Q2 2020 ORBCOMM Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to Orbcomm second quarter 2020.
The conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, we question answer period.
That's a question you make press Star then one on your Touchtone phone.
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Please note discipline is being recorded a replay of this conference will be available from approximately 11 am eastern time today through August 13 2020.
A replay service details can be found in today's press release.
Additionally, orbcomm will be webcast available in the Investor section Orbitz website at Www Dot Com Dot com.
I'd like to turn the call a word about rally Benito Orbcomms, Vice President Investor Relations.
Please go ahead of Alley.
Good morning, Thank you for joining us today I'm joined by Marc Eisenberg, Orbcomms, Chief Executive Officer, and Yieldcos Orbcomms Chief Financial Officer on today's call Mark will provide some highlights on the quarter and give an update on the business. He will then review the company's quarterly financial results.
And outlook following our prepared remarks, well open the line for your questions.
Before we began let me remind you that today's conference call includes forward looking statements and that actual results may differ from expectations reflected in each state.
We encourage you to review our press release, unless you see filings for a full discussion of risks and uncertainties that pertains to these statements Orbcomm assumes no duty to update forward looking statements. Furthermore, the financial information we will discuss include non-GAAP financial measures.
Reconciliation of these non-GAAP measures to GAAP measures is included in our press release at this point I'll turn the call over tomorrow.
Thanks Ali and good morning, everyone.
Before we begin we hope you and your families are staying safe during these unprecedented times.
Our thoughts go out to those impacted by the tender.
Earlier. This morning, we issued a press release announcing our financial results for the second quarter ending June Thirtyth 2020.
Our results came in slightly better than analysts expectations with the revenue at consensus and adjusted EBITDA, well ahead, leading to substantial cash generation.
Total revenue for the second quarter was $56.7 million down 15% prior year, but in line with guidance.
Made great strides you Q2 offsetting revenue declines through reductions in cost as a result service margin increased 130 basis points, 67.3%, an operating expenses were down $1.4 million over the prior period.
These contributions led to adjusted EBITDA of 11.9 billion.
Great, 21% margin, which was better than expected.
Our cash flow and liquidity position remains strong.
We generated operating cash flow $12.6 million in Q2, it pretty amazing increase of $11 million over last years second quarter, and our eighth consecutive quarter positive operating cash flow.
We ended the quarter with over $62 million in cash.
This is after the repayment activity.
$15 million on a revolving credit line.
And the $10 million semiannual interest payments on our judge.
Excluding these items the comedy grew cash in Q2 by a record $17 million.
Differently.
Well, our cash balances down $8 million from Q1 or jet is down $15 million.
Looking forward the third quarter does it require an interest payment.
From a liquidity perspective, our company is proven to be resilience, we clearly have its sustainable business model and we'll continue to effectively manage cash.
I mentioned last quarter Orbcomm is considered an essential business by most government authorities as we support customers.
We're also deemed essential and play roles and transporting crude across the globe sustaining the flow of critical freights and supporting key infrastructure projects.
Many of our employees continue to work remotely and they've done a great job, maintaining our business operations and supporting our global customers.
Some of our locations of partially reopened employees are returning to the office, we've implemented proper safety protocols to ensure the roaming safe and healthy.
Our manufacturing partner in Mexico continues to support critical production up our devices.
On time delivery.
We shipped over 56000 devices. Many late in the quarter. It's early on many customers were not able to receive product shipments.
About two thirds of our total revenues in Q2 were comprised of recurring revenues from customers, who depend on our technology to optimize business practices.
This is why are recurring service revenue is extremely stable with some of the lowest churn rates in the industry.
Let's move onto our markets in the third quarter were beginning to see customer demands improve in some of our international markets, such as Europe, and Asia, where the economies are starting to open again.
South America is a growing hotspot for the virus, especially in Brazil, leading to lessening demands and currency weakness.
Due to varying degrees of cobot 19 cases regionally across the United States, it's difficult to predict ordering cycles across the vast base its first customers.
Looking at our vertical markets customers and culturing transportation, we ship boot pharmaceuticals, and other medical supplies have continued to experience consistent demand for their services.
On the other had non refrigerated transportation customers overall at sea freight volumes decline.
In heavy equipment, many of our OEM dealt with an array of factory closures.
Its employees are coming on and off portal furlough.
Most of these Oems are now operational but continue to be subject you Coke at 19 hot spots.
We believe the markets for these customers are beginning to recover as businesses and governments moved through various stages of reopening.
As a result.
We'd expect our shipments to begin to recover as well.
Although the pandemic has made it difficult for our sales teams to travel and engage opportunities onsite at customers facilities. We've made progress working remotely to win new customers and renew existing agreements. During Q2, we signed several dozen new customers across nearly all our product lines.
Although it might take some time to fully deployed these products, we're building a solid pipeline position and more comfort for future growth.
Well, it's difficult to quantify we overwhelming we believe.
The company's operating with I would see deployments or significantly outpacing those who do not.
If there was a strong case for an aiotv deployments across your company fired so it depends on it.
The cases, only stronger now as more companies see the value of having command control and visibility of their assets remotely as opposed to putting employees at risk, especially in the stay at home environment.
Let's move onto our container programs, we're continuing to deploy our projects with the container business unit the carrier Corporation.
