Q3 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to Orbcomms third quarter 2019 results conference call.
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After the speaker's remarks, there'll be a question and answer period to ask a question you May Press Star then one on your Touchtone phone.
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Please note. This event is being recorded at a replay of this conference will be available from approximately 11 30 am eastern time today through November 13 2019.
The replay service details can be found in today's press release.
Additionally, orbcomm will have a webcast available in the of investors section of its website.
At Www Orbcomm dotcom.
I would now like to turn the conference over to Michelle Ferris Orbcomm Senior director of Corporate Communications. Please go ahead Michelle.
Good morning, and thank you for joining us today I'm here with Marc Eisenberg, Orbcomms, Chief Executive Officer, and email code or comes Chief Financial Officer on today's call Mark will provide some highlights on the quarter and give an update on the business theme of energy had a company quarterly financial results and outlook for the fourth quarter as well as 2025.
During our prepared remarks, well open the line for your question.
Before we begin let me remind you that today's conference call include forward looking statements about actual results may differ from the expectations reflected anything that we had heard kindred youre actually the FTC filings for a full discussion at the risks and uncertainties opportunities.
Well no duty to update forward looking statements. Furthermore, the financial information we have Chuck includes non-GAAP financial measures reconciliation of these non-GAAP measures to GAAP measures is included in our press release.
Well I'll turn the call over to Marc Eisenberg.
Thanks, Michelle and good morning, everyone earlier. This morning, we issued a press release announcing our financial results for the third quarter ending September Thirtyth 2019.
The quarter was highlighted by record margins, leading to higher than anticipated adjusted EBITDA. Despite hardware revenues being lowered <unk> due to continued weakness in the macro transportation environment.
Total revenue for the third quarter was $9.2 million down 1.8 million from last year.
The decline is entirely based on hardware and it's almost exclusively in our North American Transportation group.
This is the result of a combination of a challenging macro transportation environments as well as difficult comps due to large orders in last year's third quarter to savvy in support of the defense Logistics agency or do you away.
And JV huh.
Three of last year, we shipped $4.4 million of hardware to JV onto the away.
Without this impacts total revenues were up over the prior year by $2.6 million.
Both of these opportunities finish shipping in 2018, leading to the difficult comps dissipating by the first quarter of 2020.
Improvement in margins more than offset the reduction in hardware shipments leading to strong adjusted EBITDA.
In addition, Q3 total revenues were up 2.1 million $2.1 million sequentially over the prior quarter.
Looking back at the first three quarters of 29 team we executed on several key initiatives to streamline our business improved profitability and make better use of working capital.
We set out to raise margins. It went from the lows at 13% in product to a record 31.4% this quarter and increased service margin to 69% from lows of about 58%.
This financial improvement, let's see Q3, adjusted EBITDA of $16.9 million, where a margin of 24.5%.
We set out for place a number of high priced products in the market with our new cost reduce feature rich products, making us more competitive we reduced inventory levels, but now run 30% lower by reducing our SKU count by over 70% [noise].
About 80% to the 80000 devices shipped in the third quarter, where the new products contributing to the higher margins.
We set out to sell off older inventory now just a fractional amounts of our inventories discontinued.
We set out to reduce cost and take advantage of the leverage in the model and we're now running 20 people lighter than last year.
We set out to converge 25 web platforms across our various solutions with the goal is to cargo watch our highest volume web portal in fleet manager or in Cat Cat portal will soon be on the new platform with our other three major transportation portals to follow over the next few quarters.
We set out to move the entire company to one integrated financial system, and we now have 90% of our revenues on our new ERP platform with a goal of 100% in just a few months.
We set out to win a number of large opportunities in our 150000 unit container opportunity with carrier is expected to start shipping in Q.
Q3, and we I'm sorry has started shipping in Q3, and we expect the deployments totaling nearly 30000 units.
I'm sorry of other large deployments starting in Q4.
[noise], we set out to be a significant cash generator and cash flow from operations reached $10 million in Q3, which was the fifth consecutive quarter of positive cash flow.
From an execution perspective, we accomplished an awful lot this year, but unfortunately, it was met with a difficult transportation environment, where year over year sales in our North American group are down $12 million in hardware shipments.
And trendy just $16 million by yearend.
This market deliveries from Oems are down to 10 year lows.
For example, according to HPC research, New Reefer deliveries from North American OEM to transportation companies are trending 20000, this year versus 70022 dry van deliveries are trending to 80000.
Versus 260000 last year and truck deliveries are trending to 160000 versus 536000 last year.
Keep in mind, while we would not expect it would be installed on all of these deployments had they not been down year over year, we would expect to be on a good portion in many cases, we would be replacing our existing hardware. So it has a larger effect on hardware sales in which you S. transportation is down about 20% year over year.
And a far less significant effect on transportation service, which is basically flat.
In our Q4 guidance, we're not assuming that these OEM orders bounced back. However, the only trailers are agent and we would expect to see demand improve overtime at the very least will start to comp out 20 teens record shipment levels in the first quarter of next year.
With the work we did through the initiatives I talked about earlier as well as the $12 million in revenue growth across our non transportation products. We expect adjusted EBITDA to grow about 10% in 2019, even on a relatively flat revenue year.
A growing industry trend, we're seeing in our markets involves an increasing number of customers choosing to implement I O T solutions in a subscription model, where the hardware connectivity and software all bundled into one monthly price.
Typically these types of contract averaged five years.
Many customers like this model because they can avoid the upfront capital needed to purchase I O T devices and speed up their internal decision process. We like that we can substantially increased our closing percentage, while making good use of our capital.
This model becomes more popular a few of our new large customers are opting for this type of arrangement.
As opposed to our current model, where our hardware revenues are recorded upon shipment and service revenues are recorded over the life of units in this type of transaction all revenues will be recognized as subscription service revenue over the life of the contracts and while it will impact hardware or five hardware revenues in the short term.
Term starting in Q4, we believe this model benefits work comp over the long term.
First off the Lumpiness in our hardware revenues that we sometimes experienced historically should lessen in.
In addition, the subscription model should increase else predominantly in recurring revenue overtime.
