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ORBCOMM, Inc. (NASDAQ:ORBC)

Q3 2007 Earnings Call

November 13, 2007 10:30 am ET

Executives

Robert Costantini - Executive Vice President and Chief Financial 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's Third Quarter 2007 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise.

At this time, and with great pleasure, I would like to turn the 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 few housekeeping items, earlier this morning, we issued a press release announcing financial results for the third quarter of 2007.

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

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

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

These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual 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 that ORBCOMM assumes no duty to update these forward-looking statements.

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

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

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

Jerry Eisenberg

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

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

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

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

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

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

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

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

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

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

All of the satellites we are speaking about will enhance our network performance, as well as add new features such as AIS detection. We are seeing 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 the results, so I will summarize our financials for the third quarter of 2007.

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

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

Service revenue continues to grow strongly, and product revenue as well this quarter on higher unit volumes, which led to an overall strong growth in revenue over the comparable period. After the three months ended 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 loss from operations in the third quarter of 2007 by 19.5% or $480,000 to $2 million, compared to the third quarter of 2006. We expect service revenue to continue to grow over comparable prior year periods through the remainder of 2007.

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

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

And again, please refer to our press release and Form 10-Q for a reconciliation of non-GAAP figures to GAAP figures. Adjusted EBITDA improved by 71.2% in the third quarter of 2007 over the prior year period to a loss of $476,000, down from a loss of $1.7 million in the third quarter of 2006.

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

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

Before moving on, I’d like to remind everyone that, as we continue 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 income statement, which is a normal and expected result.

However, this will not affect our EBITDA next year. Growth rates are still growing at moderate levels. Expenses related to service operations, which we generally define by excluding product costs that grew 12.5%. That's contrasting nicely with the growth in service revenues at 55%.

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

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

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

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

Again, accounting for the effect of stock-based compensation for the first nine months of 2007 and 2006, costs and expenses less costs of product sales increased $500,000 or 2.8% in the first nine months of 2007 over the prior year period, again demonstrating our model is working and moderating the 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 the third quarter of 2007, and including stock-based compensation of $900,000 versus a net loss of $1.9 million in the prior year period. And that includes stock-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 the third quarter of 2007, billable subscriber communicators now include terrestrial units shipped activated for usage in billing on the cellular communications network of our service provider.

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

Billable subscriber communicators net additions of approximately 39,000 units for the third quarter of 2007 included approximately 31,700 satellite and 7,500 terrestrial units, and that compared to approximately 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 that we issued on August 14, 2007, and we plan to issue 2008 guidance after the year-end in January of 2008.

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

Marc Eisenberg

Thanks, Robert. There are exciting developments at ORBCOMM as we capitalize on our new and existing markets. We are continuing to focus on increasing the number of subscriber communicators activated on our M2M data communications system, and we are pleased with the strength of our OEM business.

This past quarter, our OEM business was responsible for more than 40% of our net satellite subscriber additions. We are focused on adding to the number of OEMs rolling out ORBCOMM-equipped machines and seeing OEMs installing 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 softness in specific areas of the transportation business, our OEM business has a higher degree of predictability, and is the fastest-growing area of our business.

In addition, ORBCOMM's distribution network has resellers that sell into diverse markets, lessening the dependence on an individual sector.

Our terrestrial business is off to a strong start, with approximately 7,500 net subscriber communicator additions. We expect to see several new and exciting applications that will capitalize on the availability of this service, including dual-mode devices that combine ORBCOMM and terrestrial technologies.

This would allow us to capture subscribers in markets requiring higher bandwidth that are traditionally served by higher-priced satellite networks.

One recent development was the signing of a reseller agreement with AT&T, the largest GSM provider in North America. This will enable 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 higher bandwidth requirements by using dual-mode subscriber communicators, which combine both networks. Now we have agreements with the two largest terrestrial GSM networks in North America that we can make available to our resellers.

I would like to touch upon some other recent business highlights. Hitachi, a leading global electronics company and manufacturer of heavy machinery headquartered in Tokyo, Japan and had previously announced ORBCOMM standardization on excavator equipment, has added ORBCOMM service as standard on two new product types, wheel loaders and mining equipment.

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

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

Argon ST intends to leverage its communications technology and significant knowledge of the ORBCOMM network to deliver unique services to various markets. Argon ST has partnered with Hydac International, the world's leader in fluid condition monitoring, to provide data analysis expertise for onboard fluid systems such as hydraulic and oil filtration health and predictive maintenance on commercial vehicles.

Archetype, a leading provider of Web-enabled GPS, asset tracking and management solutions with a rapidly growing global presence in the emerging M2M marketplace, has signed an international value-added reseller or IVAR agreement.

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

ORBCOMM continues to add new resellers, OEMs, markets and services, leading to many exciting opportunities. We expect these opportunities to 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 from Lucas 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 you talk a little bit about we are seeing tremendous scale on the EBITDA side of things. Where do you see that you guys would be reaching EBITDA breakeven?