Well one of the Premier global shipping companies.
In Q2, consistent with our remarks from last quarters earnings call.
We shipped about 9000 devices.
Bringing the total to date to nearly 57000.
Looking at the second half of this year, we continue to anticipate shipping another 9000 devices in both the third and fourth quarters.
This will bring the total to roughly 75000 devices deployed by year end out of these 150000 unit project.
We anticipate shipping the majority of the remaining devices throughout 2021.
This project represented about one third of the decline in total revenues between Q1 in Q2.
And is a good example of how the current market conditions push revenue to the rights, but do not materially alter the opportunity.
We're working on an additional project and supported a second shifting one customer the opportunity consists of approximately 7000 devices of which we shipped about two thirds in Q2 and expect to ship the remainder in Q3.
In U.S. transportation, where 2019, so a significant slowed down in freight loads, leading to a subsequent reduction in freight rates any dramatic falloff of new orders trucks and trailers, we were seeing the beginnings of a market recovery in Q1.
Be pandemic slowed that progress in Q2, with new truck and trailer orders getting new lows.
According to industry analysts, new OEM orders declined 32% for trucks and 46% for trailers in Q2 compared to last year.
So showed signs of recovery in June.
Although we don't know precisely when OEM orders will return to fully normalized levels.
There are many aging assets and the fields that we expect to be replaced overtime.
Positioning us for future hardware to match.
[noise], we're making progress assisting transportation customers in preparation for the sunsetting of Threeg wireless service, starting with T. Mobile at the end of 2021 with others cellular providers soon to follow.
One of our long time customers. The hub group has become the retrofit of their fleets. The board comes next generation asset tracking products.
This feature rich solar power device will provide hub.
Complete visibility of assets and cargo status detection with its integrated cargo sensor for maximum efficiency.
We shifted began installing the Q2 and expect to ramp further in Q3.
We're seeing increased demand from customers choosing a subscription model, which includes hardware as part of the service offering in a single monthly rates.
Anticipate Q3 to be our largest subscription model quarter to date with about 6000 device is expected to close.
This would represent about $2 million in hardware revenue under our standard sales model that will instead be recognized just service over the next three to six years.
In the long term these deals expand our recurring service revenue base and lead to greater future growth.
And our heavy equipment solutions group, we recently expanded our longstanding agreement with Terex, a global manufacturer of lifting and material processing products and services.
There's a lots to be excited about with this partnership.
First terex extended the service term at their current basis subscribers for up to 11 years, many of which were coming to the end of their contract.
Second the Turks will offer the solution. This standard across several of their brands, including power screen Finley C.B. I Eco tech and Eva equipped.
Third Terex is a great example of how our integration strategy is working.
When we sign charts in 2014, we developed a customized web portal for them based on the fleet edge crap platform, we inherited in the mobile that acquisition.
Our next has now moved to work Coms OEM platform as part of the consolidation of our customer facing web portals, delivering a state of the art experience for their users, which includes expanded machine data collection and more robust analytics to drive further improvements across their businesses.
Lastly, we've begun collaborating with Trx on our latest dual mode telematics device, which ensures the equipment can operate anywhere in the world for years to calm.
Our next is one of many Oems were seeing the importance of dual mode connectivity.
Our first to deploy this technology is standard Fitch.
Work comes dual mode offering is unique to the industry as well as these significant competitive advantage and.
And we're seeing demand increase in many of our key markets.
Looking at Orbcomm strategy. After 12 acquisitions were nearing the completion of our integration plan.
Which focused on streamlining our business, improving profitability and making better use of working capital.
First we realized the 75% reduction or skew count after reengineering our product portfolio.
Which is also enabled us to achieve better inventory management and significantly increased product margins.
Second we improved our distribution channels to allow for greater cross selling opportunities, which have led to increased double play in triple play wins.
Third we consolidated 13 different accounting systems into one ERP system, enabling faster monthly close process.
And if it can cost efficiencies simplified billing and a better experience for customers.
Lastly, we went live on the work come platform and the OEM platform, which replaced the 25 existing customer facing web portals. These new platforms provide customers with visibility multiple asset types using a single sign on and off for increased processing power data bandwidth and.
City to supported by GE I O T ecosystem.
All of these improvements achieved through our integration plans have led to greater scale improved adjusted EBITDA margins significantly increased levels of cash generation.
We are now pivoting our focus from innovation supporting integration.
[laughter] innovation driving long term growth.
Our transition is centered around several key projects many of which had been in the pipeline and are ready for release.
There are over 15 projects some of which include our new satellite as an accessory offering with jets dual mode connectivity to almost any work come telematics device as well as most other devices on the market and our highly product for small vessel is tracking.
We're also working to expand our OEM portfolio with carrier with new products on the refrigerated containers and trailers. We are implementing our machine learning strategy through an improved sensor portfolio as well as video on both cargo and didn't have assets to assist fleets with enhanced real time visibility.
In addition, we're helping customers gain deeper insights about their assets performance through advanced analytics, including benchmarks historic trends and comparisons among asset types, enabling faster more informed business decisions.
Prior to 2019 were coms annual organic growth averaged about 8% leading to just 10% growth in adjusted EBITDA.
We expect our investments in innovation lead to greater levels of organic growth and our investments in integration.
