies and geographic market, which strengthens ORBCOMM’s end-to-end solutions portfolio. In addition to the technology acquired through acquisition we enhanced our solutions portfolio with new ORBCOMM developed products. Many of these devices are tailored for the transportation industry and now enable us to meet a variety of market needs from cold chain monitoring to intermodal container security to drive an asset tracking. A good example is the award winning solar powered GT 1100 which began shipping in small quantities in the fourth quarter of 2013.

We plan to bring some additional new devices to the market such as our self-contained, dual-mode packaged telematics product, which combined with the bandwidth of cellular communications with the coverage of satellite in a small footprints. We’ll be announcing further product releases in the near future.

Another key elements to future growth are the strategic alliances when established with other telecommunications providers including MSS industry leaders Inmarsat and Globalstar. Together we are collaborating to set a new standard for the global M2M industry. As we announced in November, we are creating a series of interchangeable modems powered by the ORBCOMM, Inmarsat and Globalstar networks that will have the same footprint connectors, power inputs and programming environment using a substantial number of common parts, plus expanding the capabilities developers can utilize whilst sharing scale among the key players in the satellite industry. We began shipping the ORBCOMM OG2 modem development kits in the first quarter of 2014. And expect to launch the Inmarsat and Globalstar versions in late 2014.

Working with industry leaders like Inmarsat and Globalstar as well as offering multimode services, with some of the world's largest cellular carriers had significant flexibility to our solutions portfolio and the distribution of our products.

To summarize 2013, we leverage the multi-faceted growth approach including strategic acquisitions alliances with industry leaders, new product developments and organic growth to expand our leadership position in the global M2M marketplace.

We are now an integrated multi-network provider of complete telematic solutions, well poised for continued growth and success using our constellation as a key enabler. Another way to say it, we have invested millions of dollars in 2013 that we think will result in significant increases in market share going forward. And we are confident that those investments were the correct course of action.

Now on to recent news. In January, we successfully completed a round of financing in which our company netted $37 million in cash. As we have stated, this capital is here marked for growth.

We didn't wait long, yesterday we announced the acquisition of Euroscan, an important step in the future of ORBCOMM's growth plans. Based in the Netherlands, Euroscan is the cold chain telematics leader in the European Union.

As an industry leader in this field in North America we understand the worldwide market for M2M transportation solutions and see it to be growing as customers adopt equipments for improved safety and reduced costs. Euroscan has done an excellent job in their core business of providing transportation temperature compliance recorders in response to the European Food Safety regulations created in the late 1990s and over the past couple of years they’ve expanded this core capability to M2M solving the regulation issues, while providing valuable logistics insight to transportation companies.

Euroscan has world-class OEM relationships not only with the large trailer manufacturers such as Schmitz Cargobull and Krone Group but also with refrigeration manufacturers such as Carrier who deliver high volumes of Euroscan private labeled temperature recording devices that are factory installed on newly produced refrigeration units. Because the end users of their products are typically global food companies such as McDonald’s, Euroscan’s footprints covers multiple geographies. While we were initially attracted to this company because of their footholds in European cold chain we became even more intrigued by their broad distribution channels.

Euroscan operates outside of ORBCOMM solutions’ distribution footprints and we’re confident that Euroscan can distribute all of ORBCOMM’s solutions throughout their channels. Until now ORBCOMM distributed solutions predominantly in North America and Euroscan expands ORBCOMM’s distribution of M2M solutions into Europe, the far East and South America. Euroscan started by selling temperature recording products which were not wireless solutions they’ve begun transitioning those recording products into wireless solutions by selling adapter products allowing them to start converting their large installed base of nearly 200,000 recording units to report wirelessly.

Euroscan has approximately 10,000 installed wireless subscribers today, approximately 3,000 of which are already included in ORBCOMM’s subscriber count, due to selling the wholesale airtime on these deployments.

Euroscan’s service revenues have grown to 20% of revenues and we expect that to continue to grow as they sell more wireless solutions into their mix. And add the entire suite of ORBCOMM’s solutions to their distribution channel as they transition to a full transportation service provider.

As part of this acquisition, we acquired Ameriscan, Euroscan’s subsidiary in North America which accounts for approximately 15% of Euroscan’s global sales. Euroscan’s products are well positioned to meet the upcoming demands of regulations in the United States for food safety with the FDA’s Food Safety Modernization Act. In addition the company has a great list of key accounts, who are focused on meeting refrigerated transportation temperature quality standards.

Together with our previous acquisitions of StarTrak and PAR LMS, Euroscan enables ORBCOMM to meet the M2M demands of food and pharmaceutical companies in North America, while expanding our distribution globally.

Euroscan is about 40 employees; nearly all of them we expect will be staying on. In sizing the company, Euroscan does approximately $15 million a year in sales and nearly $4 million in adjusted EBITDA. ORBCOMM paid approximately $29 million at closing comprised of approximately 90% in cash and 10% in equity, plus the potential earn-out consideration of up to $6.5 million.

We believe overtime based on the size of the EU market that the Euroscan platform can achieve solution sales in the EU that can approach that of our North American operation. For now, impact on revenues in the first quarter from this acquisition will be negligible due to the transaction closing late in the quarter. Allowing for transaction and integration cost, we anticipate this acquisition to immediately be accretive.

We’ve got some other news to report, we are excited to announce in April 30, 2014 launch date for our first OG2 mission containing six satellites on the dedicated Falcon 9 rocket. Currently we are second on the SpaceX manifest, but the proceeding CRS or Cargo Resupply Mission is scheduled to lift off in just a few days on March 16th. Assuming they hit that date without incidence, we anticipate shipping our satellite by month end. Our rocket’s first and second stage engines are at the SpaceX facility in Texas for test firing and should also make their way to Cape Canaveral by April 1st.

