ORBCOMM Q3 2007 Earnings Call Transcript

Nov.13.07 | About: ORBCOMM Inc. (ORBC)

ORBCOMM, Inc. (NASDAQ:ORBC)

Q3 2007 Earnings Call

November 13, 2007 10:30 am ET

Executives

Robert Costantini - Executive Vice President and ChiefFinancial Officer

Jerry Eisenberg - Chief Executive Officer

Mark Eisenberg - Chief Operating Officer

Analysts

Lucas Binder - UBS

Chris Quilty - Raymond James

Tim Horan - CIBC

Amit Kapur - Piper Jaffray

Thomas Watts - Cowen and Company

Jeb Besser - Manchester Management

Jim Leventhal - Alexander & James Co.

Michael Harkins - Levy, Harkins

Franklin Ross - Lynch Foundation

Operator

Good morning, ladies and gentlemen, and welcome to ORBCOMM'sThird Quarter 2007 Financial Results Conference Call. All lines have beenplaced on mute to prevent any background noise.

At this time, and with great pleasure, I would like to turnthe call over to Mr. Robert Costantini, ORBCOMM's Chief Financial Officer.Please go ahead, sir.

Robert Costantini

Good morning, and thank you all for joining us. Just a fewhousekeeping items, earlier this morning, we issued a press release announcingfinancial results for the third quarter of 2007.

A replay of this conference call will be available beginningat 12 Noon Eastern Time today until Monday, November 19, 2007 at noon. We havean accompanying audio webcast available on our website at www.orbcomm.com, aswell as an archive which will be available for the week.

With me today are Jerry Eisenberg, ORBCOMM's Chief ExecutiveOfficer, and Mark Eisenberg, the Company's Chief Operating Officer.

Just before we begin, I would like to point out that duringthe course of this conference, we may make a number of forward-lookingstatements as defined by the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to variousrisks and uncertainties, and there are important factors that could causeactual outcomes to differ materially from those indicated in these statements.

Some of these factors are described in our SEC filings,including the risk factors section of our Form 10-K. I want to remind you thatORBCOMM assumes no duty to update these forward-looking statements.

As well, the financial information we will discuss todaywill include non-GAAP financial measures such as EBITDA and adjusted EBITDA.The Company believes that these financial measures provide an enhancedunderstanding of our underlying operating performance.

A reconciliation of EBITDA and adjusted EBITDA to net losson a GAAP basis is included in our earnings release, a copy of which is availablenow on our website.

With that aside, I will turn it over to Jerry.

Jerry Eisenberg

Thank you, Robert. Good morning to everyone, and thank youfor joining us on this call today. We are pleased to report another successfulquarter, as we continue to increase our service revenue and improve on ourEBITDA.

We continue to gain traction in our ongoing efforts to growour business and to improve our financial performance. This is evidenced by thesuccess we had in adding more than 39,000 billable subscriber communicators inthe third quarter of 2007.

We believe our momentum with the major VARs including theOEMs will continue to drive our growth, and that ORBCOMM is well positioned tocapitalize on this growth.

I'd like to spend a few minutes talking to you about our newsatellites. High-altitude tests of the final AIS payload was completed abouttwo weeks ago. The aircraft took off from Houston.

It went to an altitude in excess of 30,000 feet and thentraveled about 50 miles into the Gulf of Mexico, where it was able to coversome of the busiest ports in Texas and Louisiana.

In about two hours of flight, we received more than 60,000detections from over 1,000 identify as blue ships. We are delighted with thatresult.

As far as our Coast Guard demonstration satellite isconcerned, construction of that satellite is completed. Concerning ourquick-launch satellites, COSMOS, who is the Russian launch subcontractor, hasgiven us a window for launch of between December 20th and December 28th.

In preparation, we have been conducting testing on thesatellites and all of the various parts that make up the satellites. Werecently became aware that some panels on the solar panels needed to bereworked or replaced.

This work is being performed at the solar panelsubcontractor in Russia. We hope that this can be completed and retested anddelivered in time for the launch window, but it is likely that this will causea short delay into sometime in the early part of 2008.

Pertaining to our next-generation satellite program, thesatellite program procurement process continues, and we expect to be able tomake an announcement by the end of the year.

All of the satellites we are speaking about will enhance ournetwork performance, as well as add new features such as AIS detection. We areseeing a number of positive market developments that play into our strengths,and we should benefit the Company with these in the future.

I now will return it back to Robert.

Robert Costantini

Thanks, Jerry. I know most of you have already reviewed theresults, so I will summarize our financials for the third quarter of 2007.