Convert that revenue at higher incremental EBITDA margins were targeting long term organic growth.
10%.
Leading to adjusted EBITDA growth of 20%.
Summing up despite a difficult global environments. There are a lot of good things happening in the business.
In the home stretch of our integration plan.
Which weve heavily invested in for a number of years with our two platforms onboarding, new and existing customers on a daily basis.
Our business is shown resiliency during this pandemic and Q3 is trending higher.
The company has turned the corner on positive cash generation and we're now performing at significantly higher levels.
We've developed best in class platforms, and invested multiple new products that are about to hit the market generate incremental growth.
With our substantial cash reserves on the hat and a solid base of customers. We're confident we're in a great position and we'll come out stronger as the markets begin to stabilize and momentum grows in the back half of the year.
With that I'll turn the call over to Dean to take you through the financials.
Thank you Mark good morning, everyone.
This performance in Q2 came in at or better than expected.
That's probably the company's second quarter financial results.
Total revenue for Q2 was $56.7 million down 15% from the prior year period in line with guidance.
Due to service revenues of $38.4 million bounced between 3% compared to the prior year.
This amount $37 million Tan from recurring service revenue compared to 38.5 million year, though.
Keep in mind last year's revenues include about $1 million, making teamers contract expired at the end of 2019.
The screen. This revenue from Q2 last year. The current service revenue was down about $500000 you every year.
Sure and one of the worst macro environments experienced in my career with fluctuate foreign exchange rates.
Don't forget historic lows factory closures have not recurring service revenues at 99% last years levels shows the stability of our business model.
In Q2, we added approximately 18000 net subscribers, which was lower than historical average around 75007 per quarter for the last couple of years.
The lower net subscriber adds to the corner I was there was also a challenging environment for shipping and installing new devices.
<unk> and a slight increase in deactivations.
Our total billable subscribers ended the quarter approximately 2.22 million.
Product sales in the second quarter were $18.3 million compared to 27.4 million in the prior year period.
Decreased revenues was primarily primarily due to delays and customer deployments as results dependent.
Turning to gross profit margin.
Some of your rights to margin of 54.6% in the second quarter.
We are 90 basis point improvement over last year, driven by growth in service margin and a higher mix of service revenues.
Service margin in Q2 was 67.3%.
103 basis point improvement over the prior year period due to lower direct service cost achieved through our cost reduction plans.
Marching in Q2 was 27.8% a decrease of 60 basis points compared to the same period last year.
Great margins were actually up in the prior year quarter. When you factor in roughly $2 million are fixed costs in both quarters overall margin was down slightly considered churn as hardware sales improved.
Operating expenses were $32.8 million in Q2.
A decrease of 1.4 million compared to the prior year period.
Year over year improvement was primarily driven by reductions in labor National services traveling Henrik Stenson, partially offset by higher bad debt expense of 1.6 million.
Excluding the bad debt expense to $3 million decline operating expenses theater cost reduction plan targets for the second quarter 2020.
As he told me mantra spending during the pandemic environment.
Lower product development cost also contributed to decline operating expenses.
Adjusted EBITDA in Q2 was $11.9 million, 21% margin, which was above our outlook provided last quarter.
Largely driven by higher service margin reduced operating expenses.
Thanks for the balance sheet.
Yeah into Q2 with $62.4 million in cash and a $15 million decrease in debt from March 31st could you repeat the full amount of our loved withdrawal.
Looking at our cash flow statement, our cash flow in Q2 is strong and given the economic environment.
Ashley operations in Q2 came in at $12.6 million compared to 1.9 million in the prior year period.
Has generated in the quarter, excluding that 15 million gallons revolver pay back was 7.2 million.
Second quarter also included a semiannual interest payment on our debt of $10 million.
Excluding this interest payment our future cash generation was $17 million for the first half of 2020, a cash balances have increased $8.1 million compared to 1 million for the first half 2019.
Keep in mind to 8.1 million in 2020 is inclusive of 2.5 million utilizing our stock buyback program.
We're very pleased with its cash generation requirements and expect to generate more cash than the second half of 20 Twond.
FX for the quarter was $5.7 million.
The decrease of 400000 compared to Q2 of last year as we continue to focus on reductions in spending and nearing the completion of our acquisition integration activity.
Subscription model investments for $200000 in the quarter.
We're expecting capex of $20 million for the full year 2020.
Plus $3 million for investments in subscription model.
As a reminder, 2017, our capex exceeded 27.002 million 19 to think it was just over 21 million.
Let's move onto our outlook.
He believed the largest impact from a pandemic our financial results for most of what do you have occurred in the second quarter.
Representing the lowest point.
Our business and we anticipate improvements to begin in the third quarter.
As a result, we expect total revenues in Q3 will be between 59 and $62 million.
In line with current analyst expectations.
We anticipate adjusted EBITDA margin will be approximately 21.5%.
An improvement over analyst expectations.
Due to the continued uncertainties surrounding the macro environment, we intend to provide fourth quarter guidance during the earnings conference call in late October.
In closing, we're pleased with our performance in Q2.
Adjusted EBITDA and cash generation exceeded expectations during these unprecedented times.
We've made great progress, our integration and cost reduction plans, resulting in higher margins and increased efficiencies.
We've also substantially improved our liquidity position demonstrating our disciplined cash management.