Lastly, it's moving some of the opportunities that have been sitting out there for quite some time to closure. We're currently offering this model to solutions customers, mostly in transportation, which is approximately half of our hardware revenues.
I don't anticipate this model to be used on about 20% of our transportation deployment or 10% of overall product sales.
This translates to about $3 million transitioning of hardware revenue a corridor.
We begin offering to smiled isn't this Q4 and GE will get into the effect on accounting in a few moments.
Let's move on for business highlights starting with our container programs.
We've made great progress on the large deployment with who we can now faced carrier the largest refrigerated transportation OEM globally.
Reported one of the industry's largest shipping companies.
As a reminder, this is a fleet wide project global deployment of 150000 devices, leveraging our expertise to help create carriers customer specific refrigerator container monitoring control solution.
We shipped over 12000 devices in Q3 and anticipate shipping an additional 9000 devices in Q4, representing just over $4 million in hardware revenue in 2019.
Looking ahead to 2020 revenues for this opportunity, we'll continue to ramp and should average between four and $6 million a quarter until the full retrofit deployment and completed in 2021.
After this retrofit is completed assuming this deployment is like most others. We would expect to continue to supply roughly 15000 assets per year as reefer containers typically get upgraded over a 10 year cycle.
The customer is scheduled to go live with this project in the fourth quarter and we anticipate there will be more to share with you on our next call.
This project represents one of our largest opportunities to date and we hope our collaboration with carrier yields many more customers.
We're excited to report on another significant refrigerator container opportunity.
Well, they producer and distributor produce to operate their own private fleet of ship and container.
We are pursuing this opportunity directly free fleet wide deployment of our refrigerator container monitoring solution to be building on between 15, and 20000 assets as well as our vessel monitoring solution on five vessels.
Through our onboard cellular network or application captures location and operational status data from the containers and send it back to the land based portal via satellite connection extending visibility and control of their containers and see.
We've integrated the latest controlled atmosphere technology, which regulates carbon dioxide oxygen and nitrogen level inside the container to enhance the shelf life.
The perishable produce.
Core platforms, when able completes command and control of these assets.
We expect that they will be one of our first customer to utilize our new subscription model that I mentioned earlier, so while we had been projecting a good portion of this project hardware revenue in Q4, instead, we expect it to be recognized through an all in one monthly pricing within recurring service revenues over the life of the contracts.
We're working through the final details of this contract and hope to make an announcement with them at the intermodal Europe trade show next week.
[noise] digging in for transportation business. Despite the difficult challenges for trucking companies. We continue to win a number of new customers many of which one private fleets.
That are not a sensitive to the macro transportation environment.
They're choosing orbcomm for our ability to deliver solutions for multiple asset classes using a single integrated platform.
Last quarter, we mentioned an opportunity with one of America's largest grocery retailers, we selected orbcomm to track and monitor about 10000 assets consisting of both dry and refrigerated refrigerated trailers degree double play opportunity.
Well the initial shipments to this customer was pushed from Q3 to Q4, which had an impact on Q3 revenues, we expect to ship about 2000 devices the quarter, starting in Q4 and hope to finish in 2020, representing one of our largest opportunity is expected to close this year.
We're expecting increased activity at our longtime customer Walmart America's largest private fleets and will be ramping up to extend our dry and refrigerated solutions across the remainder of their assets increasing the speed of deployment.
An additional fourth quarter, winning cargos with paddles transportation was using our drive and solution to enhanced visibility improve utilization and lower costs for their trailer fleet through location in cargo Centene data.
We continue to gain momentum with our integrated into habit and cargo product offerings and close multiple single and double play opportunities in the third quarter, including Alan Ritchie.
Hi, transport, Texas freight and Queen transportation, which represent a total of over 2000 assets.
Alan Ritchie, a leading provider of transportation services.
[laughter] using our integrated into have an trailers solutions across their fleet, which transport smell for the U.S. postal service.
West Westside transport a mid size trucking company is using both our any tab and drive and solution to track and monitor their trucks and trailers Queen transportation, an asset base truckload carrier and logistics provider and Texas freight a dry van truckload carrier are both using our in cabs.
Solution across their entire fleet of trucks. These customers are you seeing improvements in driver safety productivity and LG compliance through our best in class Fleet management solution.
And all we shipped over 3900 in cab units in the third quarter, which should lead to stronger service revenue growth as they get installs.
Looking ahead, there are a significant demand for our solutions across our markets that leverage our advanced functionality value added services and deep industry expertise.
We're working through the final stages of a number of contracts totaling nearly 100000 units.
Many of these opportunities represent double and triple plays ranging in size.
From a thousand to over 30000 units and we anticipate about half to utilize our new subscription model.
While we expect most of these deals to close in the short term we expect the majority of these units to ship throughout 2020.
Leading to strong year for deployment.
Turning to area to through revenue Q3 revenues.
Were $3.2 million up over 10% year over year.
Global fishing watch extended their contract through receive our S data for another three years. So we can continue to aid them and monitoring global commercial fishing activity and supporting Ocean resource conservation.
Oceaneering also extended its contract with Orbcomm through 2022, and we'll continue to use our as data to support its vessel tracking platforms, which improved navigation and safety for ports and Riverawaves and its environmental in emergency response applications, which monitor undersea pipeline and offshore.
Our oil and gas operations.
Continuing with our satellite offerings, we had another great quarter and shipped about 34000 IBP satellite devices.
Oh, we won a large opportunity with Vishy Pell, a leading provider of telecommunications services in maritime equipment in Asia to provide our vessel monitoring system or Vms for commercial fishing vessels throughout Vietnam Orbcomms CMS is healthy this should help customers improve maritime safety and operate.
Personal efficiency, while ensuring compliance with Vietnamese fishing regulations.
Technological advancement is paramount and our greatest differentiator in the market.
While we completed a number of key product development initiatives. In 2019 continued innovation will be pivotable, a pivotal to our success in 2020, what's highlight a few.
Less than 5000 supports the features and capabilities required for both fleet management and safety and compliance in one comprehensive solution DFM 5000 will have the option of an integrated vehicle camera system that significantly improved fleet JP within cab notifications on aggressive driving as well as driver coaching and instant.
Feedback, we expect commercial launch in Q2 2020.