In the third quarter, we made notable progress, as weremained focused on growing our business. We increased our service revenue andimproved our net loss year over year, as our model continues to work,demonstrating a steady improvement not only in generating service revenue butalso moderating the growth in our costs and expenses.

We moved closer to achieving breakeven on an adjusted EBITDAbasis, and we define that as EBITDA less stock-based compensation.

Service revenue continues to grow strongly, and productrevenue as well this quarter on higher unit volumes, which led to an overallstrong growth in revenue over the comparable period. After the three monthsended September 30, 2007, service revenue increased 41.3% to $4.6 million, or$1.3 million higher than the comparable period in 2006.

Our growth in service revenue helped us to reduce our lossfrom operations in the third quarter of 2007 by 19.5% or $480,000 to $2million, compared to the third quarter of 2006. We expect service revenue tocontinue to grow over comparable prior year periods through the remainder of2007.

Product revenues increased 1.2% to $2.4 million for thethree months ended September 30th, 2007, representing a year-over-year increaseof 16% in unit volume sold over the third quarter of 2006.

Total revenue in the third quarter was $6.9 million, anincrease of $1.4 million, which as we pointed out totals 24.5% over the prioryear quarter. We also improved our EBITDA and adjusted EBITDA in the thirdquarter. EBITDA is an important non-GAAP metric we use to gauge our performanceand manage our business. They are also tracked close and used by management forreporting purposes.

And again, please refer to our press release and Form 10-Qfor a reconciliation of non-GAAP figures to GAAP figures. Adjusted EBITDAimproved by 71.2% in the third quarter of 2007 over the prior year period to aloss of $476,000, down from a loss of $1.7 million in the third quarter of2006.

Adjusted EBITDA for the first nine months of 2007 alsoimproved 50.8% to a loss of $3.1 million, compared to a loss of $6.2 millionfor the first nine months of 2006. EBITDA for the third quarter of 2007improved as well by 24.1% to a loss of $1.4 million, and that's compared to aloss of $1.8 million in the third quarter of 2006.

EBITDA for the first nine months of 2007 was a loss of $7million, and that compares to a loss of $6.8 million for 2006. And that was primarilya result of additional $3.3 million of stock-based compensation expense in2007.

Before moving on, I’d like to remind everyone that, as wecontinue to narrow our net loss, we expect to see more depreciation next year,due to the launch of our new satellites. And this will impact our incomestatement, which is a normal and expected result.

However, this will not affect our EBITDA next year. Growthrates are still growing at moderate levels. Expenses related to serviceoperations, which we generally define by excluding product costs that grew12.5%. That's contrasting nicely with the growth in service revenues at 55%.

Total costs and expenses increased 11% or $900,000 to $8.9million in the third quarter of 2007 compared to the prior year period. Includedin the third-quarter 2007 expenses are higher staffing costs and public companycosts such as those related to SEC compliance, investor relations and directorsand officers insurance.

Costs and expenses in the third quarter of 2007, excludingthe cost of product sales, increased 12.5% or $700,000 over the third quarterof 2006, and this is due to higher staffing costs generally of $700,000.

Excluding the effect of stock-based compensation for thethird quarters of 2007 and 2006, costs and expenses less the cost of productsales were flat year-over-year in the third quarter of 2007, and again this isfor the second consecutive quarter.

For the first nine months of 2007, costs and expensesincreased $1.2 million or 4.3% to $28.3 million, primarily from a $3.3 millionincrease in stock-based comp over the first nine months.

Again, accounting for the effect of stock-based compensationfor the first nine months of 2007 and 2006, costs and expenses less costs ofproduct sales increased $500,000 or 2.8% in the first nine months of 2007 overthe prior year period, again demonstrating our model is working and moderatingthe expense growth rates.

We continued to do narrow our net loss in the third quarter.Net loss was $422,000 or $0.01 per share, an improvement of 77.4% over thethird quarter of 2007, and including stock-based compensation of $900,000versus a net loss of $1.9 million in the prior year period. And that includesstock-based compensation of only $100,000.

Net loss for the nine months of 2007 was $4.7 million or$0.12 a share, and that also improved over the 2006 period by 36%.

With the commencement of our terrestrial operations in thethird quarter of 2007, billable subscriber communicators now includeterrestrial units shipped activated for usage in billing on the cellularcommunications network of our service provider.

As of September 30, 2007, there were more than 317,000billable subscriber communicators, including approximately 7,500 terrestrialunits. As of September 30, 2006, there were approximately 199,000 billablesubscriber communicators, and they were all satellite-based.

