Q3 2020 ORBCOMM Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Orbcomms third quarter 2020, <unk> results conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a quite period.
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Please also note todays event is being recorded and a replay of this conference will be available from approximately 11 am eastern time today through.
November 11 2020.
The replay service details can be found in today's press release.
Additionally, orbcomm will have a webcast available in the Investor section of its website at www Dot Orbcomm Dot com.
I would now like to turn the conference call over to Alley, Pangea Orbcomms, Vice President of Investor Relations. Please.
Please go ahead.
Good morning, and thank you for joining us today I'm joined by Marc Eisenberg, Orbcomms, Chief Executive Officer, and Dino Coast Orbcomms, Chief Financial Officer on today's call Mark will provide some highlights on the quarter and give a strategic update on the business Dan will then review.
The company's quarterly financial results and outlook following our prepared remarks, we will open the line for your questions before.
Before we begin let me remind you that today's conference call includes forward looking statements and that actual results may differ from the expectations reflected in these statements.
We encourage you to review our press release and that the SEC filings for a full discussion of the risks and uncertainties that pertain to these statements Orbcomm assumes no duty to update forward looking statements. Furthermore, the financial information. We will discuss includes non-GAAP financial measures a reconciliation of these non-GAAP measures to GAAP.
GAAP measures is included in our press release at this point I'll turn the call over to Marc Eisenberg.
Thanks, Sally good morning, everyone.
It's been an extremely active quarter. The company has made a number of strides across the business ranging from our extension with Inmarsat for L band satellite services grew.
Grew 2035 at a minimum as well as kicking off her gx a groundbreaking new service is expected to hit the market.
Sometimes 2022.
We've taken large fleets getting through our integration efforts and have a number of new products currently being released to the market.
Been generating a good deal of cash.
<unk> fourth quarter purchased 30 million of our high yield notes, we've extended our contract with carrier in North America truck trailer group.
And in addition, we've won some meaningful new deals we're seeing recovery in many of our markets.
Through it all we got a pretty good financial quarter.
So let's get into it.
Earlier. This morning, we issued a press release announcing our financial results for the third quarter ending September Thirtyth 2020.
We're pleased that we delivered another consecutive quarter, where our results beat analyst consensus for both revenue and adjusted EBITDA.
Total revenue for the third quarter was $61.7 million up sequentially from Q2 and at the high end of our guidance.
Cost reduction initiatives continue to deliver savings in Q3 with year to date savings, surpassing our target for the year.
These contributions led to adjusted EBITDA of 14 point Threemillion worried 23.2% margin, a 220 basis point improvement from last quarter and ahead of guidance.
The improvements in revenue and adjusted EBITDA resulted in another strong quarter of cash flow generation.
In Q3, our operating cash flow was $18.7 million. This is an increase of over 6 million from the prior quarter.
About 9 million more than last year's third quarter.
As a result, we ended the quarter with over $76 million in cash B $22 million increase year to date.
Our higher than in previous years, despite one of the most difficult environments in recent history.
We believe our momentum increasing cash flow demonstrates not only that our business is resilient.
But also tracking towards strategies, we continue to integrate and synergize.
In the fourth quarter, the company purchased $30 million of Orbcomms, 8% senior notes with cash on hand that was yielding negligible interest income.
Nice job for a potential upcoming debt refinancing.
Work comp business supports the stay at home economy, helping customers operate during these unprecedented times.
Our eyes, Ci and telematics technology offer the flexibility needed for organizations to quickly pivot and transition is needed providing command control and visibility of their assets dispersed across large geography.
Companies, who do not have a higher ti deployments meet to travel to locate diagnose and preset conditions on their assets work.
Work on customers can do it from their office or from their home with just a few clicks.
What were experiencing this customers would not consider I O T solutions in the past.
Substantially underperformed.
And are likely to reconsider investing and I see in the future.
They should contribute to growth well beyond the pandemic.
Since Investor focus has now turned to 2021 I'd like to discuss strategy both.
Both where we are today as well as where we are headed.
As a reminder, prior to our multiple acquisitions, we were purely a connectivity company.
Sold through a number of value added resellers.
We saw an opportunity to acquire a number of subscale resellers to hit price points at asset classes to create a complete offering.
Accumulate technical depth to continually innovate to meet the needs of the industry.
The imagination of our customers.
Since then we've acquired 12 companies.
And our main focus has been centered around integrating these assets to create a more comprehensive offering as.
As well as a more efficient organization.
As part of this integration plan, we embarked on a number of strategic initiatives focused on product rationalization.
The consolidation of platforms moving to one ERP system and.
And expanding cross selling opportunities.
So where are we today.
Well, we've realized a 75% reduction in our skew counts along with the 30% cost reduction after reengineering, our product portfolio, leading to significantly better inventory management.
And significantly improved profit margins.
We've enhanced our distribution channels, which has enabled us to win incremental customer opportunities through a double and triple play offerings.
We consolidated 13 different accounting systems into one ERP system, enabling faster monthly close process.
Terrific and cost efficiencies.
Simplify billing as well as a better experience for customers.
The orbcomm into OEM platforms, which are the result of consolidating 25 customer facing web portals are nearing completion, and onboarding, new and existing customers on a daily basis.
Not only do these two platforms provide provide customers visibility to multiple asset types using a single sign on.