For the maritime market, we're in the process of having two additional area satellite still to add incremental visibility of ship can see as well as the capability to detect small class b vessels, including pleasure craft and fishing fleet.
We expect to launch the first yeah satellite in the second half of 2020 and the second one in 2021.
We've also developed a handheld product called tally that combined had stayed up along with Orbcomms to a satellite Io key technology for small vessels with an addressable market of over 2 million vessel.
How he will be the only <unk> solution in the market that provides two way messaging.
We currently start or have started fielding trials for Holly and expect to make it commercially available in mid 2020.
We've also made great strides in converging art 25 web platforms down to two thereby reducing integrations across multiple platforms and better utilize inner circle. Our resources, we began field testing the new platform, which we branded as the Orbcomm platform with a select group of transportation customers in Q3.
And received great feedback on the ease of use some functionality of user interface.
One beta testing is completed in Q4 will begin the first phase of customer migration, new customers will be automatically integrated into the platform ensuring optimal performance feed in advance supporting and diagnostics.
There are over 10 key additional products and service innovation planned for launch in 2020, such as a chassis solution for managing utilization and maintenance on chassis that transport containers.
[laughter] the consolidation to one global Reefer truck trailer device.
Dual mode products for vehicle monitoring and asset management as well as several new peripherals, including a wireless sensor hub and camera based cargo sensor for low detection cargo volume volume estimation and monitoring of asset conditions. We're also expanding our products for reapers dry vans and refrigerated can.
Banners to include analytics enable us, enabling us to provide greater value in ROI, driven insights to our customers about business operation.
Oh with our accomplishments in 2019, using plans for innovation and 2020 and beyond well underway, we're executing on a strategic class to drive orbcomm to a higher level of growth and the global industrial I'd see we're becoming the vendor of choice in our markets by integrating multiple asset types on a single platform.
We are developing more best in class product with the most options such as dual mode, an array of sensors and customer specific integration to meet the evolving needs of the industry, we're continuing to reduce costs and add new disruptive technology, including Fiveg connectivity video and in cabs.
Fanning, we're continuing to support the world's largest Oems and deploying our solutions globally to solidify our future market position, we are creating incremental value in our solutions to bring us closer to the customers, enabling us to serve not just isn't I O T product company, but as a consulting group helping companies in their offer.
Regions over the long term, we're focused on continuing to scale the business and driving revenues at high incremental margins expanding the leverage in the model. We're confident in our plan and believe that we're in a strong position to support the future success of the company.
Wrapping up we've made significant progress in the third quarter across a number of initiatives such as taking cost out of the business, improving our operating efficiency and deploying new products, while increasing service and product margins to record levels. We raised our adjusted EBITDA margins of 24.5% in generated $10 million.
Operating cash flow in Q3.
With several new opportunity is expected to begin shipping in Q4, and several more high profile customers starting to fall in line and the introduction of our new subscription model, we're setting the stage for saw strong starts 2020.
With that I'll turn the call over to Dean to take you through the financial.
Thank you Mark and good morning, everyone, let's start with the company's third quarter financial results.
Total revenue for Q3 was $59.2 million down 1.8 million compared to the same period last year.
As Mark mentioned earlier Q3 revenues were lower mainly in our North American transportation group due to a larger than expected downturn in the transportation market in 2019 as well so comparable period from 2018, which included several large deployments that did not repeat in the current year period.
Sequentially total revenues in Q3 were up 2.1 million over the prior period quarter. We anticipate revenues continue on an upward trend for the next several quarters.
Product sales in the second quarter were $28.6 million down 3.9 million from the prior period and up 1.3 million sequentially from the second quarters revenues.
Q3 service revenues were $40.5 million, a 5.4% compare the prior year period.
Recurring service revenues in the quarter grew 5.3% over the prior year were up sequentially from Q2.
Contributes to this improvement was additionally, about 80000 net billable subscribers in the quarter.
Bringing our total base to 2.6 million at the end of September 2019.
Or 2.2 million, excluding the sub slate the 18th you contract farmers.
Looking at gross profit margin the company realized margin of 53.5% in Q3, Snick, an improvement compared to 47.3% last year driven by growth in both product gross margin and service gross margin.
Product margin in Q3 was 31.4% an increase with 24.2% of prior year period and up from 28.4% in Q2 2019.
Improvement was primarily driven by a higher percentage mix of sales of our newer costs are nice products and the current period versus last year.
Okay, great strides over the last year in transition of product lines to know products and as a result have greatly improved our product margins.
With regards to very traditional product sales and recurring service revenues were seeing a growing interest in the market with respect to subscription service model as Mark mentioned earlier.
The basic structure the model allows the customer to contract for data service offering at a fixed monthly subscription rate.
With Orbcomm routine title in control over the device asset.
Under this contract model, there's no product sale NAND devices, we utilize will be maintained on our balance sheet depreciated over the useful life of the asset.
Over the life of the contracts toll revenues will be similar whoever there'll be no upfront product revenue and there will be high recurring service revenue over the contract term.
Current expectations are for the subscription models and pet products sales by approximately 10% in upcoming quarters.
And this was an incremental positive impact on a recurring service revenue over longer time period.
Moving onto service March results, our Q3 service margin was 69% a record service March low for the company and a significant improvement compared to 66.8% in the prior year.
The increase service margin was due to incremental service revenues and reduce costs in the quarter and to a lesser degree the acceleration of deferred service revenues leads to expiring 18 key contract.
Normalized in the March and with respect to accelerate deferred revenue would result in a service margin of over 68% in the corner, which is still record margin for the company.
[noise] operating expenses in Q3 were $34.7 million up approximately 3.6 million compared to the same period last year.
This year over year increase was primarily driven by two items. The first was a net benefit of $2.5 million unless you know in the prior period. The prior year period compose mostly of production and they're not fair value.
And the second is from an increase in appreciation of several hundred thousand dollars in Q3 2019 compared to Q3 2018.
Adjusted EBITDA in Q3 was 16 point and $16.9 million.
A decrease of $450000 from the prior year period.
Once again, there was a long there was a large earn out adjustment in the prior year period that benefit adjusted EBITDA by approximately $2.5 million net.