Billable subscriber communicators net additions ofapproximately 39,000 units for the third quarter of 2007 included approximately31,700 satellite and 7,500 terrestrial units, and that compared toapproximately 29,100 satellite-only units in the third quarter of 2006.

That's a review of our financials for the third quarter.With respect to guidance there is no change to our full-year 2007 guidance thatwe issued on August 14, 2007, and we plan to issue 2008 guidance after theyear-end in January of 2008.

I would like to now turn over the call to our ChiefOperating Officer, Marc Eisenberg, who will give you an update of operationalhighlights for the quarter.

Marc Eisenberg

Thanks, Robert. There are exciting developments at ORBCOMMas we capitalize on our new and existing markets. We are continuing to focus onincreasing the number of subscriber communicators activated on our M2M datacommunications system, and we are pleased with the strength of our OEMbusiness.

This past quarter, our OEM business was responsible for morethan 40% of our net satellite subscriber additions. We are focused on adding tothe number of OEMs rolling out ORBCOMM-equipped machines and seeing OEMsinstalling these devices in more and more product models and more territories.This is a trend we expect to continue.

While some of our resellers tell us that there is softnessin specific areas of the transportation business, our OEM business has a higherdegree of predictability, and is the fastest-growing area of our business.

In addition, ORBCOMM's distribution network has resellersthat sell into diverse markets, lessening the dependence on an individualsector.

Our terrestrial business is off to a strong start, withapproximately 7,500 net subscriber communicator additions. We expect to seeseveral new and exciting applications that will capitalize on the availabilityof this service, including dual-mode devices that combine ORBCOMM andterrestrial technologies.

This would allow us to capture subscribers in marketsrequiring higher bandwidth that are traditionally served by higher-pricedsatellite networks.

One recent development was the signing of a reselleragreement with AT&T, the largest GSM provider in North America. This willenable us to offer dual-mode satellite and GSM services as well as GSM-only,complementing ORBCOMM's existing satellite-based wireless services.

These dual-mode services target end-users who have higherbandwidth requirements by using dual-mode subscriber communicators, whichcombine both networks. Now we have agreements with the two largest terrestrialGSM networks in North America that we can make available to our resellers.

I would like to touch upon some other recent businesshighlights. Hitachi, a leading global electronics company and manufacturer ofheavy machinery headquartered in Tokyo, Japan and had previously announcedORBCOMM standardization on excavator equipment, has added ORBCOMM service asstandard on two new product types, wheel loaders and mining equipment.

In addition, all of these ORBCOMM-enabled devices have begundeployments in Japan and Australia, two new territories. This is a trend weexpect to continue at Hitachi and other OEMs.

Argon ST, a leading developer of communications,intelligence, surveillance and reconnaissance systems, has signed aninternational value-added reseller or IVAR agreement.

Argon ST intends to leverage its communications technologyand significant knowledge of the ORBCOMM network to deliver unique services tovarious markets. Argon ST has partnered with Hydac International, the world'sleader in fluid condition monitoring, to provide data analysis expertise foronboard fluid systems such as hydraulic and oil filtration health andpredictive maintenance on commercial vehicles.

Archetype, a leading provider of Web-enabled GPS, assettracking and management solutions with a rapidly growing global presence in theemerging M2M marketplace, has signed an international value-added reseller orIVAR agreement.

Archetype intends to begin offering ORBCOMM satellitedual-mode and terrestrial wireless services to new and existing customers.

ORBCOMM continues to add new resellers, OEMs, markets andservices, leading to many exciting opportunities. We expect these opportunitiesto continue and generate new business for the Company.

Now, we would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is coming fromLucas Binder of UBS. Please go ahead.

Lucas Binder - UBS

Hi. Good morning, guys.

Robert Costantini

Good morning Lucas.

Lucas Binder - UBS

Couple of quick questions for you, first of all, can youtalk a little bit about we are seeing tremendous scale on the EBITDA side ofthings. Where do you see that you guys would be reaching EBITDA breakeven?

Could it be by the end of this year? Do you still feelthat's going to be the case?

Robert Costantini

Well Lucas, we were guiding toward breakeven on an adjustedEBITDA basis. We talked about crossing over into that territory in the fourthquarter. We still think that's double. We're anticipating that. With respect toEBITDA…

Lucas Binder - UBS

I was just talking adjusted EBITDA.

Robert Costantini

…for 2008.