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

Robert Costantini

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

Lucas Binder - UBS

I was just talking adjusted EBITDA.

Robert Costantini

…for 2008.

Lucas Binder - UBS

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

Jerry Eisenberg

It is likely that will happen. Testing found some problems with some of the solar panels they had to be sent back to the supplier in Russia. They are being repaired now. I don't think the repairs take a great amount of time, but then they have to be reshipped and they have to go through customs and then they have to be retested because we retest the full satellite once it's integrated again.

So that may call as a slippage for, I would say, weeks not months.

Lucas Binder - UBS

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

And can you also maybe talk about why, despite the fact that, 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 that way?

Robert Costantini

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

So it's really not a function of the traffic level that goes over the network. So we do think there's quite a bit of operating leverage. You have to really understand what your depreciation number was that you were backing out there. But again, we're seeing in this relevant range, the costs are controllable.

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

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

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

But we've said all along, this is the satellite business. We are very horizontal, we're running a network and we think EBITDA margins should be 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 year period, didn't exactly fall in the third quarter.

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

Operator

Thank you. Your next question is coming form Chris Quilty of Raymond 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 fact that you're about halfway through the quarter, the range would imply somewhere between $33,000 to $58,000. Can you give us a sense of whether you think you're trending 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 you that visibility at this point. We feel like the guidance that was issued is still relevant. There are a number of variables in play that could have an impact 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 the number of prebuilds were up, I think order of magnitude 30% to 40%. Is that a trend that holding and provide any visibility?

Robert Costantini

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

Marc Eisenberg

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

Chris Quilty - Raymond James

One particular OEM, Caterpillar, you mentioned in last quarter, that you had some Caterpillar in your projections. We haven't seen any kind of an announcement. Could that be a cause for coming up on the lower end of 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 trouble when we comment on one specific VAR.

Chris Quilty - Raymond James

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

Marc Eisenberg

Yes. There is definitely some activity in Mexico. There was a technical barrier in Mexico where, in addition to the license, you also need sort of a control switch in Mexico. That has been installed, and we think Mexico is going to be a very good market for us and there's a number of resellers 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 for the Coast Guard contract, where you were already sort of forced into a penalty situation? I didn't look this morning, but there were sort of if I remember correctly, there was a deadline for that launch in December?

Jerry Eisenberg

That is correct. The Coast Guard is aware of everything that we told you today, and we have been having discussions with them. I really don'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 the second 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 you expect to spend?

Robert Costantini

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

Chris Quilty - Raymond James

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

Marc Eisenberg

We have definitely seen an uptick in the OEM business. Just taking a look at the Hitachi release, if you go to their website, we are standard on, as of today, another up to 22 miles of Hitachi equipment. That's what 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 last quarter. We said that they're up to 40% of our business. I couldn't give you an exact number, but I'm guessing that was 10% to 20% last year.

So we are definitely seeing them pick up and taking a greater role in our business. There's other OEMs out there that we have been working on. One of the ones we mentioned on the last earnings call was Liebherr. But there's lots of stuff in play right now, and we will release it as the deals get struck and we get permission from the OEMs.

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

But again, as of this moment right now, we're still not aware of any OEM rolling out any other satellite solution other than ours for M2M. 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, of CIBC. 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 seems to be very, very high. Is there or maybe something going on in the quarter that leads you to believe you can do that at this point? Thanks.

Robert Costantini

Yes, we're anticipating a couple of things. We expect to continue to see service revenue growth sequentially. With the Wal-Mart install behind us in 2006, the comps will see product revenue grow as well. And we also have within our guidance for product sales the Selman earth station, which we're anticipating in this quarter, which will also provide that additional uptick 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 sequential growth. How much would the earth station sale be about in? Maybe can you comment on ARPUs a little bit? They were a little bit weak this quarter. But the 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. But the earth station itself will be north of, let's call it in the range of $1.3 million, in terms of revenue. And with respect to ARPU, what we know is that the threshold business will have an impact on ARPU; it's just too soon at this point to say what that will be.

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

Tim Horan - CIBC

Thanks a lot. And just one more, I guess when you lowered guidance in August, you said it was really just a delay; there was no change in the opportunity. Are you seeing if it was just a delay, are we seeing any change in that? Or are we starting to see an impact of those contracts really hitting 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 the miss this year versus where guidance was six months ago was very, very substantial. And if it was just a delay, I think we would start to see some pickup in growth at this point. Thanks.

Marc Eisenberg

Here what we're seeing Tim is some of the deals that we have been 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 CapEx until they are feeling a little more comfort that the deal is on the larger scale.

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

Tim Horan - CIBC

So, can you talk a little bit more of the timing delay? Or we 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 get four 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 best guess is on communicator adds for next year, or a really rough range? Given the information that you've gotten over the last three months, because we haven't really gotten an update on that since the last call. Thanks.

Robert Costantini

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

Operator

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

Amit Kapur - Piper Jaffray

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

Marc Eisenberg

Yes, what we were seeing originally was people taking separate devices and building their own applications around separate devices and 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 the resellers? What could we do to drive the costs?