Normalized basis, adjusted EBITDA increased by approximately $2 million for prior year period, adjusted EBITDA margin improved from 21% to 24.5% an increase of 350 basis points.
The increase in margin was primarily driven by improvements in both service and product gross profit.
To be clear significant increase across our margins offset by relatively small increases in costs led to a 15% improvement adjusted EBITDA, which is central to our 2000, making plan.
Change the bouncing cash flows the company ended Q3, 2019, with approximately $51 million of cash and cash equivalents to.
Total debt at the end of third quarter remained at $247 million.
During Q3 2019, the company purchased 1.6 million shares of common stock under the stock buyback program announced in August .
Just seemed outstanding shares may, possibly 2% and using $7.8 million of cash.
[noise] Castle from operations in Q3 were about $10 million and free cash flow for financing activities or 4.7 million in the corner.
Cash from operations with strong despite a working capital use of cash of 3.8 million in the quarter as inventory levels grew and it's just piece of upcoming cells.
This was our fifth consecutive quarter of positive operating cash flow and since June Thirtyth 2018, you generate positive free cash flow of $18.9 million before the stock buyback activities.
11.1 million after the buyback activities.
Our cash balance from $39 million on June Thirtyth 2018 to 51 million on September Thirtyth 2019.
This positive free cash flow improvement over the past five quarters was produced during a period of continuing investment with the cars for product transitions and SKU count reductions or integration activity of their back office and global ERP system.
And ongoing integration with respect to our customer facing platform conversions.
Our improving margins and our revenue growth forecast for 2020 should result in even greater cash flow generation, what we experienced over the past year.
Capex for the quarter was $5.7 million inline with the recent average trend and expectations.
Looking ahead to 2020. This is my first planning session as CFO of Orbcomm.
Clearly planning is nothing one of our strengths in the past and we're working to improve this area through the following initiatives.
Fired a newly at a planning Chris had who has years of public company experience, we're incorporating more industry data and trends and our planning analysis.
One more closely collaborating with the business units. We're also taking a more conservative look at our numbers I'm confident these steps will lead to a more accurate planning and forecasting across our business going forward.
Moving to our outlook in the fourth quarter 2019, we expect total revenues to be between 68 and $72 million.
Oh previous expectations due largely to slow down in the North American transportation market and a number of opportunities moving to subscription model with revenues recognized as recurring service revenue over the life to combat.
We anticipate adjusted EBITDA margin to be approximately 24%.
Moving on to 2020.
We're providing preliminary guidance as we finalize our budgeting process.
We see a large hardware tailwind based on number of factors.
First assuming we deployed 80000 of their meaning 128000 units between 20 as part of the carrier contract for the first customer that would represent about $17 million in 2020 revenue versus a $4 million we expected due in 2019.
Were $13 million increase year over year for this one contract.
Second we have a large number of opportunities totaling nearly 100000 units that we anticipate closing shortly.
It is a far higher figure lead into next year than in prior years.
Third as most Smithsonian networks are announcing treaties sunsets over the next 18 months, we're already working with customers as well as customers of competitors to play next generation hardware to beat these and pending deadlines.
Based on these tailwinds, we expect hardware revenue to grow 10% to 15%, even with as much as $12 million of hardware projected to be deployed towards subscription model.
Looking at service, we anticipate recurring service revenue to grow to at low single digits to start the year versus last year, just its creation of they tend to immerse contract and then approaching higher single digit growth due to execute our deployments constructs recognize our subscription revenues in greater numbers in the back half of the year.
Other service revenues are expected to be flat, we expect desalinated grow about 4%, which is 2% after the nonrecurring adjustments in 2019.
We expect capex to be around $33 million to $5 million based on the quantity of deployments using our new subscription model.
Adjusted EBITDA margin is specially the being a 24% to 26% range.
In closing, we're pleased with the progress you've made with many of our financial metrics in Q3 2019.
Revenues grew sequentially from Q2 as more opportunities to fall in line.
We continue to make significant year over year improvements in product margin.
Service margins reached a record 69% in the quarter.
Adjusted EBITDA margin due to 24.5% in Q3, 2019, and we generate our fifth consecutive quarter of positive operating cash flow and continued free cash flow generation splitting the buyback activity.
This concludes certain parts of the call well now take your questions.
[noise], we will now begin the question answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your hands that before pressing the keys to withdraw your question. Please press Star then tell at this time way upon.
Momentarily to assemble I roster.
Our first question comes from Ric Prentiss with Raymond James. Please go ahead.
Thanks, Good morning, guys.
Good morning.
Hey, I want to start off with the questions on the subscription model.
We've seen one of 'em.
The other people with satellite space KVH I have a pretty good success with our agile plan similar concept.
Tuesday upfront capex hurdles for people to get into the middle East AD market for maritime.
Had really good success as far as take rates.
Help us understand a little bit.
Why you think just 20% of the transportation deployed it will take it and then that would be 10% of total obviously, if there are what what would keep it from not being higher than that 20% take rate and that.
Sure. So let's talk about why transportation first as opposed to you know the satellite group or others and then we could talk about within transportation.
So.
The reason, it's John you know starting and transportation is.
In transportation people buy an entire solution for us from us. So it kind of a you know pays to get 'em that type of financing across the entire asset as opposed to our satellite group, where you are buying almost an accessory you know to some sort of telematics solution. So imagine.
You know you had a sell card that was going into you know a del laptop and you were you know financing just the just to sell card.
You know what I mean, it's just does it doesn't really lend itself you know that business too. It's a financing a and then in our heavy equipment business. You know most of the people that we sell through their Oems in Oems have a lower cost of capital than Orbcomm and [noise].
So you know, we're charging ourselves something like a an eight or 9% cost of capital you know where the customer you know built into that model. So once you get into the transportation group.
You know, it's just starting and [noise].
There's not you know two contracts that we expect to closed you know imminently and you know in that group you know just those two deals are a you know something like 50000 units between them and you know that that's off to a a relatively quick start.
Up big portion of that in Q4, and then you know spread over a over the next year.
So when you look at Orbcomms customer base, you know looking at some of the names that we announced today you know some of the on the smaller transportation companies that have similar you know cost of capital you know to Orbcomm will you know definitely take advantage of these solutions, which is so exciting for us because that's the part of the business that we.