Lucas Binder - UBS

I was talking just talking adjusted EBITDA, becausestock-based comp doesn't really fall into it. And then, can you kind of give usa little bit of an update on, Jerry, you mentioned that the launch of the CoastGuard satellite and the six new satellites to are go into the A Plane, youthink, is going to go into the beginning of 2008?

Jerry Eisenberg

It is likely that will happen. Testing found some problemswith some of the solar panels they had to be sent back to the supplier inRussia. They are being repaired now. I don't think the repairs take a greatamount of time, but then they have to be reshipped and they have to go throughcustoms and then they have to be retested because we retest the full satelliteonce it's integrated again.

So that may call as a slippage for, I would say, weeks notmonths.

Lucas Binder - UBS

Okay. And than lastly, when we look at cost of service, I'mtaking cost of service as excluding stock-based comp and excludingdepreciation. We are seeing some very significant leverage here in thebusiness. How do you look at where gross margin can go to, and how quicklywe're going to get there?

And can you also maybe talk about why, despite the factthat, obviously, the business is quite a bit bigger than it was a year ago,cost of service is actually down year-over-year when you think about it thatway?

Robert Costantini

Let me see, if I can parse through that. We think there is alot of leverage there. Again, you've got to bear in mind, we are managing anetwork or we are looking at satellites and the health and the maintenance ofthose satellites.

So it's really not a function of the traffic level that goesover the network. So we do think there's quite a bit of operating leverage. Youhave to really understand what your depreciation number was that you werebacking out there. But again, we're seeing in this relevant range, the costsare controllable.

For me, the increase would be additional network engineersmonitoring the network. So that at some point will take place, and we will seesome growth there. But again, it will be like in a step function.

In addition, you'll see that grow as one of the things weput in the cost of services would be the IVAR commissions that we pay for thecountry reps. So as we go our business internationally, you will see somegrowth there.

I wouldn't exactly say it was it's somewhat of a variablecost, and probably one of the only ones within that category. I think themargins again, adjusted EBITDA or incremental EBITDA margins now are very high.Again, we're tracking not any particular margin at this point, just to crossover to positive territory is our first goal and then grow the margins.

But we've said all along, this is the satellite business. Weare very horizontal, we're running a network and we think EBITDA margins shouldbe very high, north of 70% when we achieve scale.

So that's sort of my view of it. Why is it down? There is,again, probably some costs, repairs and maintenance that were in the prior yearperiod, didn't exactly fall in the third quarter.

But there is nothing, there's no effort to scale back theresources that we devote to the network. Right now, it's just fluctuating inthe quarter. But we are committed to putting all the right resources in place.

Operator

Thank you. Your next question is coming form Chris Quilty ofRaymond James. Please go ahead.

Chris Quilty - Raymond James

Good morning, gentlemen.

Robert Costantini

Hi, good morning Chris.

Chris Quilty - Raymond James

You're maintaining the guidance for the year. Given the factthat you're about halfway through the quarter, the range would imply somewherebetween $33,000 to $58,000. Can you give us a sense of whether you think you'retrending towards the middle, low or high end of that range?

Robert Costantini

We're not going to do that. We are not going to give youthat visibility at this point. We feel like the guidance that was issued isstill relevant. There are a number of variables in play that could have animpact in that, and right now we just think it's a little bit too soon to tell.

Chris Quilty - Raymond James

How about in terms, last quarter, you talked about thenumber of prebuilds were up, I think order of magnitude 30% to 40%. Is that atrend that holding and provide any visibility?

Robert Costantini

That trend is still holding. I'm afraid I don't know whatthe growth might be at this point quarter-over-quarter, but the number ishigher.

Marc Eisenberg

I think what we're seeing also is you are seeing a lot moreactivity in the prebuild, where it's not just building up; there's a lot moreunits. The OEMs this quarter really kind of bust through a little bit, so theypulled a greater number of units out of the prebuild as well.

Chris Quilty - Raymond James

One particular OEM, Caterpillar, you mentioned in lastquarter, that you had some Caterpillar in your projections. We haven't seen anykind of an announcement. Could that be a cause for coming up on the lower endof the guidance range this quarter or for the fourth quarter, excuse me?

Marc Eisenberg

Cat continues to be a significant portion of our business.We don't comment on how they use it. They typically comment on how they use it.But we can't give you too much detail on Caterpillar, because we get in troublewhen we comment on one specific VAR.

Chris Quilty - Raymond James

Okay. International markets, last quarter you mentioned alittle bit of weakness. Can you give us an update on how that is trending, andany specific developments in Mexico?