With the increased processing power data bandwidth and scalability, they could supporting Fiveg video based iOS ecosystem.
As a matter of fact, the Orbcomm platform was recognized with the 2020 eyes. She edge Computing Excellence Award from Iowa, Gee evolution World as an innovative solution.
Overall as a result of our integration plan.
The company has begun to realize and half efficiencies greater scale and improved adjusted EBITDA margins and increased cash generation.
While we have improved nearly every key metric that the company tracks. It is not yet led to strong organic growth.
We have now transition to the next phase of our strategy, which is centered around innovation for growth.
Recently, we discuss long term targets focused on organic revenue growth of 10% for.
Adjusted EBITDA growth of 20%.
All these targets our tenant 20 plan, which includes a number of key strategic initiatives many of which have already been in the works for some time and are just beginning to yield results.
Our strategic initiatives are centered around launching new innovative products, adding new channels to market and developing incremental service offerings.
Starting with product innovation, we anticipate launching several new products over the next few quarters, many of which leverage orbcomms skill sets in.
In multiple forms of connectivity, creating multi mode opportunities a strong competitive advantage to orbcomm.
Historically companies, who are utilizing cellular connectivity to their higher ti applications and want to be expanded coverage and backup capabilities that satellite providers have to pay nearly double for both hardware and airtime, making dual mode English offer.
To advance dual mode to a mainstream offering we've built our satellite as an accessory device, which combines the satellite modem with the external antenna, thereby enabling satellite connectivity three very simple plug and play connection.
By lowering costs.
Resulting in a significantly lowering pricing to the market customers can cost effectively add dual mode connectivity to almost any work come telematics for third party device.
By this time next year, we expect nearly all of our product lines to have the capability to add satellite as an accessory making it a far larger share of orbcomms deployments over time.
Some other innovative products in development include adding video to both cargo and in cap assets to help customers improve security lower risk and enhance utilization.
Also improving our sensor portfolio, adding visibility around tire pressure identifying tractors and trailers sensing cargo in refrigerated assets along with multiple other projects are affordable and I asked device, which product sizes, sorry, I asked service, making it affordable and bite.
Directional for small vessels as well as many of the products. We just listed are planned for launch in just a few months.
These product investment and innovation were made over the last few years and are now coming to fruition most.
Most of these products are delivering little to no revenue today and represent greenfield opportunities to capture incremental market share and drive organic growth.
Turning to new channels to market, we've engaged in multiple strategic partnerships with both distribution and integration partners that are starting to bear fruit yesterday, we announced that we extended and enhanced our agreement with Inmarsat The world leader in Global Mobile satellite communications through at least 2035.
This agreement also kicks off our next generation satellite offerings, while expanding our distribution through inmarsats channels.
We will talk about our partnership with Inmarsat in greater detail in just a few moments.
We've also enhanced our strategic partnership with carrier and extended our telematics agreement for a minimum of three years.
We're continuing to evolve the customized OEM solution for their refrigerated truck and trailer systems, which is comprised of a full suite of orbcomm products, using our cellular and dual mode connectivity as well as a state of the art reporting and analytics platform.
Our agreement with carrier solidifies, our long term partnership and creates an exciting opportunity to continue to deliver full service solution that provides complete cargo transparency from origin destination.
In addition, we're working on a number of partner integrations that enable us to integrate our telematics data with their safety maintenance and work flow management systems, enabling greater functionality actually.
Maximum asset utilization and better customer service.
Another channel to market is through our inside sales team, which we're building out the focus on selling to small fleets that represent the large portion of the addressable market.
Lastly, we are developing incremental service offerings to enhance the experience of our customers and continue to make us an integral part of their business operations.
Now that we've built a strong foundation for robust Orbcomm and OEM platforms, we can utilize the incremental bandwidth processing power and scalability.
Deliver additional value to our customers, our new service offerings will leverage advanced telematics business intelligence tools and industry benchmarking tools, coupled with our deep industry expertise to help customers operate more efficiently and unlock incremental ROI.
In addition, we are focused on expanding our subscription model offering which combines the hardware and service into a single monthly rate.
We kicked off our subscription offering this year and with demand substantially increasing in the third quarter.
We believe customer demand for the subscription model will continue to rise leading to incremental recurring service revenues and future growth.
To wrap up our strategic discussion.
We're seeing the tail end of the integration phase of our strategy.
And we're now focused on driving innovation and long term growth.
Moving on to transportation, starting with an overview of the market.
New truck and trailer orders rebounded in Q3 after hitting lows in Q2.
According to AHGP research and MTR transportation intelligence, New OEM orders increased 124% for trucks and a 146% for trailers in Q3 compared to prior year.
This improvement is partially due to a large pent up demand stemming from last year's weaken transportation market combined with delayed orders for new assets. This year as factories here through the pandemic. In addition, we're seeing a rise in freight rates.
As a result of all of these factors the transportation market appears to be recovering.
Appointments in our transportation group took a positive step in the third quarter as we're seeing a mix of growing demand for many of our large longstanding customers as well as a number of new projects.
Many of our existing customers already use orbcomm to manage one asset type are.
Looking to expand to additional assets and consolidate vendors.
The majority of the opportunities we're working on today are double and triple plays involving two or more different asset classes.
It could include refrigerated trailers dry vans trucks Gensets chasses.
As the number of asset classes. The company looks that continues to go up so too are closed accounts.