While we could have launched up to eight satellites, we have decided to focus on six. There were multiple factors that went into that decision, the first of which is that six satellites is more than adequate to fill the gaps and coverage and achieve the first mission objective. Moreover, our second and final launch is just a few months away slated for the end of 2014, so there will be no material impact on the completion date for the full network.

Other considerations that led to this decision included the insurance program, available time per satellite on in-orbit testing, as well as other technical items. After a very long road with multiple partners on funding this initiative, designing and manufacturing these spacecrafts, sourcing and watching the progress around the launch vehicle, we are now extremely excited to report that we are scheduled less than seven weeks away from getting our first mission airborne.

On that we will spend the good deal of time and the progress of this mission during our next call in May. We intend to share a link for anyone who desires to watch the launch real time prior to the launch date.

Another step in preparing for OG2 launch is the commercial availability of our next generation OG2 satellite modems, which we announced last week. The OG2 modems are 100% backwards compatible. We’re offering two versions of the modem; the OG2-M, solely focused on satellite communications and the OG2-GPS, which adds an on-board three-axis accelerometer and built-in GPS.

With the footprint smaller than a credit card, both the OG2-M and the OG2-GPS feature a single wide range power supply, which provide significant flexibility for product designers. The modems utilize an industry standard PCI Express physical interface for easy integration into a broad range of M2M applications.

We're also offering a turn-key OG2 Developer’s Kit that is designed to reduce development time and expedite the deployment of OG2 solutions in the field. OEMs can utilize the kit to validate the modem’s compatibility with our existing applications and to benchmark modem and network performance.

We’ve already started shipping Developer’s Kit and are seeing a favorable response from system integrators and resellers who are interested in using the new modems to start building OG2 ready applications.

Let’s update you on some of our large opportunities. We ship the first 500 GT 2300 units to Hub Group in the fourth quarter of 2013, most of which have now been installed. We're undergoing an evaluation with Hub and see great results to-date. We're in the process of refining the installed process and building the next batch, however there is a long build cycle, so we will not ship additional product in the first quarter and are planning to continue shipping late second quarter or early third quarter.

All-in-all we expect to ship nearly 30,000 units by the end of 2015, which should have a long-term material lift to hardware revenues starting in the back half of 2014 and long-term growth in service revenues.

Doosan is finalizing their validation testing and targeting a May roll out in the U.S. and a June roll out in the EU. This should further expand revenues in the back half of the year.

We have also announced a strategic marketing agreement with Rogers, the largest GSM cellular operator in Canada. While we have announced partnerships with carriers in the past, this one is unique. And that is the first of our wireless partners to market and distribute ORBCOMM’s suite of M2M asset tracking and monitoring solutions direct to end users.

In other words, we sell their airtime and they sell our products, which dramatically expands our efforts in Canada. We anticipate other carrier announcements throughout the year, which would significantly further the speed and scope of our product distribution.

Once again, this year we continued to accelerate our transition from wholesale satellite network operator to an integrated multi-network provider of complete telematic solutions using our satellite constellation as a key enabler.

We're focused on continuing to grow the business through innovation and market expansion. And while we have made great strive to that end in 2013, we believe the best is yet to come.

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

Robert Costantini

Thank you, Marc. In Q4, ORBCOMM was focused on a number of key projects including integrating the SENS acquisition that closed on October 1st. Shipping products for Hub and pursuing other growth opportunities. We were also focused on our latest acquisition, Euroscan, which we announced yesterday. This is our fourth acquisition in the last 12 months. I will discuss this more later.

We continue to execute on our growth strategy to grow the business by all means available to us in anticipation of the OG2 launch. Overall in the fourth quarter of 2013, total revenues were $19.2 million compared to $16.2 million in Q4 of 2012, an increase of 19% over the prior year.

Service revenues in the fourth quarter of 2013 increased 20% to $14.8 million and product sales increased 16% to $4.5 million over the prior year period. These figures for Q4 were within the pre-expected ranges pre-announced in our filing related to our January 17th equity offering.

Net income in Q4 was $0.8 million or $0.02 per share compared to $21 million or $0.05 per share last year in the fourth quarter. Full year 2013 net income was $4.5 million or $0.10 per share compared to $8.7 million or $0.19 per share last year. The impact of acquisition-related cost was $0.03 per share compared to $0.02 last year in 2012.

As mentioned, we’re pursuing strategic opportunities to grow the business that require expenditures over the short-term for new products and services to capture higher future revenues. In Q4 we closed several deals including Hub and Doosan and expect significant revenues from these activities in 2014.

Acquisition-related costs were approximately $302,000 in the fourth quarter and $1.7 million for the full year. The SENS acquisition completed in Q4 was the primary driver and some of it related to Euroscan. We will continue to see these costs continue into Q1 2014.

Q4 2013 adjusted EBITDA was $4.4 million and inline with our expectations, adding back $0.3 million in acquisition-related cost will make that $4.7 million. Full year 2013 adjusted EBITDA was $15 million compared to $16.7 million in 2012 and 2013 includes $1.7 million in acquisition-related costs that are $1 million higher than in 2012.

On a prior period comparative basis for the fourth quarter and full year, our results were way down by the dramatic fluctuation in Japanese yen exchange rates versus the U.S. dollar that occurred in January of 2013. So in Q4 2013, total revenues would have been higher by almost $0.4 million and $1.3 million for the full year.

We’re embarking on expanding internationally with the Euroscan acquisition so we’ll be watching the euro and yen exchange rates more closely.

Discussing the income statement in more detail, service revenues for the fourth quarter of 2013 were $14.8 million, up $2.4 million or 20% year-over-year compared to $12.4 million in the fourth quarter of 2012. The quarterly increase year-over-year was the result of growth in organic service revenue in AIS with contributions from the 2013 acquisitions of GlobalTrak, MobileNet and SENS.