Marc Eisenberg

Yes. There is definitely some activity in Mexico. There wasa technical barrier in Mexico where, in addition to the license, you also needsort of a control switch in Mexico. That has been installed, and we thinkMexico is going to be a very good market for us and there's a number ofresellers gearing up in Mexico, as well as a number of IVARs.

Chris Quilty - Raymond James

The delay in the quick-launch, what are the implications forthe Coast Guard contract, where you were already sort of forced into a penaltysituation? I didn't look this morning, but there were sort of if I remembercorrectly, there was a deadline for that launch in December?

Jerry Eisenberg

That is correct. The Coast Guard is aware of everything thatwe told you today, and we have been having discussions with them. I reallydon't expect any material impact in our contract with them.

Chris Quilty - Raymond James

In the Q, you had talked about $33 million of CapEx in thesecond half, and it doesn't look like there was a huge amount of expenditures,though, in the third quarter. Is that still basically on target for what youexpect to spend?

Robert Costantini

Yes. There's a lot of completion activity surrounding thequick-launch that will come into play in the fourth quarter. So we're seeingthose payments now being made.

Chris Quilty - Raymond James

Okay. And a final question you had and this is just generalin nature. You had talked about OEMs picking up to certain monthly consumptionlevels. What's your sense on how that has trended, either better or worse thanyou had originally bought, over the last three to six months? What are yourexpectations for potential new OEM adds over, say, the next six-month period?

Marc Eisenberg

We have definitely seen an uptick in the OEM business. Justtaking a look at the Hitachi release, if you go to their website, we arestandard on, as of today, another up to 22 miles of Hitachi equipment. That'swhat we are seeing across a number of the OEMs as it starts to grow.

In this quarter, we saw some of these guys kick in significantly.We still anticipate getting to the run rates we talked about on the lastquarter. We said that they're up to 40% of our business. I couldn't give you anexact number, but I'm guessing that was 10% to 20% last year.

So we are definitely seeing them pick up and taking agreater role in our business. There's other OEMs out there that we have beenworking on. One of the ones we mentioned on the last earnings call wasLiebherr. But there's lots of stuff in play right now, and we will release itas the deals get struck and we get permission from the OEMs.

Some of the OEMs don't mind doing a release when the deal isstruck, and some of them want to hold off on releases until they are actuallyready to deploy. So, sometimes we get caught into that.

But again, as of this moment right now, we're still notaware of any OEM rolling out any other satellite solution other than ours forM2M. They could have an XM or a Sirius, but that's a very different business.

Chris Quilty - Raymond James

Great thanks for the update.

Marc Eisenberg

All right. Chris.

Operator

Thank you your next question is coming from Tim Horan, ofCIBC. Please go ahead.

Tim Horan - CIBC

Good morning guys.

Marc Eisenberg

Good morning.

Tim Horan - CIBC

The low end of your revenue guidance would imply, I think,over 20% sequential revenue growth, if I’m calculating that right. That seemsto be very, very high. Is there or maybe something going on in the quarter thatleads you to believe you can do that at this point? Thanks.

Robert Costantini

Yes, we're anticipating a couple of things. We expect tocontinue to see service revenue growth sequentially. With the Wal-Mart installbehind us in 2006, the comps will see product revenue grow as well. And we alsohave within our guidance for product sales the Selman earth station, whichwe're anticipating in this quarter, which will also provide that additionaluptick that you're looking for. So those are the three things that are planned.

Tim Horan - CIBC

But two of those are not really incremental to sequentialgrowth. How much would the earth station sale be about in? Maybe can youcomment on ARPUs a little bit? They were a little bit weak this quarter. Butthe first two really wouldn't affect sequential growth, I don't think.

Robert Costantini

Well, no, I think they will have somewhat of an impact. Butthe earth station itself will be north of, let's call it in the range of $1.3million, in terms of revenue. And with respect to ARPU, what we know is thatthe threshold business will have an impact on ARPU; it's just too soon at thispoint to say what that will be.

We are still short of learning about the terrestrialbusiness. But on the satellite side of the business, we expect no materialchange in ARPU. So, right now, we will have to wait to see how the terrestrialside really shakes up.

Tim Horan - CIBC

Thanks a lot. And just one more, I guess when you loweredguidance in August, you said it was really just a delay; there was no change inthe opportunity. Are you seeing if it was just a delay, are we seeing anychange in that? Or are we starting to see an impact of those contracts reallyhitting a little bit more?