Further strengthen your confidence that we can emerge from this pandemic a stronger company.
We're cautiously optimistic for the second half of the year has sales momentum builds.
We continue to shift our focus internally from acquisition integration to longer term growth through innovation.
This concludes our remarks for the call and we'll now take your questions.
Well now begin the question answer session.
Good question from a press Star then one on your Touchtone phone.
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At this time, we'll pause momentarily to assemble roster.
First question comes Rick Prentiss Raymond James Please go ahead.
Thanks, Good morning, guys.
Hey, good morning.
And hope you and a family employees continue to be well during this turbulent time with the cobot 19 virus.
A couple of questions if I could as you think about the way too few played out.
Did you see any changes from April to made a June and now with July and the books.
As far as what you saw as far as business trends.
You know certainly I mean, not U.S. transportation was the.
Probably the most obvious in that if you look at the industry trends.
You know at least in terms of OEM purchases for new equipment, which is important for us shipping equipment.
You know I've never quite seen anything like it where you know April and May you know almost went to zero.
And then June.
It comes Roaring back now I don't know how much of that is a you know make up from April in June or flows are consistent toward a you know future levels are there were factory closures. So they were unable to build products.
And then it comes back but you know June kind of looks like you know a normal month, when you kind of look at cargo loads and we monitor our own.
You know we monitor our own.
You know usage if they units in a you know moving them then we kind of monitor it just to see what shipments of goods look like.
Yeah. It was definitely a Ah you know.
<unk> all in April you know it starts to improve a little bit in may and it also gets a little bit better in June so you're not the movement of goods. You know is coming back and it was a lot more pronounced in.
You know I guess as you kind of rank.
You know reapers dry vans and Ral it was in that order reapers showed b.
You know the smallest reduction.
Dry vans with the next slowest and then rail significantly slowed down, but you know when Ral all of our big guys have placed orders for Newbuilds. You know that were expected to ship in Q3 again, you know nearly zero numbers in a you know in Q2. So you know that feels pretty well and then lastly to answer your.
A question.
And I don't know the demands I mean, obviously demand, but you know it's hard to place, but you're playing this whack a mole with factory closures for Oems.
Literally shipping zero their orders you know moved or canceled and you know it's it it's difficult it's difficult to call someone up its furloughed.
And say.
You know when them why don't we shipping your order and mental Southern factory opens and are you know you've got Oh, you know an eight week Golden you've got to get it out in three weeks. So you know just kind of all over the place I think in a in a recession, we'd been through it we understand what the playbook is right.
We understand it's a reduction in you know it's not this fine every 100 or zero that we experienced in Q2.
As you take in July further like evidence of what you saw in June or even better recovery.
Uh Huh, you know I think where.
You know, where we are guiding to you know an improvement and you know for us to improve six or 7% year over year doesn't sound like a lot but quarter over quarter. You know that's a big number for us and as you look at our numbers.
Understand the difference between Q1 in Q2, you know right there in the heart of the pandemic, 50% of it was a reduction in that one carrier order, where they went from 60000 subs to 9000 stubs and then the a large part of it is the accounting change.
With 18 met the 18 teen Maersk, where it's an ugly caught between the quarters back those two things out and you know that is half of the reduction between Q1 in Q2.
So you know as it were you know improves you know with that guidance in Q3.
It feels like it.
40% of the way back but.
Actually closer to 60 or 70.
But and obviously margins in the quarter. We're we're in a pleasant surprise gene called out some lower labor professional services travel and entertainment the guidance for Threeq you continues to show improved particularly in the cost side.
Anything specific there that they could revert back the other way that would cause pressure on costs or is it really.
Just good cost controls just trying to think through the the margin I'm surprised into third quarter guidance.
So [laughter] getting a ticket personnel that's okay.
Okay, Yes, sure sure Ricky I think I'm the cost containment as I'm going to be consistent I don't see cost increasing much maybe a small amount for travel and small amount for commissions.
But I think costs are at this level.
Q3 in Q4.
And you're not adding to that Rick So you understand where some of the costs are coming from there was 1.6 million a bad debt in the a second quarter that you know we won't repeat or we don't believe level repeat I mean, you're always good. So you know that's kind of something that'll help.
In the tour and in the.
<unk> third quarter results, but in addition, if you look at your Highpoint before we started the integration plan.
Oh.
The company.
Uh huh.
Okay.
According to the ER.
Good.
And Ah I I think in terms of travel we're not <unk> you know bathree increase traveling green maybe goes up a little bit in Q4, but you know if you're not a sales person or installer and orbcomm, you're probably not traveling right now.
Make sense last one for me is obviously some.
Good long term target goals, 10% revenue growth, 20% adjusted EBITDA growth.
Does it take to achieve that does or M&A, that's required to kind of help achieve that type item.
Just I think right now M&A is off the table for the rest of this year I assume but.
What role does M&A needs to play in that a long term targets.
Yeah, I think if we confused you on the call. That's my fault, but you know, we're guiding to 10% organic growth, okay, and 8% historically between 2019 was backing out acquisitions and that was organic growth, but we think 50% of that grosses.
No just the.
Accompany a you know continuing to grow as we always have by adding customers Buddy full 50% of it are products that you know have almost you know zero sales right. Now that are you know coming into the business or you know new channels.