For the full year ended December 31, 2013, service revenues were $56 million compared to $49 million last year, an increase of $6.9 million or 14% year-over-year. Product sales were also higher in the fourth quarter of 2013, increasing 16% year-over-year to $4.5 million and that’s compared to $3.8 million in the fourth quarter of 2012. The increase this year over the prior year was significantly aided by the acquisitions.

Product sales for the full year ended December 31, 2013 were $18.3 million compared to $15.5 million in the prior year. The full year increase over the prior period was 18% and that was largely due to our organic growth of $0.7 million at StarTrak and $4.4 million from the acquisitions. It also reflects lower product sales in Japan.

We introduced several new products in 2013 and we believe we will continue to drive growth in product sales, notably the GT 1100 as well as the GT 2300 which was built for Hub. For 2014, there are several new products in the pipeline still to be introduced.

Again to recap, total revenues for the fourth quarter of 2013 were $19.2 million compared to $16.2 million in 2012 an increase of 19%. And for the full year ended December 31, 2013, total revenues were $74.2 million compared to $64.5 million in 2012, a of 15%.

Relating to cost and expenses, as we already indicated, additional expenditures are being incurred to build products and services that allow us to pursue large revenue opportunities that we expect in 2014 to begin contributing revenues. We will continue to see additional cost increases, expect the rate of growth and expenses to moderate, not including the additional cost to operate newly acquired businesses. Our recent announcements involving Hub, Inmarsat and Doosan to name a few, validate our strategy to incur these costs in pursuit of these opportunities.

We are disciplined in controlling costs weighing additional investments to get -- against expected returns from the growth opportunities available. Generally, our costs are primarily driven by increases in the number of employees. This is largely determined by the desire to keep acquired talent in engineering and sales needed to grow, develop and sell new products and services.

In Q1 2014, we will see the impact of the Euroscan transaction and also the seasonal impact where some costs tend to be higher than Q4, such as increase in payroll taxes, benefit premium increases and public company cost for the shareholder meetings.

Cost of services were $6.7 million in the fourth quarter and that is up from $5.6 million in the prior year and that increase is $1.1 million. Most of this increase was due to higher operating and labor costs to run the acquired companies as well as higher depreciation and expenses of $0.2 million. Costs of product sales were $3.6 million in the fourth quarter up from $2.2 million in the prior year and that increase is mainly due to higher product sales in Q4.

Selling, general and administrative expenses were $6.4 million in Q4 2013 and $0.9 million higher than the $5.5 million spent in Q4 2012. The main drivers were the additional operating costs from the acquisitions including new employees, spending on new initiatives and costs in anticipation of the OG2 launch.

Product development cost in the fourth quarter was $0.8 million and increased only slightly over the prior year. Acquisition related costs were $300,000 in Q4 compared to nil in Q4 of 2012. We expect acquisition related costs to pick up in Q1 2014 as mentioned, obviously reflecting Euroscan acquisition.

Income from operations was $1.5 million or $0.9 million lower than the fourth quarter of 2013 compared to $2.4 million in Q4 of 2012. Net income was $0.8 million for the fourth quarter of 2013 compared to $2.1 million for Q4 in 2012. For the full year ended December 31 2013, net income was $4.5 million and that’s compared to $8.7 million in the prior year period.

Earnings per share were $0.02 per share in Q4 2013 and $0.05 per share in Q4 of last year. For the 12 months ended December 31, 2013, earnings per share was $0.10 versus $0.19 in 2012. The impact of acquisition related cost was $0.03 per share this year compared to $0.02 per share last year.

Adjusted EBITDA for the fourth quarter of 2013 was $4.4 million compared to $4.2 million in last year’s fourth quarter, a gain of 5.4%. Adjusted EBITDA in Q4 this year includes acquisition related cost of $0.3 million versus nil last year. Adding back acquisition related cost to increase in adjusted EBITDA would be 11.7%. Adjusted EBITDA margins were 22.8% for the fourth quarter and as compared to 25.7% in the prior year period. And that was lowered by acquisition related costs, the yen exchange rate and cost to investing and growing our businesses.

For the full year ended December 31, 2013, adjusted EBITDA was $15 million compared to $16.7 million in 2012, and 2013 includes $1 million more in acquisition related costs than in 2012, totaling $1.7 million for the full year of 2013.

Looking at the balance sheet, cash and cash equivalents, restricted cash and marketable securities were $70.5 million compared to $64.9 million at December 31, 2012 and that’s an increase of $5.6 million. The increase in 2013 cash balances primarily comprised $45 million from AIG in January 2013 add to that cash flow from operating activities of $8.8 million less capital expenditures of $37.3 million and over $7 million as part of the consideration for the three acquisitions we did in 2013.

Not reflected in our year end 2013 cash balances are the net proceeds from our January 17th equity offering. The company’s net proceeds were approximately $37 million, after paying for underwriting fees and expenses. We issued $6.3 million common shares that include the overallotment at $6.15 per share. ORBCOMM offered all the shares and received all the net proceeds of the offering. Total shares outstanding are now over 54 million shares.

So on a pro forma basis, the cash balance as of 12, 31, 2013 inclusive of the equity raise would have been a $107.5 million. Total equity is approximately a $193 million at December 31, 2013.

So, at this point, I’d like to take a few moments discussing the opportunity with Euroscan. As Marc mentioned earlier, Euroscan is the cold chain telematics market leader in the European Union with approximately $15 million in sales and generating nearly $4 million in adjusted EBITDA a year.

Once again, we anticipate Euroscan transaction to be accretive to earnings in 2014. The impact on revenues in the first quarter will be negligible due to the transaction closing late in the quarter, but following the transaction and integration, we anticipate this acquisition to be immediately accretive.