Or at the time, I was thinking maybe it was a three,four-month delay. Are we picking the delay is more like a year? Because themiss this year versus where guidance was six months ago was very, verysubstantial. And if it was just a delay, I think we would start to see somepickup in growth at this point. Thanks.

Marc Eisenberg

Here what we're seeing Tim is some of the deals that we havebeen working on haven't moved in another direction are kind of still out there.So specific to the transportation industry more trucking than anything else.You've got some of these truckers that are holding onto some of their CapExuntil they are feeling a little more comfort that the deal is on the largerscale.

So it's an individual case-by-case situation. But again, wehaven't seen any announcements that we are actually, our VARs lost any of thesedeals.

Tim Horan - CIBC

So, can you talk a little bit more of the timing delay? Orwe have to wait for the economy to turn around maybe a year from now? Or is it…

Marc Eisenberg

I think if you asked four different truckers, you might getfour different answers. I just wouldn't know how to answer that.

Tim Horan - CIBC

Okay. Can you give us maybe at this point what your bestguess is on communicator adds for next year, or a really rough range? Given theinformation that you've gotten over the last three months, because we haven'treally gotten an update on that since the last call. Thanks.

Robert Costantini

Yes, Tim, we're going to decline to give you the range, wecertainly think it's going to be up over this year for sure, but we'll issueour guidance once we get a sense of how it looks for the rest of the year andwe give you most accurate picture possible when we issue that guidance inJanuary. Thank you.

Operator

Thank you. Your next question is coming from Amit Kapur ofPiper Jaffray. Please go ahead.

Amit Kapur - Piper Jaffray

Okay. Thanks guys. Maybe you could talk about thedevelopment of the dual-mode devices. Are you seeing any bottlenecks towardsgreater device availability out there?

Marc Eisenberg

Yes, what we were seeing originally was people takingseparate devices and building their own applications around separate devicesand we took the bull by the horns and said that's an expensive way to do it.What if us and some of our manufacturers were to do that integration for theresellers? What could we do to drive the costs?

And I think what we're seeing in the market that will comeout and it will start out with the pilot units in the tens of units and then goto the thousands in 2008, but you'll see, we actually saw at the CTIA show the Wavecom device, which is a sub-$200dual-mode kind of based on their GSM product out there.

I believe they are the first biggest M2M module maker outthere and basically, they took that devise and enabled it with ORBCOMM and thatwill be one of the devices and then our subsidiary, Stellar, is kind of workingin the opposite direction.

They are taking a fully functional ORBCOMM device, the DS301and they are creating a bay in it will take various different modules, whetherit's GSM or Wi-Fi or some other technology, and that will be out also in 2008and the pilots will come sooner, so that people can start developing on these.

Amit Kapur - Piper Jaffray

Great. Maybe now that you have got a quarter of theterrestrial service behind you, what's some feedback, any feedback you canshare there? How do you view your opportunity for the GSM-only services?

Marc Eisenberg

Yes, I think ORBCOMM's value add is really in the dual-modepicture, long-term. But for the terrestrial-only, I think we were off to a veryfast start, because it's something that we been planning on and executing onfor months and then when you released it, a bunch of activations fell into thethird quarter.

So I don't know that 7,500 first-quarter out is necessarilyrepresentative of where we would have been, if it weren't for that hugequantity that we kind of swallowed at once. So maybe you got a quarter and ahalf worth of business there.

That being said, we said on our road show that HarborResearch tells us there's 400 million addressable units out there in the fourmarkets and they anticipate that 60 million of them will be wired or so,between now and 2012 and some of those are going to go satellite, some of thoseare going to go terrestrial and some of those are going to be dual-mode.

We want the opportunity to sell into each of those, but thisparticular dual-mode devise that kind of gives you better bandwidth than othersatellite networks and gives you the low-cost routing plus it gives you thesatellite coverage, we think that's very special in this market and verydifficult to beat.

Amit Kapur - Piper Jaffray

Great and maybe a final question for you, Robert, in terms ofyou mentioned that the depreciation next year is going to ramp. Can you remindus what time period you are going to depreciate the new satellites over?

Robert Costantini

Yes. We're looking at a 10-year depreciation cycle.

Amit Kapur - Piper Jaffray

Great, thanks a lot.

Robert Costantini

sure

Operator

Thank you. Your next question is coming from Thomas Watts ofCowen and Company. Please go ahead.

Robert Costantini

Good morning, Tom.

Thomas Watts - Cowen and Company

Hi, good morning.

Jerry Eisenberg

Good morning, Tom.