Really want to grow.
A good portion of our customers as well you know are the walmarts of the World you know and meet with night and you know guys like that and Jay behind where you know their cost of capital was lower than us. So it's not a perfect model for them. So why we kind of what it that way.
Okay.
And then I think Mark you mentioned five year contracts or why just five year contract. So what they some of these assets have longer life like maybe a 10 year life of some of the items are being put on.
[noise] so of the to that that <unk>, you know I, just referred one of them as a seven year and one of them and a six year.
And Ah you know we need to leverage this across.
What we believe the expected life of LT he is.
<unk>.
I guess LG you know was sure 10 years than we could do it over 10 years, but you know we're just not back confident.
Sure. Okay, and then if we think about this thing sorry for the questions. Obviously, it's a new model for us to look at a do it do it I'm sure everyone else is the same question.
And if we think about maybe and Dan you mentioned also maybe 12 million of what would have been previously hardware revenue will show up business kind of subscription model within calendar 20, if we assume a five year life on that 12 million sales should we be thinking that over time.
That turns into like two and a half million of service revenue than a year for the sales that happen. This year as a way to think of it takes a 12 million divided by five years.
Yeah, no and a little bit higher than that because services nervous the services in there too. If you think of attrition them out are there wasn't a product and then recurring service and now it's going to be.
The two combined spread over a five or six or seven year term and the interest income.
Right to get your return on capital. So how should we think about kind of the if we move 12 million out us hardware sales how much should we be putting in whether its monthly quarterly annually for that honor services revenue line.
Yeah, well you as you mentioned that that are that hardware trends leases.
The hardware translation to to the recurring service and then you a few dollars more for for the monthly traditional service and then.
Robin we recorded an interest income, but but then of course, there's some from some financing on into that we sat for into a building that model and the monthly price.
Sure and then I think you maybe hit my other question working capital is an issue. Obviously when you start this kind of program and get paid over time. So it sounds like the Capex of 30 to 35 million.
It's up versus maybe what people might even thinking about it would've been in the low 20 million raises that how we think about that the working capital item. It really has the capex.
Yeah, the inventory will flow through Capex, and then go into fixed assets. So that $12 million is on top of our normal $20 million to $25 million of Capex.
So I think what you were thinking in terms of you know low Twentys, we think that's right.
So low Twentys and just you know layer. This plan on top of it. So when you take $12 million of hardware and then you take it down to cost you're under $10 million and you add that to.
That's a cut back.
The number the numbers clearly just that simple sure okay and last one from me Paul It. It obviously, there's a lot on that subscription model when you're talking about recurring service revenue starting out in the low single digits in the first part of 20, and then approaching high single digit what are you expecting either for the year help us kind of bracket, what does low mean and.
What does approaching Jaime.
Uh huh.
So.
I think we tried to give you some visibility you know as we finalize the.
You know the business plan for next year.
So you know I think for your model now.
You know I would probably stick in the you know in a in the threes maybe at the beginning in the year and then by the fourth quarter kind of trending to.
Seven to eight or nine.
Okay, great I apologize lets might be able to jump at appreciate all those answers guys.
Sure.
Our next question will come from Mike Walkley with Canaccord Genuity. Please go ahead.
Great. Thanks, Yeah. Congrats on the the strong margins are both products and services and he appears with all the moving parts. The 2020 adjusted EBITDA guidance is you know <unk> roughly in line to maybe even above consensus.
Just on them on the margins how should we think about you know the synergies continuing as you talk about combining all these platforms and indeed, how should we think about product and services margins trending into 20, that's implied in your guidance.
Yeah. So on a service margin, yeah, I, I said normalizing and on the cost of normalizing the a the recurring service revenue.
And the to pick up we had on that for revenue with 18 tumors gets in the 68% range.
Yeah, we see that you're trending solely up as we do more work on the synergy model with that with the platform conversions there should be some cost savings as we get that further unfinished over the next year I'm. So we do see incremental growth in service margin also just just from adding more more service revenue the incremental margins.
Typically higher on a product side to 31%, 31.4%. We did in Q3, we think that's the range going forward, depending on the mix, what we sell but we see that kind of where we're landing would fit with the new products, we drilled down.
Yeah, the they're still 20% of our based that needs to move to a you know than the new skews I think we went over some of them like the FM 5000, which is key in think business and the.
You know the Blue tree business, you know that still hasn't converted so.
Maybe maybe a you know in a in a revenue quarter, where you know we grew up on 15 or 20% because.
A little more.
Large you'll centric, which you know me lowered a little bit kind of offset by.
The higher margins on the last 20% of the products, it's still need to be fielded maybe they average out but you know we're hoping you know that north of 30 is the new normal yeah.
Great. Thanks, and a follow up question for me just on the on the outlook for they tend to 50% product growth.
I understand now some of the bundled deals against that but you know the transportation patient markets Investor Transportation markets. We can see it to from some of your end customers. They are weak trends implied in your guidance are you expecting that market flat next year bouncing back taking a conservative look in that market, obviously just that one.
<unk> large carrier deal homeless can make up year over year full 10% to take guidance growth. So just wondering what you're assuming for that transport market and how it might bounce back or not implying your guidance.
If carrier takes their 80000 units next year, you're up 10% exactly so.
So you know that feels pretty good and then I don't know that you kind of Oh boy. They there there's a little bit of excitement here in that you know there's.
Not included in carrier you know, we're sitting here in the final negotiations.
Have a you know another 100000 devices and this isn't the base business.
The 34000 satellite subs that we do you know or I'm sorry. This is a hardware we ship every quarter, that's not what we're talking about.
You know there you know, including this new container when that we're talking about that we.
We wanted to throw the name out there, but we were a you know forbade until a into next week conference.
There's there's a lot of opportunity there and I don't believe.
I don't believe that.
$12 million is you know age, but a street.
Full from you know a hardware revenues you know to subscription model I think 6 million of it is.
But I think the other 6 million or deals that if we didnt have this model we couldn't have close.
Got it I understood and last question for me I'll pass it on.
Just kind of looking at your guidance ex Myrisk on the on the services roughly six 7% services grow thing is that kind of what you guys are implying in your guidance and if so would that potentially conservative given kind of your high single digit that outlook over time on organic basis. Thanks.