We acquired all of Euroscan’s equity in a share purchase transaction, transaction was denominated in euros, but I’ll take the liberty to do the U.S. dollar conversion. At the closing date exchange rate, ORBCOMM paid just over $29 million, not including net adjustments for cash and working capital.

The consideration comprised of approximately 90% cash and 10% ORBCOMM common stock. The cash component was about $26.9 million and the common stock component was valued at a little over $2.2 million.

The contingent earn out consideration is $6.5 million that’s achievable over three years based on Euroscan achieving gross profit target, service revenue -- adding service revenue generating subscribers, as well as various technical achievements. We continue to look ahead in 2014, and it’s quite possible that with the opportunities we see in the market, revenues could reach over $100 million. And we can reach higher annualized levels by year-end 2014 as we continue to execute on our growth strategy.

At the core of this growth is our solution services but also benefit further from Euroscan, plus the already announced customer wins of Doosan and Hub, the new products we’re developing and plan to roll out in 2014, our collaboration with Inmarsat and Globalstar and of course the launch of our OG2 constellation.

There is a lot for us to look forward to in 2014 and beyond. We have made significant investments over the last year with the intent to grow market share and it continues to some extent now. The first quarter, we’ll probably look heavy on the cost side. We anticipate large acquisition-related costs. We attended multiple industry tradeshow and conferences, we’re traveling a [handful large deployment] and we’re active with our global distribution partners.

In addition, we mentioned earlier, Q1 cost tends to be higher putting the seasonal impact of higher employee cost and public company expenses. For all these reasons, cost in the first quarter maybe higher by a few million dollars, pushing adjusted EBITDA lower in Q1 2014 than the fourth quarter of 2013. We would anticipate that these costs increases will moderate over the year and get back to more typical ORBCOMM EBITDA margins before year-end.

So wrapping up, ORBCOMM had yet another strong quarter, driven by increases in revenues, while continue to incur costs as a consequence of pursuing these growth opportunities. We have been investing to acquire and integrate new companies, prepare the business for a next generation of satellites, and pursue major customer initiatives. We expect many of these investments to start generating revenues throughout 2014. Adding Euroscan gives us needed scale, new products and global distribution which coupled with the inherent leverage in our operating model should enable us to continue to improve adjusted EBITDA and expand our adjusted EBITDA margins. We remain focused on executing on all of these opportunities and look forward to discussing our project more throughout the year.

With that we will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question is from the line of Mike Walkley with Canaccord Genuity.

Mike Walkley - Canaccord Genuity

Great thank you very much. Just following up on Euroscan can you share with us the mix between hardware and services and would you expect them to do more than $15 million on a annual run rate after closing the deal?

Marc Eisenberg

So the mix is 80-20 today, hardware to service, a couple of years ago that mix was 100 and zero. So they are growing quite quickly, the wireless mix as opposed to the hardware sales. But if you look at kind of the theory behind this acquisition, it’s kind of like very similar to what we did with StarTrak where you start with a company that specializes in piece of transportation and then you take all of ORBCOMM products and put it through that. I mean ORBCOMM was looking at entering into Europe and it’s a market that if you are not located on the continent it’s a struggle to support, you are not on their hours, the customer service you have got to speak all the multiple languages. So one way about this would have been to put tens of ORBCOMM people into Europe and it was preferable to acquire Euroscan. So imagine we take that company with its couple of SKUs expanded to every SKU that ORBCOMM has, plus take their products and bring them here and we think it could grow pretty drastically.

Mike Walkley - Canaccord Genuity

Okay, thanks. And then Marc. What’s the hardware gross margin currently for the products and sounds like you had some earn outs for them to either maintain or grow that gross margin?

Marc Eisenberg

Yes. So the gross margin in there, well, their EBITDA gross margin, if you take that $50 million and …

Robert Costantini

Yes, it’s like 25%.

Marc Eisenberg

It’s like 25%, and they have 40 people. So in terms of the exact gross margin, I assume it varies per product, but clearly it’s higher than 25%.

Robert Costantini

Yes.

Mike Walkley - Canaccord Genuity

Okay, great. Thanks. And then just, it sounds like, really transformative year in 2013 with solid acquisitions in the M2M group and you shared some details on, some of these recent ones in more back half periods. Can you update us, how to think of Rider? And just as you look at your year, how should we think about maybe ARPU and EBITDA margins as the year progresses?

Marc Eisenberg

Sure, that’s all. I will start with the customers. Rob, you could take them second half. So in terms of like Rider and Doosan and Hub; the Rider deal was significant amount of units over a long amount of years. And it gets traded out as they put new units in service. So you will see some nice growth on that accounts overtime. The Hub deal is much, much more explosive in that in order to get what they are looking for, the ROI that they are looking for, they have got to go back into their base of intermodal containers, and they have got to equip them all as quickly as possible, so that they can use this to operate their complete logistic system out there.

And that’s why we are kind of flying to get nearly 30,000 units deployed. And you look at 30,000 units and in that mid 100s range and its millions upon millions of dollars of hardware that gets sold. And the Doosan deal it will fuel up to mid single-digit 1,000 units and kind of scale up from there, over the next four, five years as they add more models and more distribution points around the globe. So that one will also be a quicker impact.

Robert Costantini

Yes, so as far as ARPUs and EBITDA margins, or adjusted EBITDA margins concerned, we're moving the impacts of transaction acquisition related costs and those types of things. We expect those margins to improve throughout the year, as the products that come on at these higher margins fold in that those will help drive those margins higher. We also expect to see the leverage in the model, kick-in as revenue, service revenues grow.

The incremental margins there as we talked about are very significant to help grow adjusted EBITDA margins. With respect to ARPU though I’d say that ARPUs are probably going to be level to, current levels where they are now.