Two great Triple play opportunities, we closed this quarter or TBM carriers and demand the truck lines, both of which began deploying our in cap refrigerated and dry van solutions in the third quarter.
We also signed a double play opportunity with trends Gourmet European food and beverage wholesale company, who is using our in cap and refrigerated solutions.
In Q3, our fleet management group that previously focused almost exclusively on oil and gas shipped 2800 units far above the recent norms as they continue to transition to more diverse markets, including ambulance commercial vehicle and over the road transportation.
Great example of our development work supporting the upcoming Canadian deal de mandate as well as the integration of the feature sets from multiple platforms to the Orbcomm platform is our win with Reimer Express lives a large Canadian truckload carrier, which will begin deploying our in cap solution in Q4.
On their fleet of 1500 trucks.
As previously discussed one of our new channels to market is through subscription models. In Q3, we closed several subscription opportunities representing about 6000 devices of which roughly 2500 shifts within the quarter, making it our largest subscription quarter to date.
As the devices get installed revenue will be recognized as recurring service over the life of the contract.
Let's move on to our container programs, our project with carriers container group in support of a major shipping line customer continues to progress in Q3, we delivered approximately 9000 devices, bringing the total to date to about 67000 of the total 150000 units deployment.
We anticipate shipping the majority of the balance throughout 2021.
Supportive and additional shipping line customer we delivered the remaining 3000 devices in Q3.
Total 7000 units deployment.
There are many other pilots in process and we hope to build on our momentum in this market for Aiotv penetration is growing rapidly.
Turning to Ascs revenues in Q3 were $2.7 million, a tick down from last quarter as some large customers extended their long term contracts at slightly lower rates.
Renewed our multi year contract with ice just market to continue to use our data to enable commodity trading applications.
We also signed a contract extension with marine traffic through 2023.
In addition, we were awarded a new three year deal with the leader in Geo spatial mapping, we will integrate our past data into their cloud based platform for big data analytics and visualization.
As previously announced we're partnering with clients base, who will build launch and operate our two next generation skewed sats.
To expand coverage of Orbcomms constellation.
Increased visibility to smaller class b ships and extend our polar footprints.
States has started integrating the satellite components and we're targeting the initial launch in the first half of next year.
In some recent news, we're collaborating with Inmarsat on a next generation Global Aiotv service called <unk> Gx offered.
The offered the best in class combination of high bandwidth data packets with low cost terminals.
The first offering is a higher data rate services designed to be about 40 times faster than the current IBP service, allowing for much larger messages and faster delivery times.
Orbcomms current generation IBP deployments can be seamlessly upgraded over the air to the OTN service. So customers can start development and integration now to ensure their solutions are market ready when Oh gx is expected to become available in 2022.
Orbcomm and Inmarsat are designing the second OGE ex offering which is extremely power efficient and could supporting daily message for multiple years on a satellite terminal utilizing a single double a battery.
This capability is ideal for remote monitoring and environmental sensing applications.
Oh Gx offerings will be supported by Inmarsats current eyeq, four and forthcoming Isix L band constellations, providing the most sophisticated data payload and lowest latency of any L band satellite store and forward service.
In March that will also distribute orbcomms portfolio of Blue Gx telematics devices globally through its extensive commercial and government sales channels.
By extending our long term successful partnership through 2035 at a minimum we can leverage our synergies with inmarsat and continue to deliver the industry's best satellite offering with the broadest geographic coverage, the most regulatory authorizations and the best value to customers.
For those who are as excited about this partnership is I am Rupert peers, Inmarsat CEO and I are participating in a video interview hosted by satellite expert Tim Ferraro Tms associates, a recording of which will be available on both companies websites by Monday November 2nd.
Wrapping up we are pleased with the quarter and where we're headed I think this quarter had a positive story for nearly all shareholders for.
For those who are focused on quarterly financials and want to see a quick turnaround from COVID-19, we're moving in the right direction for.
For those focused on de levering, there's a great story here.
For those focused on execution, we've taken large strides in our integration efforts and our inmarsat relationship really cements our satellite business for many years for those focused on growth.
Hope you are as excited as we are about our tenant 20 plan comprised of product service and distribution initiatives, we're clearly making strides across the organization.
With that I will turn the call over to Dean to take you through the financials.
Thank you Mark good morning, everyone.
I'm pleased that our Q3 financial performance came in better than expected and we look forward to making progress on our strategic growth initiatives in place.
Let's start with their view of the company's third quarter financial results.
Total revenue for Q3 was $61.7 million up nearly 9% sequentially from Q2 and at the high end of our guidance.
You treat service revenues were $39.7 million.
Let me down compared to the prior year, but up sequentially.
The current service revenues for the quarter was 36.3 $6.4 million compared to 39.2 million year, though.
About two thirds of this decline in recurring service revenues is due to expire at 18 to contracts and putting mers.
The other one third of this decline relates to continued customer disruptions, resulting from the ongoing cokemaking pandemic.
Good portion of the headwinds we face today should dissipate over the next year as you pass the anniversary of the 18 to contract revenue.
You're going to see stabilization in the oil and gas market.
Thats businesses overall recover.
Other service revenues in Q3 were $3.3 million nothing about 2 million from the prior year period.
Given largely by onetime software license revenues.
Product sales in the third quarter were $22 million Nick.