Thomas Watts - Cowen and Company

Just perhaps you could give us a little bit more color onthe terrestrial. Should we think of each terrestrial addition as also comingwith the satellite subscriber? Or are there any that are actually doing justterrestrial right now?

Marc Eisenberg

Some of them are doing just terrestrial. As a matter offact, most of the ones that we've already deployed are just terrestrial. But abunch of them are sold to people that will end up being dual-mode. They justhaven't completed the development cycle to get that done.

Thomas Watts - Cowen and Company

Okay. So all the way, those will come along. Also, in termsof equipment revenues in the past we have looked at about 50% of adds beingunits, the number of units sold for equipment revenues. Can you give us whatthe number of units was?

Robert Costantini

Well, we don't release the unit number. We haven't beendoing that historically. But I'll tell you what you've got to look at is thesort of dynamic with two manufacturers in the market. They are catering to thegrowth aspect of the business like the OEMs. We won't see that product revenue,because they are using another manufacturer to do that.

So, the split historically has been 50/50. Again, it doesn'tnecessarily have to hold for us to be successful. We see some choppiness inthat occasionally and again it's all been on the service revenue side, which iswhere we're really focused on growing the business.

So I can't really give you a breakdown on that, because Ireally don't know what the OEMs are going to take in terms of their uptake inQ4.

Thomas Watts - Cowen and Company

And then, using those assumptions, it looks like equipmentARPU or the average revenue per unit was quite a bit lighter this quarter. Isthere any mix shift there that could explain that, or is it?

Robert Costantini

Yes. It's primarily the terrestrial just getting started.

Marc Eisenberg

The terrestrial looks like a certain dollar amount per unitand then as they get plugged in, the usage kicks in as well. So, I don't thinkwe've gotten the full ARPU advantage from the units that were installedterrestrially at the end of the quarter.

Thomas Watts - Cowen and Company

And then on OEM sales, I believe it was on the lastquarter's call you said you thought you were going to be about $7,000 a monthat the end of Q1 '08. Is that a number that still looks reasonable in terms ofthe OEM ramp?

Robert Costantini

We still like that number.

Thomas Watts - Cowen and Company

And then finally, just on the Coast Guard satellite, you putout an 8-K detailing all of the changes in the pricing that you negotiated, itlooked like in turn for the extension of the window there. How has thataffected the revenue potential from the Coast Guard contract?

Robert Costantini

Very minimal effect. You've really got to understand what weare doing here and what we're saying about this business to reach thatconclusion or to reach the right conclusion, I should say. That is just onecomponent that came along with the contract.

We haven't really sat down and looked at the opportunity onall the satellites of AIS. With respect to the deferred revenue, that will haveno impact on the deferred revenue component, once the satellite getsoperational.

So, it was contractually required for the modification. Wethink, it was a very reasonable position on both sides to do that. So we don'tthink that's going to have a huge impact.

Thomas Watts - Cowen and Company

Okay. Thanks very much.

Robert Costantini

Sure.

Operator

Your next question comes from Jeb Besser of ManchesterManagement. Please go ahead.

Robert Costantini

Hi, Jeb.

Jeb Besser - Manchester Management

Hi. Just a quick question on the launch timing. How are yougoing to update us on whether or not you're going to make the existing windowor whether or not it's going to come early next year?

Jerry Eisenberg

As soon as we get back the solar panels arrive and aretested, we will then speak to COSMOS about a new launch window, and we'll makean announcement at that time.

Jeb Besser - Manchester Management

Okay. So there will be an update before we just hear thatyou launched the bird or you didn't?

Jerry Eisenberg

Absolutely. We will announce the launch date in advance ofit taking place.

Jeb Besser - Manchester Management

Okay. Thank you.

Operator

(Operator Instructions) Our next question is coming from JimLeventhal (ph) of Alexander & James Co. (ph). Please go ahead.

Jim Leventhal - Alexander & James Co.

Hi, guys. How are you?

Robert Costantini

Hi, Jim. How are you?

Jim Leventhal - Alexander & James Co.

I wonder if I could just ask you a couple of questions aboutGE. It seems that hasn't been covered too much this go round. Last time, on thelast conference call, I think what was said is that GE was bidding onopportunities of up to 1 million units. And I'm wondering if there update onthat. Are they still bidding on those contract? I think there were fourcontracts.

Marc Eisenberg

They are still involved in a number of different deals. AndI don't believe that they've lost any of them, but from what I'm aware, itwould be difficult for those to be installed in the fourth quarter, if one wereto close, due to it being very difficult to get the trucks after or even alittle bit before Thanksgiving.