The mix obviously impacts that and as we see more of the solutions service revenue subs go on, those will tend to raise ARPUs going forward, but I’d over to the over the year, we're probably going to see them stable from where they are now.

Mike Walkley - Canaccord Genuity

Okay. Great, thank you very much.

Marc Eisenberg

Thank you.

Operator

Our next question is from the line of Jim McIlree with Chardan Capital Markets. Please go ahead.

Robert Costantini

Hey Jim.

Jim McIlree - Chardan Capital Markets

Hey great thanks and good morning.

Robert Costantini

Good morning.

Jim McIlree - Chardan Capital Markets

Bob can you talk about the CapEx for 2014 and ‘15? And if there is any kind of big bubble of activity by quarter, if you could point that out, that would be appreciated.

Robert Costantini

Yes. So on the program including risk management for the OG2 launches it's going to be roughly $77 million of additional spending. That one includes about $55 million on the two main contracts and $20 million or thereabout for the insurance.

You contrast that with the equity raise less the Euroscan acquisition. So we have that cash on our balance sheet. We have cash from our operations obviously and we expect Euroscan to be accretive that way as well.

As far as quarterly impacts of the -- I'd say Q2 now with this launch, we'll see it's not going to be a level, but I'd say less than probably $15 million in Q1, $20 million in Q2. As we get prepared for the end of the year in Q3 or Q4, you are probably looking at another $19 million or $20 million. That would then leave about $10.5 million in 2015 and a lot of that is related, well that is actually related to post separation in orbit incentive.

Jim McIlree - Chardan Capital Markets

Great. That's helpful. And in the answer to the previous question on ARPU, you talked about as more services are added that will have a tendency to lift ARPUs. So, I'm just wondering, why you wouldn't see that in 2014? The comments that you made in your prepared remarks suggest that you are going to see a big increase in the amount of services that you're selling in 2014. So, why wouldn’t -- is there something that’s making total ARPUs come down or you are just not seeing that benefit in this year?

Marc Eisenberg

Jim, is there something we said that led you to believe that ARPUs were going to come down?

Jim McIlree - Chardan Capital Markets

No.

Robert Costantini

No. We said there were going to be a level and rises…

Jim McIlree - Chardan Capital Markets

Right. You said there are going to be levels but you also said that as you get more solutions or services in there that would have a tendency to look ARPUs.

Robert Costantini

I think I am [not sure] what you’re asking man, I mean that was impact of that as we see these deals come on line that will tend to -- but the base is large so you’ve got to continue to have those at a higher levels. But yes that should be the impact of adding those subs. I mean I am not trying to indicate that ARPUs are going to drop. They’re going to be stable and rise off of the level that they’re now.

Marc Eisenberg

I think you’ve got two things to look forward to with ARPUs. I think as our solutions pick up they’re at a higher ARPUs, so they should certainly lift versus the base. So if the solutions are growing at a higher rate that will certainly help. And then the second thing that should help ARPUs is the first -- this mission one of OG2. So when mission one launches we kind of fill that hole in the sky and we think those usage based customers will see -- will be transmitting a whole lot more data and that could be pretty material. So, we think our ARPUs could rise. So we don’t mean to point you any other direction.

Jim McIlree - Chardan Capital Markets

Okay. And lastly, can you help me understand organic growth during the year or the quarter, maybe the easiest way so I can avoid definitional problems that if you can help me, if you can indicate what the revenues from GlobalTrak, MobileNet and SENS were for the year?

Robert Costantini

Yes. We don’t sort of break that out, but the -- let’s talk with the network I mean I think that might be the best way to sort of get started here. So network revenues and this would be mostly like on the satellite stuff that would be up about 11% over the prior year. So, there was satellite threshold and those types of revenues. But with respect to MobileNet, SENS and StarTrak, I mean I think -- I am sorry you said GlobalTrak, SENS and MobileNet, right?

Jim McIlree - Chardan Capital Markets

The new ones.

Robert Costantini

Yes. So service revenues for the 12 months there were roughly little over $2 million. And then on the hardware side which was more significant you are looking at roughly $4.5 million, let’s call it $5 million.

Jim McIlree - Chardan Capital Markets

That’s great. And I lied, there is one more. There is some growth in the quarter, how much of that was from the acquisition of SENS?

Marc Eisenberg

Like over 20,000 was SENS and we were kind of heading toward a low 40s number and then the last day of the quarter one of our usage-based OEMs sends in a request to deactivate something like 5,000 units because they weren’t showing usage. So, it kind of surprised us on the last day of the quarter, but the good news is they turned them up because they weren’t showing usage.

Jim McIlree - Chardan Capital Markets

Okay, great. Thanks a lot. I appreciate it.

Operator

Thank you. And next question is from the line of Mike Malouf with Craig-Hallum Capital Group. Please go ahead.

Ross Licero - Craig-Hallum Capital Group

Yes. Hi, good morning guys. This is Ross Licero on for Mike. Just wanted to know with these Euroscan subs, let’s call them traditional subs, can we retrofit those for M2M or we’re going have to wait for new products or new containers to come online?

Marc Eisenberg

You could do both, so it depends on the end user, it’s kind of difficult sometimes to go and find the unit in the field and re-up it, but they’ve created like this adapter that you could put on a current product and it’s an external box. So overtime you can upgrade it, I doubt that they will be able to upgrade all those units in the field, but on a going forward basis as these things have roughly seven or eight year lives on a going forward basis, we think that over the next couple of years, they are going to be predominantly wireless.

So, we did the acquisition kind of looking and paying for a hardware company, but we think what we’re really ending up with is a wireless recurring revenue company.

Ross Licero - Craig-Hallum Capital Group

Okay, great. And what’s the acquisition pipeline look like now, I don’t know whether you touched around that?