An increase of 3.7 million from the prior quarter and several of our large existing transportation customers increased our volumes in Q3.
In total we shipped over 66000 devices in the quarter, which was 10000 more than we shipped in Q2.
As Mark mentioned earlier, we're seeing our transportation business picked up alongside the market improvement and anticipate customer deployments to continue gaining momentum as we finished the year and enter 2021.
Let's move on to our billable subscribers, which ended up the third quarter.
2.17 million sets.
Our subscriber count at two one time adjustments in the quarter.
The first was the result of the TPS ethnic issue with a large construction OEM customer that dates back to 2018 involving hardware they purchased from a third party.
As a reminder, the GPS ethnic issue cost some assets, which utilized time measures to use GPS functionality.
Lose track of time.
The past two years. This OEM has been updating these modems over the air replacement hardware on these assets.
Well the customer did address which are their fleet about 40000 subscribers and shut off from Q3 and were not able to be serviced.
Most of which were non revenue generating same store come in 2020.
Our OEM customer will continue to suggest these remaining units have been coming from maintenance, so somebody might come back over time.
Second adjustment was the result of our integration from various platforms to the Orbcomm platform design.
Designed to give us Arthur far better visibility into subscriber metrics than the legacy platforms nothing.
To identify and set off about 50000 subs that were continuing to incur cost with little or no associated recurring revenue.
Well, we've improved visibility to our subscribers, we will continue to monitor them best optimize cost revenue and profitability.
Apart from these one off adjustments we added approximately 40000 net subscribers, which is more than double the number we added in Q2 as customer demand for our I O T solutions increased.
Turning to gross profit margin.
How many realize the margin of 53.7% third quarter up 20 basis points compared to the prior year period, the revenue mix as roughly two through service and high margins and one third product.
Gross margin in Q3 remained strong at 67.4%.
Up slightly from the quarter from the prior quarter.
Not as much in Q3 was 29% new crude improvement over Q2, though down from last year's 31.4%.
The decline from the prior year period was primarily due to lower product revenue and the fixed costs associated with our hardware business.
Third quarter operating expenses were $32.5 million.
Decrease of 2.2 million compared to the prior year period.
The year over year improvement was primarily driven by reductions in travel and entertainment professional fees labor cost and marketing expense.
As well as lower product development cost.
We did record $1.5 million of bad debt expense in Q3.
Which is higher than the quarterly 600000, the average last year prior to the pandemic.
Lower than the $1.9 million in the prior quarter.
Excluding the incremental bad debt expense operating expenses decreased $3 million year over year for the quarter.
This year's reduction in operating expenses surpasses the reductions we achieved last year savings initiative in already to use our full year 2020 reduction plan targets after only nine months.
These cost reductions have contributed to adjusted EBITDA in Q3 of $14.3 million and.
23.2% margin and above our guidance.
Sequentially from Q2, this performance was up $2.4 million or 220 basis point improvement in adjusted EBITDA margin large.
Largely driven by higher revenues and reduced operating expenses.
Looking at our cash flow statement.
Cash flow from operations was a record $18.7 million nearly double the 9.9 million generated in the prior year period.
That's for the quarter was $4.9 million, a decrease of $800000 compared to Q3 of last year.
As our spend on integration activity begins to diminish.
As part of the Capex in the quarter, we invested nearly $700000 in our new subscription service model.
Well, we are seeing customer demand increase for this type of offering we.
We believe our spending to support the subscription model this year will be between two and $3 million.
Investments next year would that be about $8 million.
Turning to the balance sheet becomes.
The company ended Q3 with $76.2 million in cash.
This is an increase of $14 million from the end of June.
$2 million increase from the end of 2019.
Our cash position has continued to grow this year, despite facing a difficult economic environment.
As Mark noted earlier you.
We repurchased $30 million or senior secured notes in October, bringing our principal balance outstanding down to 220 million.
With negligible interest income being earned on the cash.
We believe paying down some of our 8% senior notes.
Using our overall debt and interest expenses the right financial decision.
With interest rates at historical levels, and our business generated consistent free cash flow. We are actively reviewing our options for refinancing our remaining debt.
Let's move on to the outlook for Q4.
As you are all Delaware many areas around the world are seeing a rise in COVID-19 cases.
Making it difficult to anticipate future business trends and forecast revenues.
We also consider up customer demand for the subscription model affects the hardware sales in the short run the benefits service revenues in the long run.
Taking these factors into consideration.
We expect total revenues in Q4 to be between 60 and $64 million, we anticipate adjusted EBITDA margin in Q4 to be between 22, and a half and 23.5%.
We intend to provide first quarter 2021 guidance during the next earnings conference call in late February.
In closing.
Pleased with our Q3 performance with total revenues adjusted EBITDA and cash generation exceeding expectations.
We have been able to deliver significant cost reductions throughout the year, surpassing our original savings target, which has contributed to increased cash flows.
Well the floor to closing the on an upward trend in carrying this momentum into 2021 as we execute on our strategic initiatives to deliver long term revenue growth.
This concludes our remarks for the call and we'll now take your questions.
And ladies and gentlemen at this time, we'll begin the question and answer session Dot.
To ask a question you May press Star then one using a touchtone telephone.
If you are using a speaker phone we do ask you. Please pick up the handset before pressing the keys to ensure the best sound quality.