You know for an example, the S. T 2100 that we've talked about on the call the new OEM.
Stuff for carriers, they make the stuff standard.
We sold Volvo a.
You know there a satellite.
Before they but we bought the satellite hardware from a third party.
You know any new bodies that we're hiring are going to the inside sales group to get us too.
Mall or fleet, that's never been named strong point for us.
Yeah, the adoption of the solutions.
Offering the subscription model, where the first half of your was slow and then you know 6000 units you know, we're going to deploy or starts to deployed in the third quarter a there there.
Multiple initiatives to get that other huh.
Great great. Good to know it's on the organic side and M&A could be something on top of that'd be fine jumping in either one.
<unk> emanates cheating right [laughter], well again best wishes hope you family to please stay well these crazy times guys. Thanks, Sir Thanks, Rick.
Thank you.
Next question for Mike Walkley Canaccord Genuity. Please go ahead.
Great. Thank you then like congratulations on a great results in this tough tough environment, especially on the that's one margin.
[laughter] follow on question just.
A lot of your competitors or have any guess price concessions and even losing contracting their subs in this environment. So one just how do you see kind of orbcomm market share improving in this tough environment and then to US as you look to year Q3 guidance.
How should we think maybe about your ARPU trends and potential net ads.
Tied in your point in that guidance for the quarter. Thanks.
[noise] door.
I'll start with the with the that the subscribers.
So subs subscribers I think got or churn of subscribers in the quarter I think was 1.7%.
Which are you kind of look at that on an annual basis. It was kind of trending between six and seven where we are always are.
You know closer to the seven than the the six so so with the higher end of are normal range. So I don't think that churn is necessarily why these subscribers were off a few thousand from where we are anticipating but as you kind of look at the difference you know what did we churn in Q1 versus Q2.
Even though is the percentage it was a a rounding error. The difference was about 8000 subs on a 2.2 million subs. So you know like I said you Gotta go few decimal points in order to.
Track that but you know 8000 subs you know would've been neo right in the Middle aware you know you guys were expecting in terms of the you know the sub kind of quarter. So we're seeing them a little bit not enough to affect the EBITDA of the business not enough to affect the.
You know the cash generation of the business, but you.
You know we are seeing that the be bigger issue with subs right. Now is these factory closures being open and closed just shipping new goods getting them received in time, the subscription model getting stuff installed in this environment that was the bigger problem, but you know I think if you take or.
58000, or 56000 units that we build you take that 1.7% churn and you'll be like I will 18000 got to their number.
I I think in terms of by you know difficult markets.
We've really been confronted with a couple of issues. So we are seeing a little bit a contraction, which is you know why we're not you know why we're at 99% of last year as opposed to you know 105% of last year.
And there are some areas that are really really struggling globally.
And we've got a reasonable size business in Brazil.
And you know I'm on the Brightside, it's come back a little but the real early in the quarter was just suffocating to the point, where some of our customers. You know we're building them more than they were building their customers and we had to work on on that you know seconds every quarter, we say you know.
Right, we've reached the bottom of oil and gas it can't get any worse and then you know wow It got worse.
I'm sure you guys saw in the middle of the quarter, where oil was trading.
But you know there are a lot of oil service companies.
You know going into traps or elevens and stuff like that and we've made a significant amount of concessions there.
And lastly, we renewed a number of yes agreements and.
Some of these agreements there was less competition and if you look at them now make some reductions in order to extend these guys for three years to come.
So that would be the.
The the third area I think you know there's headwinds and Tailwinds in terms of ARPU was the last part of your question you know, there's certainly a large tailwind with subscription models and that's starting to ramp up and you know do a whole lot better I think there's an awful lot we're doing to enrich.
Sure subscribers to get more value out of each subscriber take a single mode unit make it dual mode or take a telematics been make it an analytics Ben you know long term, there's a lot of Tailwinds you know to get that you know going but you know in the short run we still need to.
You know support these difficult areas of the business and you know to help these guys stay in business and successful in ride through the pandemic.
[noise]. Thanks, that's helpful. [laughter] kind of a follow up question just on the competitive dynamics, Mark, Yes, I know M&A.
Might be challenging at current current time in the market, but are you seeing opportunities certainly maybe private companies are smaller [laughter] that leading Tom competitors struggling this environment take shares in certain verticals.
[noise] somewhat.
I think you know during this integration the last two years as we've said.
M&A is completely you know off the table we couldn't.
We needed to get this integration done and I think now you know the picture is starting to pay and why we need to do that rate we needed to get the machine right. So.
As we process more incremental dollars they come through that the margins that were all expecting and until the integration pay takes place you know the company with subscale and just moving in the wrong direction and you know the the ugliness coming out of that was higher inventory levels and lower margins and.
Gee, we got that fix them, you know where feel like we're in a really good place and you know if we wanted to gauge or.
M&A you know probably in 2021, we could probably do that but you know let me be clear there's no strategic assets that we don't monitor or track right now.
That's a joan already have or have some sort of visibility into within our own you know R&D, so, but I don't think that's what you're asking me.
You know in terms of you know would we do with deal to get better scale you know.
Something that's great for shareholders because.
No we're trading at EQT, EBITDA, and we could buy it.
Well synergize it disease.
You know would we do that probably but there's absolutely nothing that we're closing in on right now that probably could close this year, but.