Yeah, I think you know if you're saying you're 6% in for the full year General range, Yes, yes, that's the direction, we're going in <unk> for that for the full year and.
Well I have to see how much the recurring service revenue picks up but this is remodel on top of that I think if you pull out you know that that three you know three to three and a half million or so of a a generic next year.
On the guidance that we've given you know we think we are at high single digits.
Great. Thank you.
Our next question comes from Iraq facade Dray with credit Suisse. Please go ahead.
Yes, Hi, a couple of questions for me first and in terms of in in terms of the model that that's sort of like sensitize is higher capital expenditures. What do you think if you look at the overall range of 30 to 35 million if you're wrong, you know how how much how much higher over the long run.
And Capex go.
Yeah I think.
You know I think if were more successful you know then capex can go higher but you know we're not worried about the 12 million dollar model at all because the $12 million model you know it cost is closer to.
Let's just specifically look at 2020.
The 12 million model you know it cost is really a $9 million you know investments and of that 9 million dollar investment is one of the analysts the saying before you know 20 or 25% of it you know you get back in the first year. So it really looks like a 7 million dollar investment and then as you take that.
1 million dollar investment and by bunch of these deals we've been you know kind of pushing toward closure for a long time, so you're not deploying new capital a large portion of this you're shipping out of the current inventory. So we're kind of looking at $4 million of capital. A you know for suffered for 2020, which you know now.
You know on a on the guidance. We've given you know maybe it's you know $25 million in cash that you generate and you know putting $4 million toward this plan seems like you know the right thing to do you know I think going forward. If we can continue to you know grow this business as you know this high single digit service first on.
Certain service growth and a you know significantly higher in hardware you know I don't think or you know that small investment just a you know puts a whole lot more risk and play at all.
Great that's very helpful.
As far as the as far as of the cadence I I may have missed this earlier by 13 million on the on the on the large contract they give us some sense of a cadence there through the year and then to the 100000 units that your larger contracts would you expect a expect their clothes in a relatively is you know relatively soon any color in terms of.
The stage you're in in terms of a in and in terms of sort of closing those would be would be helpful. Thanks.
Yeah. So you know we're expecting the first or trying to think the Jack map 28000 to close within the next.
Let's say a weak although I think its closer you know because you've got some shows that we're going towards and then.
Just over 30000, where we're kind of just.
Starting to work through the documents on that as well so that would be in the next.
I don't know 45 days, because we have to start shipping or a portion of that in Q4, and there's some sensitivity there because.
It's replacing a large threeg deployment that dies at the end of next year. So all 30, some odd thousand to those need to be deployed in 2020, you know otherwise it's going to drastically affect their operations.
And then after that there's a you know 15 or 20 ones, but I think.
This is going to be a you know a number of a you know press releases hopefully in a in November .
Yeah and on the carrier cadence I think it'll be pretty even throughout next year I'm in the $4 million to $5 million the quarter. Please quarter next year.
Great. Thank you very much.
Our next question comes from Chris Quilty with quickly analytics. Please go ahead.
Hi, guys quick question for Dean I can't type and do the math that at the same time, but if we looked at your 2020 guidance backed out the 80 in TV subs and also made the adjustment for the subscription deals that are.
Are you at high single digit growth or does that really implies something almost at a.
Low double digit.
Oh are you talking about a year or a quarter.
No for the full year 2020.
Oh Your service revenue, we're looking at you know blended <unk>, probably in the 6% range for the full year over year over year.
And does that adjust for the you know impact of the ATM t. subs going off and the 12 million subscription.
That that yes, the full impact all in with with the transcription.
Altogether.
Gotcha, taking about a I'm sorry, Chris you're taking about a a $3 million step backward.
And then the 12 million a subscription you know even though you know it should be generating you know two or two and a half million dollars on an annual basis.
No you're only getting you know, let's say six months on average for the you know as they roll out over the course of the year not on the first day.
So you know now you're taking about a million dollars step forward.
Gotcha, Okay, Matt makes sense.
So the other question on the planning side of things, you've obviously got a the issue within North American transportation, what are you doing to try to assess some of the.
Global markets and understanding the trends going on there with their growth.
Yeah, I mean, we're certainly [noise].
Watching the.
Closer than ever you know the various industry trends getting is our hands on you know as much research as we.
As we possibly can and even if U.S. transportation thing as we kinda monitor the data I don't know if.
2019 is you know a huge glutton transportation or you know whether it's just an over expansion and in 2018, you know I think the comp numbers or worse than the industry is if you were to averaged 2018 and 2019 as bad as 2019 is and divide.
By two you'd still be at a pretty good run rate or so we're kind of saying you know, hoping that I'm you know that balances out you know like a Reaper you. You know does you know historically, it's it's pretty consistent you know between 30 and 40000 reverse that gets shipped a year and then boom last year. It goes to 70000.
You know when this year it goes back down to 20, but you know you look at 70 in 20, and you're like 45000 average that shouldn't be so bad. So you know we're hoping that you know next year. You know you just kind of you know go back to normal run rate, but we're certainly not guiding to that you know we're guiding to you know.
Steve a you know some of the three view trade out plus this carrier contract easily gets you to our guidance.
Gotcha, and Mark one thing that wasn't totally clear with.
The new expected orders and roll out you know is the percentage of in cab are going up or staying steady.
As we move forward and you know what what becomes the impact on the ARPU.
Yeah, so while it has gone up.
But you know we were thinking you know in cap would be about 4500 units. This quarter and you know the transportation had an effect on it but not a massive effect. We did 3900. So let's say we were 15% off from our expectations you know based on a you know the.
He'd be macro environment out there, but you know 3900 is still in effect and I think it has.
You know I I think incrementally, it's a big deal, but I think a you know in terms of measuring ARPU is across 2.6 million units.
You know you're you're dealing with you know pennies there, but you know incrementally you know as these things get installed you know 4000 units that you know $40 or ARPU.
No. That's a that's a pretty big effect, you know from a relatively small amount of ads.
Gotcha, and just specifically on customers that are adopting subscription type plans is that fair to assume that they're all those are all customers doing in cab type solutions.