To withdraw your question. Please you May press star into.
Again that is star and then one to ask a question.
And our first question today comes from Mike Walkley from Canaccord Genuity. Please go ahead with your question.
Thank you and congratulations on the strong cash flow and a margin levels first.
First question for me just on the Q4 outlet Tina Thanks for giving it a shot at a lot of your competitors are seeing a lot more subs come off at not providing guidance, but you can you just help us embedded in your guidance.
Think about the net subscriber outlet.
Dean or Mark do you think there's more de activating of some subs as they move to new platform.
And do you also see some struggling verticals like oil.
Customers still turning off subs Im just trying to get an idea of maybe net subs implied in your guidance how to think about service revenue sequentially.
So you know from us from a subscriber standpoint, we're not seeing.
Customers de activating units, what we're seeing is as we move to the Orbcomm network better visibility of the subs are on the switch. So you know as an example, you know when we inherited the in thing subscriber base.
[noise] there were more cellular connections on the network then there were trucks and it was difficult to rationalize and shut those down because the old platform Didnt have the tools to say Okay. You know this is a subscriber that's not being used but shut it off without affecting.
Affecting People's operations. So you know as we get it integrated into a far more evolved platform and.
And we have more visibility.
You know we're going to continue to you know make the best choices when it comes to cash and you know in shutting off these subscribers I think it's a 200000 dollar a year you know savings you know between.
You know in costs against you know no revenues so of course anyone would do that.
From from a from a service revenue perspective.
You know, we're seeing growth, we're seeing the subscription model and its been offset by two things. The first is.
You've got a 18, she maersk number that at its peak was 6 million a year now to zero. So you know that is one the headwinds in the comp numbers that are you know, we'll get to the bottom of you know one another couple of quarters and the second is at its peak the oil and gas industry. You know was at about 16.
Million now it's at about 5 million. So you know that's about 11 million of headwinds over the last two years as oil and gas continued to contract.
And I think we've got some good news there in that you know as you kind of look forward listen the mess things at zero, it's not going to go to negative so.
You know you've kind of written that went out and that's great News and then you know oil and gas.
We didn't lose these customers, but you know you've got a big customer that has a fleet of 6000 and you know they've laid off employees and now they have a fleet of 3000. So you didn't lose the customer, but you know the fleets have drastically shrunk and you know I think in.
In addition, you had you know two bankruptcies.
In our markets, which you know affected service as well. So we don't think its going to go lower than 5 million, but if it does maybe it's four but it's most likely not going to go to zero on the positive side of that business. We shipped 2800 units in the quarter and not one of them was oil and gas we were in the ambulance business. This reimer Ics.
Breast deal.
I was.
You knew which isn't in cap deal using input.
Im thinking the cabin blue treat you know in a platform.
All of these deals are outside of that but but I think the largest impact on service revenues to give you feel for how one time. It was you know.
From Q2 to Q3 was on you know we took a dip down in Q2 because of coated and then in Q3, you got the whole quarter impact of it you know as opposed to the way came in in pieces in Q2.
Yes.
Got it that makes a lot of sense and just with a really strong cash flow generation and paying down some of the debt.
What are the next steps in terms of refinancing is there any time horizon that you have to get through or is it just the ongoing negotiations now to to refinance that debt, but kind of interest rate. You said are you seemed from the market.
Yes, So you know the market isn't what we expected the market to be so to start.
You know it is unlikely that we go back down the you know be treatable high yield market it's unlikely.
And the reason it's unlikely is you know originally you know the the company was on a a different path. When you know a few years ago. We went that route that Ah you know when you have these bonds you can keep adding onto them and as you continue to acquire companies that can get bigger and bigger.
And you know having purchased everything we needed to purchase and having all the right asset classes getting it all integrated you know M&A is not really focus you know at this time.
So you know, we don't really need that kind of you.
You know, we we don't really need that kind of a industry.
Instrument.
You know and.
As you kind of look at these you know these notes that we Oh, we have now you know there was a make whole until April we were interested in trading it out then and you know boom coded hits.
And we never really had an opportunity to you know test the markets and then as we started looking at other types of opportunities you know, mostly you know term loans and stuff like that.
You know number one we were you know really impressed with.
You know the rates that we were getting there you know significant savings versus you know where we are now but you you don't get that pulled off.
You needed a good Q3, and a rebound and to show that you're.
So you know generating a good deal of cash can you know well Orbcomm goes and has a record quarter for cash and you know kind of a you know bolstering our ability to get this done and now it's just the computation right. So you know you're going to get a savings.
You know, it's a I don't know if we're going to be paying half the interest that we were but it could be half the interest or or or so.
And now you've got a a you know a one off for call in April It goes to one or two call and we're working through that math and.
But you know I think overall, Mike the you know where Ah.
It's a great market to get this time.
Or where it has been you know, we'll see what happens over the next couple of weeks, but it's been a great market to get this done and you know where are investigating you know with running forward is.
You know as quick as we can I don't know if it's April are now were you know made but you know we are working on it.
Great. Thanks, Mark and last question for me and I'll pass it on its great to see the the cost savings come through and I. Appreciate the 21 overview with the 10 20.
View.
I know you've worked really hard on a bunch of new products and sales channels can you maybe help us rank order or any feedback on which new products that your sales force where your clients are most most excited about in terms of helping augment that growth.