Marc Eisenberg

What do we have up our sleeves next? We’re always hunting for ways to make our business better and if it’s in the best interest of our shareholders we’ll continue to look. This one will take a good quarter to swallow and if something were to come up that was interesting, we would jump all over it, I wouldn’t expect anything eminent in the next quarter.

Ross Licero - Craig-Hallum Capital Group

Okay, all right. And maybe I missed it, but did you guys mention the AIS contribution to revenue?

Robert Costantini

No, we didn’t disclose that, but for the quarter AIS was about 900, a little over $900,000.

Marc Eisenberg

Any other question?

Ross Licero - Craig-Hallum Capital Group

Yes, sorry. Could you give us a little more color on what changed with your decision only launching six satellites rather than eight, if you could cover the -- filling all the gaps why not, why didn’t you originally start with six?

Marc Eisenberg

These things have moved along, when you start your program, you are not sure of the difference between the launches. And the way this has turned out, the launches are very close together. So the mission objective of mission one is to fill the gaps and coverage, improve the service of OG1, get fly these satellites on an out any bugs and get ready for the second launch and six satellites is more than enough to do that.

The objective of the second mission is to fill the rest of the constellation and to deploy the new OG2 services. And as the gap between those two launches has shortened we have more time to work on the six satellites that are launched to in-orbit testing and to get them into service as quick as possible. So, it was actually better for both missions to do it that way.

That being said, it helps us with our insurance concerns. There is, questions around how many units go on an aspiring and all these technical concerns that we have, but there will be no material change in coverage or what the customer will see based on the way we did it. So, that’s the way we did it.

Ross Licero - Craig-Hallum Capital Group

Okay, great. Thanks a lot.

Operator

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

Marc Eisenberg

Hey Chris

Chris Quilty - Raymond James

Thank you. Robert, can you give us an actual number of shares issued in the transaction?

Robert Costantini

Yes. 6 million…

Marc Eisenberg

Are you talking about the January transaction or the Euroscan transaction?

Chris Quilty - Raymond James

No, for the Euroscan, excuse me.

Marc Eisenberg

Euroscan.

Robert Costantini

Yes. That was 1.6 million shares. No, no I'm sorry…

Marc Eisenberg

160,000 shares.

Robert Costantini

Yes. I'm sorry the way -- it was, wait I'm sorry I have it right here.

Chris Quilty - Raymond James

No problem.

Robert Costantini

291,000.

Chris Quilty - Raymond James

Yes. And I know you’ve given out sort of the timing of roll out with Doosan and Hub and you’ve kind of gave us the ARPUs. I was hoping that, I know it's not classically like what you like to do? But perhaps looking at 2014 and assuming the timing go on schedule for those deployments and along with your run rate business. Maybe [bracket] for us kind of high-end, low-end what the equipment revenues might look like for 2014?

Marc Eisenberg

Sure. We, certainly it depends on how the units get kind of put into second quarter or third quarter. Second quarter you are going to get some Doosan subs and it's going to add a couple of million of hardware, but Hub may catch the second quarter or may start in the beginning of the third quarter. So, it's going to be slow in Q1, it's going to pick-up a little bit in Q2, it's going to hit the full stream in Q3 and Q4. And so, that's kind of what we're seeing.

Robert gave you some guidance earlier where he said, we think we could do over a $100 million, you pull out Euroscan, which is in that $15 million range; let's say $10 million from the rest of the year on, because it's only three quarters business. And you kind of get a feel to where our service revenue is, we’ve given you the Euroscan number which is 20% of that. So you can add that, what our typical growth has been in service revenues and then the rest being hardware.

Chris Quilty - Raymond James

Okay. Speaking of growth in service revenues, I think you added around 80,000 net adds in 2013 on an organic basis. Fair to assume you expect again on an organic basis for the number of subs to increase going into ‘14?

Robert Costantini

Yes. You can add number.

Marc Eisenberg

The net 80,000, I think those subs include some of these solution subs. So, I would hope that subs will go up; I would hope that satellite subs stay the same, but solution subs should be materially better.

Chris Quilty - Raymond James

Okay. And you talked earlier about the immediate revenues impact from a successful OG2 launch that’s just to be clarify that’s not because customers are now using new OG2 services that just simply the fact that end users that couldn’t transmit data because there was a gap are now able to transmit data and you get an immediate lift because the number of messages that are actually completed on the network go up?

Marc Eisenberg

Yes. So, a good way to look at it is 6 satellites give you OG2 coverage about 8 hours a day. And then the other 16 hours a day you’ve got OG1 coverage. And these satellites are flying at, they could be flying it at full power, OG1 power is down a little bit to extend the life of the satellites and there is a whole in the sky. But I think some of the setups that are out there that have not perfect antenna placements or old deployments with corroded antenna, these things are going to wake up and start transmitting again in a lot of cases. So you’ve got some of that because there is so much more gain on the new satellites. And then in addition to that, you are filling the hole in the sky. But those OG2 performance is 8 hours a day. So I think before you get the complete impact of OG2, you really need 17 satellites.

Chris Quilty - Raymond James

Got you. Also could you talk a little bit more about the anticipated transition for Euroscan from a recording to an M2M type system? And maybe if you can explain to me, it just escapes me what the value of having a recorder on that says, yes the refer ran out of gas 3 hours ago and the temperature started going up.