Long range. It is something we would consider.
Okay last question for me I'll pass the line just a dean.
I already said it I might've missed it the A.I.S. revenue in the quarter and then with the 20% EBIDTA growth in your new platforms can you talk about the incremental margin for adding sub than just how we should think about services gross margin longer term. Thanks.
Yeah. The the asked revenue was $3 million in the quarter and I don't know Mark you want to talk about.
In the second part of the question.
Sure.
You know, there's a fixed components of both our services and our hardware you know not just services. So if you are.
You know its if you're growing 10% and a share of that is hardware incremental hardware margins are north of 40%.
And incremental service margins are between 85 in 90%.
So if you figure you know the growth. This 50 50, which is what it was you know prior to 2019, you know that's what gets us with about 10% organic revenue growth leading to 20%.
Adjusted EBITDA growth.
Yeah, Mark just to add to that we have a operating expenses net model growing up 3%. We we we don't believe we need to add.
Anything tickets that level of revenue as far as operating expenses based on the platform seatbelts and the back office we built.
Great, Thanks, and best wishes to health everybody on the call.
Thank you too.
Thank you next question from Mike Latimore Northland Capital markets. Please go ahead.
Great. Thanks, Yeah good morning.
Yes, just mark back on ERP. So so should we think ARPU is relatively stable then or what should be the conclusion or.
[laughter].
Uh huh.
ARPU certainly fell in the second quarter.
You know I think it probably would be a relatively stable in Q3 in Q4, and then as we recover some of the concessions that we gave.
We're not long term you know they were just to get people through the pandemic or companies. So hopefully we recover some of those ARPU is early in the year.
Makes sense.
And then just on the couple other categories, you called out oil and gas and then stopping okay what percent of revenue roughly where those categories and.
One of the best start back up well it'd be more normalized rate.
The Dean I'm thinking oil and gas is like 5%.
Yeah, no. It's it's about 4% of October revenue that's right.
So 4% for two years ago. It was like eight right. So yes right.
As you can I mean that was the entire.
Well there were there were lots of ups and downs in 2019, but you know that might have been you know the entire decrease was related to oil and gas.
South America, I'm guessing it's high single digits.
Yeah, it's a closer to eight or 9%, you'll object to that skywave business right.
Okay, and then any subscription actually hear you can't think weighed on cats about 2 million a hardware revenue in the third quarter. I guess, you should we think about that eating that there will be something in that.
Yes, it's on a run rate for several quarters or was that build over time, well maybe that 2 million goes to you know for six or next in the next year.
So the 2 million is what we expect to close in the quarter, we don't expect to ship at all in the quarter.
So ER and a bunch of it you know is.
Some of the pushed from Q1 in the immediate difficult environment, but let me give you a feel for it I think we shipped less than 8000 units in Q2, but we expected to be 6000 in most of which has already been closed right in.
Close that in Q3.
You went from a couple of hundred Grand in Q2 to 2 million in Q3, I think we previously guided you know since it's somewhere between five and $8 million on an annual basis for a subscription model deals.
Okay, and just ask Andrew launching located.
10% organic growth its service, we wish him service revenue grow at that rate as well and then.
How are you thinking about the mix of satellite versus cellular versus the dual mode or not.
Uh huh.
You know, we're hoping to get through a world, but you can't tell the difference between satellite and dual mode and you know because all of these products you know kind of mixing into one offering.
So we're seeing an awful lot of that and ER.
Historically our biggest.
Dual mode customer was.
It was walmarts and now we're seeing it kind of spread into GE, Walmart and Terex and you know Walmart Terex and now sudden its expanded into our Reaper fleet and.
You know when that within the next two quarters one of the products were working on for carrier is.
A a dual mode solution as well so we're really seeing that spread from a couple of percent of the business and we're hoping it will get to 15% of business and that'll show up in ARPU is but I think the coolest thing about it is you know who can beecher like who also has their own you know satellite networks that.
You can go in.
And offer this stuff.
So you know that continues to.
You know that continues to grow.
Historically, you know when you look at that 8% growth.
It was.
You know.
Satellite was in the mid single digits.
And.
You know the solutions businesses were in the low teens.
Right. Okay. Thank you thanks a lot.
For.
Thank you next question just from Chris Quilty of Quilty analytics. Please go ahead.
Morning, gentlemen, just wanted to follow up on that dual mode question interesting to hear that that hub is due in a a equipment refresh it seems like yesterday that you guys did that deployment.
His hub still sticking with a a single mode cellular solution or are they expanding to to add anything dual mode.
So a hub is currently sticking with the.
With the cellular solution because.
If you look at the asset that hub has versus the other ones that I.
Mentions.
With all the other ones that I mentioned have in common as they have more access to power.
You know, they're drawing power off the reefers for terrorists, they're drawing power off the engines and ER hub has the most difficult power environment.
And that there were due to nothing but sunlight right on these containers and if you make the panel to big these things the way they get kind of banged around on rail you know adds more risk so purely for power consumption.
Hub is sticking with a cellular solution.
Gotcha and I remember the a regional deployment there was problematic you've moved years ahead in terms of your ability to do professional services and install.
Is that a installation you will be doing or with a third party and then just more generally as you looked at Q3 and shipments and installs are there any bottlenecks around your ability to get to customer sites and install.