So you know what you know this inmarsat thing was you know while it was complicated you know we set off.
Three years ago to you know extend our agreement and it just started at an extension Friday Pete.
And as we kind of took a look at the trends in the market knowing that we're making you know would deal through a minimum of 2035.
You know we start you know looking at what the you know markets can you need not now, but as you know in 2035.
And.
You know the the best way to optimize their satellites in a you know and everything else and we wanted to.
You know future proof the network.
Make it scalable.
Make it efficient from a satellite research perspective and.
And then there's this dual mode right. So so we wanted to you know make dual mode central to everything more come to us.
And you know I know a couple of things right I I know that the market for dual mode when it costs double.
It's about 5% of our market.
And I know you know the market if it was free and you gave away the hardware would be 100%.
So you know getting the hardware costs down through our S. T. 2100, you know get you you know something you know like a two handle in terms of the increase in price points. So [laughter] broad perspective, I know, it's going to be you know go from somewhere between five and 100, but I think.
Hopefully we could say, it's you know 25 or 30% of our deployments you know instead of you know something like 5% of our deployments. So I think that's super exciting and then you know as you change that.
You know the new deal with within Marseilles, we need to price the airtime and to change the revenue share where they're just telling you a component of the solution and not the whole solution she needed to figure out a way to you know make dual motor reality from a.
Cost points and that was a big.
Big part of the you.
The inmarsat negotiation so.
Getting the dual mode product together with the pricing together with the Inmarsat deal together with the extension through 2035 together with the you know the improved revenue share a dual mode products. You know a lot of things had to come together and its all deploying you know this quarter. So exciting you know and I think next quarter, we're going to get on the phone and.
Hey, <unk>.
You know here.
For great companies that have switched to dual mode. So I'm looking forward to having that call you know to stop talking about technology, but talking about deals.
So you know that one where were super Super excited and then the.
My next favorite is this conversion to video right. So you're moving from you know data.
If you go back to when I started.
You know you're going from blips in a map and then you're moving from there to diagnostics and then your you know.
I'm, sorry, alarms, and then diagnostics and you know the data bandwidth continues to you know get heavier in customers getting more utility out of our applications and we're a quarter away from video so opposed to a diagnostic read or a location you know or in addition to what I should say.
You know not just you know Where's my truck Here's my truck and this is what it's doing and this is the person that's entered my truck and it's not just empty or fold, but it's this fall and use of the products that we're you know we're holding in not so cool that we're going to be able to add video to cargo and video to end cap and these deals are so cool.
Are these products because you know this isn't like a dollar and a dream we real customers that are waiting for us to deploy this you know and you know demo ing. It you know real time and you know excited about this.
And these are you know orbcomms big customers and you can kind of guess who they are and you know if you look at what you're able to achieve from a revenue standpoint.
No customer by customer you know you can double or Triple you know the revenues to current customers by adding.
Adding video and that's really cool, but but but I think the you know the coolest part about it you know really is you know the ability to give the customer everything that they want you know, it's so exciting to complete their product offering and you know give them that experience you know I always say that.
You know where our goal isn't to a you know keep up with our competition. Our goal is to keep up with the imagination of our customers and I think video goes a long way to go there.
You know the way I asked device very very cool and Matt.
We've never really product types as before we just kind of you know open up the spigot import data over a customers.
And there is a new market for these small ships that you know will sooner or have started requiring.
Yeah, Hey, I guess, you know not just a you know transmit that the ability or the ability to see I guess and you're you're going to see our first attempt at you know providing hardware for that business, but you know it's also we satellite play in that.
You know these are dual mode devices that you know receive and transmit over 80 I asked but also can send alarm status through the Orbcomm network.
Because they are almost in the exact same frequency, so really adding safety and security to small ships and you know SLS alarms and stuff like that you know there are you know big and small I mean in terms of new products theres tens, but in terms of new products and features there's hundreds. So you know Gee I can.
I can kind of go on all day, if you look at like services I'm, sorry, I'm, a running a little bit but you know if you look at services. Our inside sales group did a couple of hundred thousand dollars. You know I think it was $180000 in Q1 smelling selling to small fleets by Q4, we're expecting it to be.
Between five and $600000. So again, it's off a very small scale, but but look at how it's growing.
No just a exciting, especially transportation begins through to recover.
Great well, thanks for taking my questions and look forward to a tracking the progress in all these new products.
Thanks.
Our next question comes from Ric Prentiss from Raymond James. Please go ahead with your question.
Hi, good morning, guys.
Hi, good morning.
Hey, one focused on cash flow, obviously, a good part of the story nice momentum there.
On the cost of debt.
How should we think about how much cash you need to run the business.
Right size the it turns into a term loan.
Might want leverage to be as we think of that component of cash flow.
Sure do you want to take that one yeah. We're in different reactions address yeah, yeah, Yeah, Yeah, Eric we you really I'm really looking at your cash on hand of about 25 to 30 million to run the business. We do have a number of international locations, which also need you to have some cash on hand.
Thats why that totals is where it is.
So it turns of leverage I think were going and you did this quarter at about three and a half times.
Net leverage we we would like to get that leverage down below three and.
We're targeting and in a couple of years to get that down closer to some I think some some kind of a no debt refinance with an amortizing.
The loan which is something we are interested in to go ahead and use that excess cash and positive cash flow to de lever the balance sheet over the next couple of years and that's one of the options. We are looking at right.