Marc Eisenberg

Got you, got you. That’s not what they are doing at all. We probably should have explained that better. So in Europe, the regulation kind of states that when you deliver something that’s refrigerated, you need to hand some sort of data sheet that states that in the time that you transported this cargo, it never accelerated or decelerated above and below the temperature ranges before you can receive that product. So, it’s the rules, it’s the law out there. And if not, you don’t accept the cargo. So that is for the most part what they have been doing over the years. And it’s a little bit antiquated. And in the future, you will just be able to get it wirelessly and real time. And in addition, you can get all of the logistic stuff and the analytics that we do here. And that’s the material change. But not only is -- not only we able to -- I mean most of the cost is already in there, you need to get it as part of this regulation. So, the incremental wireless part isn’t significant. But not only do you have us shipping our products there, you’ve get their product coming here.

The FDA is doing the same thing. In 2011, I think it was June 2011, Obama signed the FDA’s modernization law into passage. And those standards are being created right now and it’s going to be enforced in 2014 and 2015. And we are going to have their product to sell here as well to meet those standards, and some of the guys are already looking at it.

So there is a tremendous opportunity for us to take the GT 1100, the MobileNet product and everything and be able to deploy it there, take their products, their regulatory proved product and install it here and upgrade it to wireless. We are very confident. And if you look at the way this earn out is made, these guys do well converting hardware to wireless solutions. And I think they agree that that’s the future. And they didn’t blink on that topic.

Chris Quilty - Raymond James

Okay. But there is no regulation per se or customer requirement that forces them to transition the remaining whatever it is 180,000 trailers from a recorder to a wireless systems, so you basically have to sell them on the of ROI installing the equipment.

Marc Eisenberg

I see. Yes. So, there is nothing forcing them to do that. But from a hardware perspective, there is not a significant difference between the two products. And if people are willing to spend that amount of hardware here -- on hardware here, and in addition have the wireless components, there they already have the hardware, so the incremental difference is small. So, I imagine it should be a much easier sale than here. And we’ve got tens of thousands of units here.

Chris Quilty - Raymond James

Got you. And from a cost of deployment, you already have all the terrestrial wireless carriers in place that you would be able to roll it out pretty seamlessly, correct?

Marc Eisenberg

Yes. Their products already exist. They’ve got 10,000 wireless units fielded, evolved and fielded over the last year or two, and it works today. I would say what these guys do, a terrific job of is when you are on the truck or on the refer, their hardware, their interface is as good as they come. What ORBCOMM can add to their product pretty is the analytics that StarTrak and LMS brought in the portal, the actual ROI is world-class. I don’t think there is anyone in the -- even the world that does it better than we do. So you mix those two together and it’s pretty neat.

Chris Quilty - Raymond James

So you would not be looking to take your hardware and bring it over there and install it because they already have good wireless hardware in place?

Marc Eisenberg

You could take aspects of our hardware and deploy it over there. This wireless adaptor that they add to it, looks a little bit like an RT 6000. So there are definitely some hardware synergies back and forward. There are [marrow scan] product that they sale, probably really should but in RT 6000, so that one will move over and eventually they are all going to migrate to the exact same portal.

Chris Quilty - Raymond James

Got you. And so I guess the big expense then is internationalizing the language on all of your web portals, correct?

Marc Eisenberg

No, that’s done.

Chris Quilty - Raymond James

Okay, good. And another question about the timing of AIS revenue acceleration, once the new satellite, the OG2 satellites go on line, is that -- should we view that as a pretty immediate lift based upon existing contracts, where if you increase the reporting period, there is a contract that does get the revenue, goes up, or -- due to the contract needed to be renegotiated?

Marc Eisenberg

It’s kind of a mix between those. There is going to be a good 90 to 120 days of people getting a feel for the new product or fresh rates, everything else. And then keep in mind, when you launch the first mission you’ve got 8 hours of coverage, you don’t have 24 hours of coverage. And the full constellation will give near-real-time coverage.

But typically people get a feel for the service qualities. So, I’m not saying it’s going to take years to ramp, but it’s not going to be day one.

Chris Quilty - Raymond James

Got you. Alright. Thank you very much, gentlemen.

Marc Eisenberg

Chris, one other point, we put some pictures of the rockets being moved from California to Texas for firing and also there is some pictures of the satellites in final test. When we were at your conference, one of the big questions we got from the shareholders is how the heck do you move that thing over there? So, there is some pictures there for you. Just go to the investor segment of our website and it’s straight there, you can click on it.

Chris Quilty - Raymond James

Got you. And timing wise, is that going to be a night launch?

Marc Eisenberg

Around 6 pm.

Chris Quilty - Raymond James

Very good.

Operator

Our next question is from the line of Beth Lilly with Gabelli Funds. Please go ahead.

Beth Lilly - Gabelli Funds

Good morning, Marc and Robert.

Robert Costantini

Okay.

Beth Lilly - Gabelli Funds

So, I have two questions. One is, so you’re now launching 6 satellites instead of 8. And so then, will you -- still your total launch will be 17 and so you’ll launch those 2 additional a couple of months down the line or how does that work?

Marc Eisenberg

That’s exactly right. You just shifted from one to the other.

Beth Lilly - Gabelli Funds

Okay.

Marc Eisenberg

In the end it’s not going to make a difference.

Beth Lilly - Gabelli Funds

Got it. Okay, all right. That’s helpful. All right. And then secondly, and I am not sure Marc if you’ve said it or Robert, but in your comments you’ve talked about by the end of 2014, the company could be generating $100 million in revenue, did I hear you correctly?

Marc Eisenberg

Yes. To be clear, we said we thought we were going to do a $100 million in 2014 and we’d be at a higher run rate than that.

Beth Lilly - Gabelli Funds

Okay. So for the full year of 2014, you believe you’ll be over a $100 million in revenue?

Marc Eisenberg

That’s what we’re seeing.

Robert Costantini

We execute on these opportunities and that’s what we have in front of us.

Beth Lilly - Gabelli Funds

Yes. Okay. Because that’s so much higher number than I had originally modeled out for you guys. So that must be a much -- I mean with the acquisitions and then the ramp up in the ARPU, that’s substantial.