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

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

They are taking a fully functional ORBCOMM device, the DS301 and they are creating a bay in it will take various different modules, whether it's GSM or Wi-Fi or some other technology, and that will be out also in 2008 and 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 the terrestrial service behind you, what's some feedback, any feedback you can share 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-mode picture, long-term. But for the terrestrial-only, I think we were off to a very fast start, because it's something that we been planning on and executing on for months and then when you released it, a bunch of activations fell into the third quarter.

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

That being said, we said on our road show that Harbor Research tells us there's 400 million addressable units out there in the four markets 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 those are 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 this particular dual-mode devise that kind of gives you better bandwidth than other satellite networks and gives you the low-cost routing plus it gives you the satellite coverage, we think that's very special in this market and very difficult to beat.

Amit Kapur - Piper Jaffray

Great and maybe a final question for you, Robert, in terms of you mentioned that the depreciation next year is going to ramp. Can you remind us 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 of Cowen 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 on the terrestrial. Should we think of each terrestrial addition as also coming with the satellite subscriber? Or are there any that are actually doing just terrestrial right now?

Marc Eisenberg

Some of them are doing just terrestrial. As a matter of fact, most of the ones that we've already deployed are just terrestrial. But a bunch of them are sold to people that will end up being dual-mode. They just haven'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 terms of equipment revenues in the past we have looked at about 50% of adds being units, the number of units sold for equipment revenues. Can you give us what the number of units was?

Robert Costantini

Well, we don't release the unit number. We haven't been doing that historically. But I'll tell you what you've got to look at is the sort of dynamic with two manufacturers in the market. They are catering to the growth 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't necessarily have to hold for us to be successful. We see some choppiness in that occasionally and again it's all been on the service revenue side, which is where we're really focused on growing the business.

So I can't really give you a breakdown on that, because I really don't know what the OEMs are going to take in terms of their uptake in Q4.

Thomas Watts - Cowen and Company

And then, using those assumptions, it looks like equipment ARPU or the average revenue per unit was quite a bit lighter this quarter. Is there 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 unit and then as they get plugged in, the usage kicks in as well. So, I don't think we've gotten the full ARPU advantage from the units that were installed terrestrially at the end of the quarter.

Thomas Watts - Cowen and Company

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

Robert Costantini

We still like that number.

Thomas Watts - Cowen and Company

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

Robert Costantini

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

We haven't really sat down and looked at the opportunity on all the satellites of AIS. With respect to the deferred revenue, that will have no impact on the deferred revenue component, once the satellite gets operational.

So, it was contractually required for the modification. We think, it was a very reasonable position on both sides to do that. So we don't think 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 Manchester Management. Please go ahead.

Robert Costantini

Hi, Jeb.

Jeb Besser - Manchester Management

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

Jerry Eisenberg

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

Jeb Besser - Manchester Management

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

Jerry Eisenberg

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

Jeb Besser - Manchester Management

Okay. Thank you.

Operator

(Operator Instructions) Our next question is coming from Jim Leventhal (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 about GE. It seems that hasn't been covered too much this go round. Last time, on the last conference call, I think what was said is that GE was bidding on opportunities of up to 1 million units. And I'm wondering if there update on that. Are they still bidding on those contract? I think there were four contracts.

Marc Eisenberg

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

Jim Leventhal - Alexander & James Co.

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

A year ago, Stellar got the order from GE; I think it was from GE to build 412,000 subscribers, 270,000 of which looked like they were firm. Has there been any update on whether the remaining 142,000 have been taken 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 the 270,000 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 they haven'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 give any insight into two markets that seem like they are on the cusp? But any detail 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 mandatory car-monitoring program in Brazil.

Marc Eisenberg

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

There is a couple of others that we're working on as well in various parts of the railcar market. The highest take-up that we're seeing right now in the railcar market is on the Hazmat stuff or the hazardous materials.

That's the stuff with the greatest urgency to be taken up and there's a chance that gets regulated and some of the guys out there are coming 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 by Delphi, who sells into those markets. I don't think it's something that turns around overnight. But there's definitely, in some of the foreign markets more of 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 a great 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 terrestrial unit? 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. But it's kind of different, in that the way we make a satellite unit is we actually create with someone like a Cat or a Komatsu, we put them into some sort of usage 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 and calculate what we think our ARPUs are going to be, really the movement back and forth is determined by mix. A guy with a lower ARPU puts on more units than a guy with a higher ARPU, whereas the terrestrial business is different.

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

So, it can fluctuate more than the satellite units. I doubt it 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 Lynch Foundation. Please go ahead. Mr. Franklin your line is live.

Franklin Ross - Lynch Foundation

Sorry, we’ve just lost there. In terms of having to change the 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 you guys are selling, has it just become, what is the reason for that? Is it not useful 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 this time 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 questions and we look forward to speaking to you again next quarter. Thank you.

Operator

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

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