Okay makes sense and then Capex, obviously, another part of the free cash flow story you.
You mentioned two to 3 million of Capex. This year from the subscription model, maybe goes up to about 8 million next year, but how should we think of the components of capex, what's kind of the maintenance capex the subscription capex.
Thank you integration is done and then Mark I think the numbers that you'll probably also keeps a capex down.
When we think about the needs for future salaries, but help us think through the the capex trends over the coming years.
Yeah, Capex says has stepped down incrementally over the past few years, and we're going to be close to $20 million.
This is separate from any subscription deals will be close to $20 million. This year I'm, a sexist step down a little bit further next year as we get through some of these.
Sounds great and activities with Orbcomm platform, yeah, as far as maintenance Capex.
We we struggle with the planning of the little bit Rick because because we do have them. We're always working on the next.
The next product to churn and neo platform functionality.
But we do we do probably need to spend somewhere in the $12 million to $15 million range to continue to to maintain and innovate on what we have and then for the putting a subscription model. We were thinking something an 8 million dollar range next year I think we've said in the past five to 10 would be.
Probably where we could end up when we get this thing fully rolled out the customers that really are looked at both those models. Some are big customers like Walmart JB Hunt would not choose this model and some of our customers internationally, what would not be choosing this model either so its only a small part of the business that would be looking at this model.
So if you add up the 15 and the eight you might end up at a run rate of 23 million.
Total invested capital.
Next year or two.
He removed all such as go ahead.
I'm, sorry, I just want to follow up on your question before on a on the cash balance you know I think I'm you know Dean took your question to mean, you know what's the minimum amount of cash that he's comfortable running the company with but you know, let's say after the 30 million we in this quarter between 45 and $50 million.
Cash and we've got a a 25 million.
A million dollar revolver, that's completely untapped.
You know, obviously, we don't have cash concerns.
Right right.
Yeah.
And then as far as a satellite capex, how much of the nanos, probably pretty low and any needs longer term to invest in the satellite network or is there plenty of capacity out there, particularly with the numbers that deal.
Well for the you know that the area keeps ask you've talked about you know it's about is close to $2 million, we've already paid more than half of that so we have we have a little more than a million to go.
That'll happen next year when when the satellite's launch and you know there is.
You know there's still a.
Plan that we're looking at for a Salix going forward. We haven't made any final decisions I don't know Mark do you want to comment on on the thoughts on the satellite network long term.
Yeah, I think you know we will continue to evaluate you know what the markets are.
And you know there's a couple of ways that we can go number one we've already started deploying modems that have both satellites technology on it.
You know so going forward you can move subscribers from network to network.
And are you know we are evaluating hybrid frac plans, where you launch a couple of more cogent two satellites you know to extend the life of the network. Another five or 10 years, but these are you know good.
Good issues to have I mean, these decisions that we have to make in years not months.
Okay last one for me when we think of the Deactivations.
When did that come off was at the beginning of the quarter. The end of the quarter and then how should we think about what the ARPU trend would be no. Those subs are gone I think Mark you said the cost savings movies 200000 to that how should we think about deactivations timing ARPU trends and then even broader just what ARPU trends look like.
So I'm you know starting with the OEM you know the those issues you know started coming up in 2018, but you don't really know right I mean, what we do for them is we're trends meeting data and whether that data is you know Jewish because the units lost track of time.
Im or whether it's the data that they're looking for it's not our solution we have no idea.
So you know weve seen those units you know this customer pays on a price per byte. So as these units have you know stopped a you know transmitting and they've been shutting them off over the last.
A couple of years, it's been a headwind that we didn't know was a headwind.
You know since 2018.
You know world just like Wow, you know data usage has gone down a little bit.
And you know what's been happening behind the scenes is you know these these guys have been trying to upgraded over the air.
Which which is you know difficult to do when the unit doesn't know what time it is and went to wake up.
And also has been doing a hard switch in the field swapping out the hardware and they didn't get to most of them.
But this has been going on being on the scenes and you know just being the teller.
Telecommunications provider, you know, where we were just kind of watching this right. We're not actively contributing you know the other you know aspect of it is part of the integration plan right you're taking these subscribers from these 25 platforms.
And you're pulling them into the Orbcomm platform with better visibility and you know GE. It kind of feels like you know like you know doing a lot of lifting the logos you know that after you put it all back together, there's a couple of pieces left and what you're experiencing there is these are the couple of pieces left so you know if you're saying you know GE now that you've done.
This does it happen every quarter no. It's it's a onetime integration you know and as you pull the platform and you know that's the new way you run your business and Youve got better visibility you do better job.
And ARPU trends for the overall business.
Well you know G.I. I think.
You know what you've had is.
You know the oil and gas customers are high ARPU and news is that you know 60 million has gone down to 5 million. You. You know on roughly you know 20 or 30000 subscribers that gets shut off you know thats painful from you know an ARPU perspective.
And Ah you know so ARPU as many of you know trimmed down a little over the last couple of quarters, but going forward.
The subscription model. It is you know the real you know kind of flames to the fire on on ARPU, that's going to you know drastically expanded and this conversion from the in thing business, you know, which is again, a very high ARPU business. So you know that conversion to the other subs.