Jim Leventhal - Alexander & James Co.

Okay and a sort of related question and I'll understand ifyou can't answer this, but let me ask it anyway.

A year ago, Stellar got the order from GE; I think it wasfrom GE to build 412,000 subscribers, 270,000 of which looked like they werefirm. Has there been any update on whether the remaining 142,000 have beentaken up as an option?

Robert Costantini

That would probably require a contract modification. I mean,the option is still there; there has been no modification.

Jim Leventhal - Alexander & James Co.

Okay. But you can't say, if they have blown through the270,000 and now need to go to the extra 142,000?

Marc Eisenberg

Oh! That’s 270,000 was through 2009.

Jim Leventhal - Alexander & James Co.

Okay. But again, it sounds like what you're saying is theyhaven't used up that 270,000 firm contract number?

Marc Eisenberg

No.

Jim Leventhal - Alexander & James Co.

And then just I guess dovetailing from that, can you giveany insight into two markets that seem like they are on the cusp? But anydetail you could add on the railcar market and what’s going on with Brazil?

I think last time; you said that there might be a mandatorycar-monitoring program in Brazil.

Marc Eisenberg

Yeah. I mean the first; let's talk about railcar. There's anumber of new ORBCOMM resellers in the railcar market. One of them is GE, whichjust came out with their VeriWise RAIL product that uses ORBCOMM and the otheris a company called Salco.

There is a couple of others that we're working on as well invarious parts of the railcar market. The highest take-up that we're seeingright now in the railcar market is on the Hazmat stuff or the hazardousmaterials.

That's the stuff with the greatest urgency to be taken upand there's a chance that gets regulated and some of the guys out there arecoming up with their own devices prior to that.

For Brazil, we're definitely seeing some opportunities,potentially, in the automotive and that stuff in a lot of cases is driven byDelphi, who sells into those markets. I don't think it's something that turnsaround overnight. But there's definitely, in some of the foreign markets moreof a move toward getting some sort of standardized devices.

Jim Leventhal - Alexander & James Co.

Okay, listen sounds good. Keep plugging away. I think it's agreat story.

Operator

Yours next question is coming from Michael Harkins of Levy,Harkins. Please go ahead.

Michael Harkins - Levy, Harkins

Can you take me through the economics of the terrestrialunit? What is the ARPU and how does it compare to a satellite?

Marc Eisenberg

We're looking at it being similar to the satellite ones. Butit's kind of different, in that the way we make a satellite unit is we actuallycreate with someone like a Cat or a Komatsu, we put them into some sort ofusage rate and then it's literally a flat dollar amount times the amount of units.

Billing for satellite is simple and then when we go andcalculate what we think our ARPUs are going to be, really the movement back andforth is determined by mix. A guy with a lower ARPU puts on more units than aguy with a higher ARPU, whereas the terrestrial business is different.

And when we go into some of those sales, it looks like aflat dollar rate plus a usage amount. So even the 7,500 units that were turnedon or so in the last quarter, we haven't even had a couple of months todetermine what the usage is, even on those, per unit.

So, it can fluctuate more than the satellite units. I doubtit would fall much lower, but we are looking at it as similar.

Michael Harkins - Levy, Harkins

Okay, I'll ask you again next quarter.

Marc Eisenberg

Sure. Thank you.

Operator

Your next question is coming from Franklin Ross of LynchFoundation. Please go ahead. Mr. Franklin your line is live.

Franklin Ross - Lynch Foundation

Sorry, we’ve just lost there. In terms of having to changethe date with COSMOS, is there a charge there?

Jerry Eisenberg

You mean by COSMOS? No.

Franklin Ross - Lynch Foundation

Yes. No?

Jerry Eisenberg

No additional charge.

Franklin Ross - Lynch Foundation

No additional charge. And in terms of the earth station youguys are selling, has it just become, what is the reason for that? Is it notuseful anymore?

Jerry Eisenberg

No, no, it's a new earth station being sold.

Franklin Ross - Lynch Foundation

Oh, it's a new earth station. Okay, I misunderstood. Okay,thank you very much.

Operator

Thank you. There appear to be no further questions at thistime and I will turn the floor back to your host for any closing remarks.Please go ahead.

Jerry Eisenberg

We thank you all for joining us today and for your questionsand we look forward to speaking to you again next quarter. Thank you.

Operator

Thank you. This concludes today's ORBCOMM's conference callfor the third-quarter 2007 financial results. You may now disconnect and have awonderful afternoon.

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