Oh no. The the first one is that.
We talked about on the calls actually you know this refrigerator container group.
You know that's the first one you know the second large one is.
[noise] monitoring not enter intermodal containers.
So I I think you know the first deployments just because of necessity in timing and you know getting you know some of these things you know on Jarden moving or actually.
You know the a significant.
You know significantly large groups.
I don't think the you know getting 12 million fielded this year is gonna be difficult you know these.
First two deals you know gets you a you know 85% of the way there.
Gotcha and final question, Dan It sounds like you still have a pretty high level of new product development I didn't hear you specifically talk about the R&D side of things is it fair to assume that we're looking at fairly steady on a go forward into 2020.
[noise], Yeah, I think would be pretty steady and we've been running around $3.8 million a quarter on product development and we're pretty much looking to keep that number consistent for the next year.
Gotcha, Alright, thank you gentlemen.
Sure.
Our next question comes from Michael lists of Craig Hallum. Please go ahead.
Great. Thanks, guys I just have a a quick question when we sort of look at the guidance of 24% to 26% margins.
Can you just give us a sense of what or the major impact that would cause you to be it more at the lower end and then maybe we could be looking for to get you to the higher end just some color on that would be helpful. Thanks.
So I would hope that we wouldn't then below the range because we're trending the clubs that are now yeah. So any incremental sales of higher margins, but I'm I'm guessing units the larger opportunities that could close that.
Lower margins potentially yes, there's opportunities and as such a model, which.
Spencer model would would generate a higher even in March and maybe some less EBITDA dollars next year because of the pushing out of some of the revenue, but it depends on the large deals and what would the margin is on those deals and also how much absorption model revenue, we do next year.
Okay, and then these new contracts, especially the one that years, you're looking for close your next week.
Those in your guidance numbers right now are they incremental.
They're in our guidance.
Numbers, but you know there in our guidance numbers you know is a subscription model. So in 2020, you know which in our guidance number is.
You know roughly seven year deal so roughly.
20% of the total contract value.
And that deal by the way also.
[noise] six or 7000 of those units.
Would be shipped in Q4.
So there you would get the subscription model of the.
You know above that for an entire 2020 and then because those are the ER.
Environmental control the units and then the other units which are more like your standard Reefer units will you know start to get 'em deployed in the second half of the year. So.
Well, let's say you average that maybe you're gonna get two thirds.
Have a of the years you know subscription there.
But I got you know there's.
When you look at our Q4 guidance you know when you first looking at your like who you know hardware looks kinda low what's going on there, but we think 15% of our hardware you know for this quarter.
For Q4, you know up to 15% moved to a subscription model.
HM Okay, and then just a quick.
Housekeeping.
Roughly or you know maybe exactly what are the number of shows that you have outstanding at this point.
Because I think he's not items kinda give that like I know you've been buybacks and status.
Yeah.
Shares outstanding I don't I'm, sorry, I don't really have that handy I know, it's going to be roughly a million.
Less than last quarter I'm based on the weighted average.
But I'll talk about you with exact number.
Okay. Okay. That's good.
Our next question comes from David Gearhart with first analysis. Please go ahead.
Hi, Good morning. Thank you for taking my question Mark You had mentioned in your prepared remarks on some of the projects that Orbcomm was working on and you had mentioned video video is is obviously a hot market. Just wondering if you could provide some more detail on on the video product. That's got to be released next year fully proprietary how much left can we expect on on the.
Traditional subscription model and is it are you anticipating being subsidized what the I'm fully bundled model as well.
Sure.
So there's two video products, so and I mentioned them in two different parts one of them as the video model that that's in the cap.
That is monitoring you know driver and you know roads and there's a partnership on that we're working with one of the big video providers out there I don't think we've given their name yet, but and absolutely I mean, we would a you know finance that just just like anything else.
And that ones coming sooner is already being piloted at the in thing group.
And there's already a large analytics products that were project that we're working on using video. So that is the earlier of the to the second one that we talked about towards the middle of the year is different.
That's using video in cargo so in other words, using you know some sort of photography or video to monitor your cargo shipments to that you're not just monitoring Fuller empty you know you're kind of monitoring you you know what percent full or.
You know some additional security features a and that's the one that's toward the or the middle of the year and it's going to be.
Built into the are completely built into the GBP 1200, So we would finance it just like we would finance the GP 1200.
Got it. Thank you so much that's it for me.
Sure.
[noise] again, if you asked a question. Please press Star then one.
Our next question comes from Scott CEO with Roth Capital. Please go ahead.
Good morning, Thanks for taking my question just a couple of cleanups here on the legacy hardware front can you give us an idea of what you still have a within your existing inventory what sort of risk. There is if any to write offs and I have couple of follow us.
I think deemed takes a you know reserves you know based on any inventory on a quarterly basis. So that's something that we monitor constantly yes, no. We're constantly assuming inventory. So there's no there's no real risk there.
With inventory obsolescence as far as he the older skews that I don't think there's much left of any significance to work through <unk>.
But believe it or not the 20% of the old inventory that we sold this quarter.
The overwhelming majority that is old inventory that we're still building. So we're not really telling you an old inventory story there what we're really telling you is hey, some of our customers haven't moved onto our new product.
So in terms of the lift in margin you know, you're basically getting 80% of it.
Yes portion of that 20% or people that still haven't moved to the GBP 1200, yeah vendors do still moving moving GT 11, hundreds because of some ancillary features or you know like an example, you know walmarts still uses BGT 1100, because it.
The only one the dual mode and has the satellite on it the GBP 1200 product with satellite has not been you know released to the market yet. So they continue to buy you know the old product or JV Hunt does that it's not really a function of a you know old inventory.
Gotcha, and and just couple of quick questions on the Sunsetting front market. If you could provide a little bit of color in terms of your existing subscriber base. How many of those customers are three g. So are the transition opportunity there what you're seeing the broader market like how big is that market when you're talking to some of your customer base to go out.
There and continue to up sell and steal some share what's built into the model in effect for next year, when you're you're talking about your.
Made going to high single digit kind of growth what are you thinking about on that front in terms of conversion and success and when do you start to see Europe coming into play.