Marc Eisenberg

So, 74.2 last year to add 10 for Euroscan, you’re at 84.2.

Beth Lilly - Gabelli Funds

Yes.

Marc Eisenberg

You’ve got some core growth, you’ve got OG2 launching, you’ve got Doosan, you’ve got Hub, you’ve got the GT 1100; we think we’re going to sell thousands of those. We’re busy guys.

Beth Lilly - Gabelli Funds

Yes. And then the EBITDA margin…

Robert Costantini

So, I am sorry, go ahead, ask the question.

Beth Lilly - Gabelli Funds

That’s going to be flat then with this year, but the net should go up in 2015, correct?

Robert Costantini

Yes. There is leverage in the model, so I mean as you scale these revenues particularly the service revenues then the margin should rise. So we’re at 22% let’s say in the quarter, say 19% for the year that should continue to rise above 20% move into the mid 20% range by let’s say the end of the year.

Beth Lilly - Gabelli Funds

Okay, terrific, wonderful, very helpful. Thank you very much.

Marc Eisenberg

Thanks Beth.

Operator

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

Howard Rosencrans - Value Advisory

Hi guys. I am sorry I missed the satellite launch dates, was it mid April and November, is that what we are looking at?

Marc Eisenberg

April 30th, it’s an actual date.

Howard Rosencrans - Value Advisory

And November you are thinking on the 2nd?

Marc Eisenberg

Yes, we are. We don’t click on a date until -- we don’t give you date until the range gives us a date.

Howard Rosencrans - Value Advisory

Okay. And in terms of the Euroscan, how many subs did you get with that?

Marc Eisenberg

So there are 10,000 wireless subs that they have, there and if you look at those 10,000 subs, 3,000 of them are on the ORBCOMM switch, but at a couple of dollars, it’s just a wholesale terrestrial sale. Their base of what they have sold out there is 200,000 and most of that is in Europe. And going forward as they replenish that base, we are hoping that wireless subs, that’s the plan.

Howard Rosencrans - Value Advisory

I am sorry they have a base of 200,000, but those are wireless, contrasted with wireless?

Marc Eisenberg

Those are not wireless they are hardware installations through their distribution. So the newer products are wireless, the older products that they’ve shipped over the years are simply hardware. And on a going forward basis, we prefer to be in the wireless business.

Howard Rosencrans - Value Advisory

Sure. And just to review what you just said to the prior question, you are looking for top-line of a 100 and EBITDA margins migrating sort of from 20 to the mid -- from 20ish to the mid 20s over the course of the year?

Marc Eisenberg

Yes.

Howard Rosencrans - Value Advisory

Okay, very good. Thank you very much.

Operator

(Operator Instructions). Our next question is from the line of Anthony Cambeiro with Anthology Capital. Please go ahead.

Marc Eisenberg

Hey Anthony. Anthony are you on mute?

Anthony Cambeiro - Anthology Capital

Yes. I am sorry, I was. The question I have is on the depreciation increase from the first six and the first four quarter where those six satellites are up, how much will depreciation go up by and then I guess all that depreciation will end up in cost of service revenues, is that correct?

Robert Costantini

Yes. All of that depreciation with the satellites will go in cost of service revenues. So with the first launch we’re probably looking at 1 million in Q2 additional depreciation and then that will ramp up to -- incrementally that ramp up probably about $2 million more quarter.

Anthony Cambeiro - Anthology Capital

Okay. And then so the depreciation we’re running today, I guess D&A is 1.7, I don’t know how much of that is depreciation Marc, but is there any depreciation that’s kind of falling off to zero, so the net increase is going to be less than the $1 million to $2 million or is the net increase that you are seeing $1 million to $2 million?

Robert Costantini

I’m sorry, what was that question?

Marc Eisenberg

Is there any depreciation that’s rolling off.

Anthony Cambeiro - Anthology Capital

Yes. Is there any depreciation that…

Robert Costantini

Not significant depreciation rolling off. So there is always a little bit because the first constellation is fully depreciated, so it’s not going to be from there, so it’s going to be just from some infrastructure investments we’ve made along the way. So I wouldn’t expect the significant roll off, and I would add -- by Q3 at least $2 million more depreciation for the launch.

Anthony Cambeiro - Anthology Capital

Perfect. All right. Thanks guys.

Robert Costantini

Sure.

Operator

Our next question is a follow-up from the line of Howard Rosencrans with Value Advisory.

Howard Rosencrans - Value Advisory

Hi, thanks guys. The CapEx, you said for ‘14 is about 77?

Robert Costantini

‘14? I am sorry, the spending, yes. So, the additional spending on the program, yes, around 77.

Howard Rosencrans - Value Advisory

And then you said lingering into ‘15 is another, if there is another 10?

Robert Costantini

That’s correct.

Howard Rosencrans - Value Advisory

And after that it should be just a few million dollars a year, right?

Marc Eisenberg

Yes.

Robert Costantini

It’s CapEx, a couple of million dollars a year.

Howard Rosencrans - Value Advisory

Okay, great. Sounds great. Thanks very much.

Operator

(Operator Instructions). Mr. Eisenberg, there are no further questions at this time. I’d like to turn the call back over to you for any closing remarks.

Marc Eisenberg

Thank you. Summing up, it’s an exciting time for our business. We’ve got a lot in our plates. Satellites are launching soon, modems are ready to go. We’ve got some key deployments with terrific partners, just about ready to make a large impact on our financials.

We are doubling up on our addressable market with the strategic acquisition in Europe and other select continents. We’ve got several big threshold companies starting to help us distribute our products. We’re focused with our partners on adding scale and standardization in the satellite space. Thank you all for joining us today and for your questions. We look forward to speaking to you again next quarter.

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