[laughter], Yeah, [laughter] you know its a.
You know every site a different right and you know when you look at these rail yards and you know places that you install you're not installing in New York City.
You know you're installing in Omaha, our you know these despaired cities all over the country that.
You know the virus in the a political situation and everything.
Else is you know flaring up and calming down then you know where we're in this game of of whack, a mole and you know the if I were able to tell you where I'd be able to install over the course of the third quarter I would have given your fourth quarter guidance.
But because I have no idea, where this thing is flaring up and what the political landscape is on you know every mayor and every town of every customer that I have I just don't know.
So.
That's the that's I mean, you've hit on the very uncertainty that we're dealing with right now.
I understand.
So looking at the theme happens.
Like they were improving in in Q2, I'm, assuming no Cuban Q3, but in terms of net adds we don't get back to you know 60 or 80000 sort of run rate level in Q3 is that a fair assumption.
Well, if I had to place a bet on it I would say the Q3 number is like a three handle on it. So it's starting to recover just a kind of in line with sales.
And then you know Q4, you know a little bit higher.
And then you know hopefully a you know a six handle in Q1 or Q2.
Got it.
You guys didn't pay an outside marketing firm to come up with the the brand name on the Orbcomm platform I hope, but.
Can you talk more about that with a in terms of what that does with the on boarding customers or.
Alternatively, a it sounds like you've got some customers that have made the shift you know how seamless that was the move from a custom platform into you know what the generic but presumably customized platform.
Yeah, So what we do not higher marketing company to come up with the name.
But oh I understand that the name from your viewpoint, you know seems a you know kind of odd, but you know the orbcomm platform in terms of.
Internal to our.
You know to our customers you know meta made a whole lot of sense [noise], but it's hard right I mean.
You know if you look at you know Repositrak that's the first.
The thing that we built.
No there's thousands of many years that went into.
Reaper track and you know we deal with these you know big unwieldy customers that as you onboard them you know Geo I'll.
Put you across my fleets, but you know what I really need you to do is integrate to this dispatch system or this yard system and what I really want to know is you know what is the fuel economy that I'm getting on a carrier reefer versus a T.K. Reaper and you know what I really wanted though is you know how long that Mike dwelling you know at this cost.
Summer versus that customer and should I be charging you know for you know for for for that you'll that's used in.
You know those where those were the kind of thing that you're focused on as you built this thing and you continue to build on it for 10 or 12 years and each customer brought you know three or four of their own.
You know needs or desires and you know you worked on that and you know did it over years and then boom you move them all over to a new platform.
And you're starting to you know knockouts with these you know between all the platform thousands of customers you know use in those platforms onto the new platform, which is why they're all running concurrently now as the switch gets done and we keep knocking out.
You know these you know one offs that that customers need. So you can close down the other platforms, but I I get the sense you're more on the other side you know what is the benefit you know for the customers and what is the benefit for work on well the benefit for customers is you might have been using you know you're right.
It is on one platform your drive ends on another platform you chassis on another platform or your truck on another platform and you know GE. It all works on one platform and you can kind of tied trucks and trailers and you know learn how to use one platform and not have multiple screens opened then you know why was that damn cool and then you know we can kind of work on some of.
The you know cool features in marrying trucks and trailers and you know doing some of those unique things is it all comes together, but internal to Orbcomm imagine you've got 150 software engineers, serving 25 platforms. So the average platform is sick.
You're seeing G 150 seems like a lot that six seemed like nothing so your Underscaled and then you've got you know 80 people that customer service better subscale, because each of them are experts and 25 different platforms instead of being able to take a call from any customer on any platform and then you've got these multiple build that.
We're trying to work through from the old ERP systems, where you know you're sending customers pages of builds because you're sending builds up different platforms.
All sub scale all affecting the margins all affecting the cash generation all affecting the amount of a you know employees that need to effectively.
Support it and you know boom it all comes together.
Millions or over 10 million or $50 million of cost went into this that our shareholders haven't seen the value from that you know now the sudden you're seeing it through cash generation seeing the margins you know, it's starting to hit home, but I think the message for today is.
You know look at what incremental growth now means to incremental EBITDA as opposed to you know almost a one to one ratio that we experienced in the past.
I understand and the final question here, which you touched on a cash flow.
I missed it if you provided an update for the full year Capex and then if anything to add a in color there and and cash flow. You know do you have a better sense of what the full year cash flow from ops might look like.
And if you have any comments around.
Application of the cash flow towards reinstituting, the buyback or paying down debt.
You know any thoughts would be helpful.
So then you start now [laughter].
Yeah.
Chris I'll start off the the cash so.
Question on Capex, we do expect capex to be approximately $20 million for the full year.
That's that's excluding the subscription model, so subscription model might be another $3 million and investing section of the cash flow.
And.
That'd be 22 million total the first half the air we generate free cash flow about $10 million, excluding the stock buyback.
I think it'll be similar in the back half of the air. So so we would we should repeat we did in the first half and the second half.
With the $2 million of investments in subscription model. It it's almost the same as a $20 than investments we didn't stop by back and first half the year. So I would think customer cash flow in the back half of here from the first half of the year.
Oh no question on the yeah on the refinancing I don't know my logic that.
Sure.