Yeah, you know just can assist can happy to do you want me to talk about Threed year did you want me talking about North American Threeg, because you know where a minimum of you know three or four years from Ah you know considering you're up your battlefield suji.
Yes. So are you know <unk> you know, we're not really looking at Europe , we were doing the rough math on you know North American Threeg for Orbcomm across.
You know all of our different product lines and clearly the overwhelming majority was you know the man of steel right. You know that's roughly 400000 units that are a threeg, but.
You know that when seems to be a little bit part of 18 piece problem. The mine at this point, but.
You know separate from that.
Yes. There is you know somewhere between 100 150000 Threeg units out there a in our Ah you know 2.6 million dollar base.
[noise] and there's one customer that has 25% of those threeg units.
And Ah you know, we will announce what the solution is with that or you know one customer you know and within that.
Before we before we announce on a next earnings call Gotcha, Mark just in terms of what's embedded into your guidance there you're assuming that you keep up relatively.
Large portion of that existing base, but you're not assuming big share gains in terms of the rest of the market converting as that is that correct.
Yeah, well I think from a hardware perspective, I mean, there's no two ways about it you know even though there's you know.
Potential risks, there and service theirs.
No risk there on hardware I mean, you know what what God forbid you only closed.
60, or 70% of your base, it's still a massive hardware opportunity right.
So you know it is.
Certainly I mean, whatever your experience now you know next year.
All of these hardware you know kind of headwinds in Q3 in Q4, you know the those is certainly going to be tailwinds, but but you know just to be clear I mean, if you look at that guidance at the bottom ends of the range. If you can sell you know just flat to what we did this year and keep in mind, there weren't a lot of those big lumpy deals this year.
And then you were too you know do nothing but execute on you know our relationship with carrier not just the relationship with carrier our relationship with carrier just on the first deal.
If you were to execute just on that you're up 10%. So you know I'm, hoping we're giving you a field you know.
You know, 10% there are lots of new opportunities you know that we're announcing that were in the in the process of closing you know plus this three g. you know, we're hoping you're feeling that the tend to 50% as conservative Gotcha and last if I go just on subscription front not to beat a dead horse too much but a couple of questions just want to sell cycle.
It seems like it would compress under this was one if he could kind of put some numbers around what you're seeing from a reallocation from a sales cycle standpoint, as you're shifting to the subscription model a dean just want to clarify on the gross margin front for or services that it should be in the same line or improving even with the conversion to the subscription model and it's.
Sounds like overall when you normalize for 18 to your marriage that you know you're growing in high single digits. You know over the course of the year is that the normalized growth rate that we should be looking for in services as we get out beyond 2020 into 2021. Thanks.
So what was the first question [laughter] the I'm sorry, what was the first question you Gotta minimal let dean handle the second one like Walmart one was on the sales cycle right the sales cycle around or.
You know the the subscription model what well let me give you an idea. This this customer that you know on the re for fronts.
You know, we had a handshake and we were selected over a year ago.
And you know from that point, it becomes you know, 50% about developments and 50% around their budgeting cycle.
And a you know once we kind of came through you know with this model is it closed during a very quickly. So on the large opportunities you know in terms of the development that these guys need or folks like them to a you know ticket to get the product out there I mean, that's obviously still in play, but you know that waiting the extra you know in some cases six month.
So in some cases, you know the Capex doesn't get approved in a way to years something in some cases, you know that is a little bit more out the window. So.
Yeah, I think <unk> I think it's I I think we're gonna do really well with it.
Yeah on the service gross margin.
68%.
There were running at roughly right now that that should you know incrementally improve over time and for next year the year over year growth in service revenue I think you know directionally, we're looking at 6%, although we're still working on the budget.
Partly because of this 18 tumors contract and that's that's going away that's going to create some some headwind next year, but but long term, we should be growing service revenues in the high single digits every year. That's that's the model that at Orbcomm has.
Great. Thank you.
Sure.
Our next question comes from Mike from it lets new land. Please go ahead.
Hi, guys sounds like you're doing a great job or in the environment two quick question.
When you look at the ongoing I guess deals that were going after now after the read the returns in the payback period on them and then I guess, it's the life of the asset is no longer than expected I assume that cash flow becomes pretty a significant later on in the life.
Yeah, I I think that's right when you say the payback do you mean, the payback, including the high margin service. That's bundle then you know when you are exactly the cash that you put out there.
Exactly.
I I think it you know certainly varies deal by deal, but any you know average example.
You know you would probably start to just recoup your capital keeping in mind, you know the product it costs, a you know somewhere.
<unk> around 40% to 45% through the life of the contract.
And then it becomes significantly cash flow positive on the back half of the contract.
Yes, that's correct.
Excellent. So would you be partially I tend to returns are much better on that and I assume you'd rather push the majority of your contacts in this direction overtime.
I think we we walk a Ah you know we walk a a tight rope right in a the you know we don't want to come back to the market for capital.
We think we're going to generate you know $25 million next year cash and we think you know, putting you know $9 million to $10 million of that to work teams responsible.
You know, we're sitting with roughly $50 million of cash on our balance sheet, and but but keep in mind like I looked like we've said before you know there's maybe you know 50% of our business that it's not like a good fit because of you know what we sell in how we sell it and then within transportation.
You know within transportation, there are folks out there who have lower cost of capital keep in mind most of the ER or a good portion of the Fortune 500 need you know do business with Orbcomm, but you know I I guess, if you're asking how how much you know what percent of our hardware could this growth do you know if things go well as opposed to the.
You know that 10%, maybe maybe you can grow to 20, but but a you know I I would doubt that it would grow beyond that.
Perfect and yeah stock I don't know.
Down 50 cents right now.
Hi, Tim the buyback some place in your plan b to expedite that a little bit down here.
Yeah, I would I would imagine so I think.
I think you know maybe it's down 50 cents because there's a mission understanding in terms of what we're saying, it's a little bit of a complex story this quarter, but you know will buy stock when we think it's in the best interest of our shareholders.
Excellent. Okay. Appreciate it guys and good luck.
Thanks.
At this time there no further questions. The company. Thanks, you for pitch dissipating on the call and looks forward to speaking to you again when they report fourth quarter results had a good day.