That's excuse us where in different locations, we've never Uh huh.
To that before.
But yeah in terms of the.
The refinancing a you know we're currently paying 8% on.
250 million and you know, we're debating when to refinance that and.
I think this quarter is going to go a long way and getting that refinanced in that.
I'm not understanding what the cash generation was or ability to repay debt for the quarter.
I think you know the banks will have a different feeling after the quarter and then if we could show continued improvement you know in Q3, there's a there's.
There's a chance that we can refinance our debts.
By the April day, 54% penalty goes to a 2% penalty and.
You know kind of the dream would be you know a five handle on debts and you know probably more likely six handle in terms of the the the rates.
But you know the banks are.
Kinda, telling us so that is.
A significant change and then you know listening to deans guidance on cash you know, we would end the year somewhere between.
[noise] 70 $75 million.
In cash and then the question becomes you know is the a is that 250 million. Its 225 million you know what is the amount that you're going to refinance and you know we need to.
Kind of way briefings, you know, what's the value of buying back stock and whereas the stock trading at number two what is the value of the subscription model and how much do we want to invest in that number three you know what is the debt rate that you get in all of those three things are interchangeable and then if you threw it out for thing you know which would be M&A.
You know what are the opportunities out there, we'll certainly take a look at all that as well, but imagine you know some time Q2 next year with it all gets resolved.
These are a good problems to have.
Congrats what do you do ash.
Thanks, Chris.
Again, if you have a question. Please press Star then one.
Okay.
One comes from Scott Cyril Froth capital.
Please go ahead, hey, good morning, Thanks for taking my questions, Hey, guys I'm, a nice job, but a couple of quick cleanup questions and then some follow ons I'm not sure if I explicitly heard it but professional services in the quarter. It sounded like backing out the recurring that's around 600000 or so is is that correct and then on the bad.
That front I think you said 1.6 million in the second quarter could you just give us some historical perspective on that and on the numbers in front me, but I want to see that's two to three X you know, where we had been in the first quarter in the fourth quarter last year and they had a couple of follow ups.
Yes, So special services, it, especially professional services is down about $500000 for the quarter year over year, we have lower but it fees and legal fees, which we we have planned on going into the air.
For the a different for bad debt our typical quarters.
Our summer in the $400000 range for bad debt.
No, but less than 1% of revenue for the year, we've done a pretty good job historically of collecting more than 90% of our revenues.
So the 1.6 million is quite a bit higher obviously and then we expect to get back to that 400 $500000 dollars quite a range as the economy.
That's a normal level.
Gotcha that and then on the product front Mark.
You know clearly in terms of the guidance implies you know a product and hardware starting to come back into the third quarter.
In terms of the expected shipments and a couple of areas I think container sounds like it's lower there is some cannibalization from conversion to the SaaS model, but where are you specifically expecting to see the growth. It sounds like it's still early in the Threeg sunsetting. It sounds like rail is starting to come back from zero and as transportation part of that equation as well and that's why.
During feed give us an idea what the visibility on that front looks like its current time for the third quarter.
So the vote the visibility on the three G. trade outs is pretty high.
So we're working with you know a carrier on a number of fleet.
You know with a deadline of December.
2021 to get all the switched out and you may be saying yourself, all that's not a big issue. It's a.
You know, it's 18 or 18 months from now we're not even 15 months from now, but you know to get it sold to get it installed across entire large fleets you know really needs to start now to the point, where you can see you know hubs starting to ramp up which is threeg as well. So you know those are.
Our.
Moving very quickly and then we're starting to see new builds as well, which we you know have a view at a couple of months in advance and you're seeing the rail guy starting to build new products.
You know in China in other places and we're beginning to ship those as well.
We're also seeing some latent demand from.
A number of our Oems that.
Buying in the second quarter, because their factory lines were closed down and I'm not saying that those lines are Ah you know at a.
100% of normalized rates, but you know when a good portion of Q2, there is zero so.
You know you, even halfway or three quarters. The way to normalize is you know a whole lot better than zero.
So that's the kind of recovery that you're seeing.
Okay, Great and and lastly, just on the services front, you talked about some deactivations in the quarter and you talked a little bit about the churn rate, but I'm wondering if you're seeing any reactivations. Maybe also she gave US a quick update on Bluetrend in think and a 10% organic growth target. It you know kind of extrapolating out look and getting back.
To that you know 50 or 60000 net adds for quarter you start to get into the mid to high single digit kind of organic growth rate, what's the what's the timeline.
Oh, the current timeline that you would expect to start to breach that 10% organic growth is at the 2022 or is it takes something beyond that thanks.
Yeah, well I mean, it depends on what your what you're talking about I mean from.
You know like a 57 million Q2, we forget that really quick [laughter], but but if you're talking about from normalized level.
I think be goal for 2021 would be to get the company backup to normal and then to expand Tempe, 10% beyond the normalized levels. A you know in 2022.
But you know while I'd be disappointed if.
If you 2021 didn't grow 10% over a 2020 you know in based on this environment.
That being said you know vaccine Nov and who knows.
But you know assuming any recovery at all or energy, we should be growing 10% 2021.
Great. Thank you.
At this time there are no further questions.
The company. Thank you for fits with dissipating on the call today and look forward to speaking to you against the report to third quarter results have a good day.