You know, even though that's been you know painful to watch you know kind of good they're moving in the opposite direction now in one of the faster growing parts.
Parts of our business. So you know I think that will be a positive effect on ARPU too, but I think he's out of pocket.
You know units you know start to get installed you know I could see ARPU is going up.
Well done it's done really well.
Ill.
Yeah. Those are certainly help and kept our ppas are high but you every year Arpus are up from Q3 last year to Q3 this year.
9% we did.
<unk> Louis those low ARPU 18 tumors subs.
It was offset somewhat by some of the higher ARPU and gas subs, but it is up year over year I would expect it to go.
Go up incrementally as we continue to build on the subscription model.
Right. So some good trends thanks, guys stay well.
Okay.
Our next question comes from Anthony Stoss from Craig Hallum. Please go ahead with your question.
Good morning, Mark and Dean my Congrats as well on your strong free cash flow Mark if I could follow up on your comment and try to flush out anymore.
Color from you you talked about many pilot trials in process can you give us any more color in terms of the number of those trials and size what kind of opportunity do you think you would lead for Orbcomm and then secondly, do the co bid as some of your customers are coming up for renewal are you seeing any request for change of prices or is it having any impact at all and.
No longer term pricing. Thank you.
Yes, so the you know.
The last thing is unique.
Because there is little hardware component of it.
But we.
We are you know in a in a full at sprint because of coated.
Where a bunch of our three g. to L.T. trade outs have been delayed.
Because you need access to.
To these assets and you know which requires travels for the customer and travel for us.
So there is a a big you know hardware.
Movement, that's going to happen between now and the end of next year to you know to swap those out so that's the bigger issue.
You know then than anything else you know I think ER.
You know are we getting you know some renegotiation I guess, you know you're always being negotiated right that's like.
But.
You know it hasn't been material you know overall.
So.
You know not so much but I think that that work is really just a really just started what was the first question that you asked.
Your comment about any piled several trials Gilligan, yeah, yeah, yeah, yeah. So we saw a.
Our high point for pilots was 20 team.
And 2018 was a very good year for transportation and then are you know whether it was the tax rules or you know I'm not sure what created that transportation glad I think there were a lot of you know factors. The 2019 was you know we slowed down you know when the transportation market to a point where [laughter].
Here, we are the quarter after coated.
And were up you know in truck sales, 142% over last year, you know he noncovered year, I mean, if that number isn't like shocking the heck out of you do you know that I don't know what will.
But you.
You know every you know every unit starts with a pilot and you know every pilot starts to a smaller you know leads to a smaller rollout and then a complete fleetwide rollout, but you know maybe I'm fielding triple the pilots that I was at this time last year to give you a feel for just how strong it is [noise] I sit on the.
The critical pilots call with my team every single week and you know a a call that used to take 15 minutes has taken an hour and a half. So we're super excited about that.
Great. Thanks, Mark.
Sure.
Our next question comes from Scott certainly from Roth Capital. Please go with your question.
Hey, good morning, Thanks for taking my question and nice job guys and declining operating environment, particularly on the on the cash flow front. He just did to follow up on a couple of questions. You provided some color in terms of the mix of business as it relates to oil and gas I was wondering if you can give us an idea about heavy equipment as.
As well have been some headwinds on that front that you called out how big is that business is that bottoming as well.
And as part of that sounds like transportation is starting to come back youre seeing that from various Oh, my indexes and otherwise and utilization and pricing.
Want to confirm that that was up sequentially and then as were looking into the fourth quarter. It sounds like you put it all together recurring services should be up sequentially just want to confirm that.
Yeah, that's our thought you know I think.
You know I I think you know as we can as you kind of look at the numbers you look at recurring service from you know Q2 and Q3.
You know I I get last quarter, you know why its down a little bit this quarter.
And I I think it really is that full quarters worth of last quarter's effect and you know service revenues were a little slower to go up but you know years, great news there really slow to go down which is why we're generating so much cash.
So you know I think it's going to bounce back and go up and he Oh.
Let's see cobiz or some crazy times.
But I don't know that recurring service has gone down in 10 years. So.
Maybe you could pick out one quarter, but I don't think so so just to give you a feel for how stable that model is and you know why we think a you know we're in a really good path and why those headwinds are behind us.
I got good news and bad news for you in heavy equipment right.
You know in terms of heavy equipment not viewed over the last quarter.
You know the industry is down in terms of units about 26%.
You know year over year up but you know orbcomm is on an awful lot more model lines than we were last year, you know, making heavy equipment, what kind of flat now what kind of things about that is you know here. We were expecting this you know large increase because you know look at these great new model lines that.
You know we are getting on it you know terex in jail GE and you.
You know you know super exciting stuff and then it kind of looks like you know flat business Bill.
Because the you know some of those core models that weve been on for a while you.
You know aren't selling as much but.
You know, we're not getting like this out you know massive drain and not in a heavy equipment you know it kind of looks kind of looks flat.
Heavy equipment can be a little bit lumpy.
In terms of hardware shipments because they don't you know sell a backhoe and then you know order or sub you know I'm, sorry order piece of hardware you know they they keep a huge amount of hardware on the hand, and then you know when cove it hits they stopped buying and hardware shipments you know can can drastically.
Flow down, but there's still eating away at the inventory. They have and then you know at the end of it eventually comes another shipment. So over the course of the year, you're fine, but it can be a little lumpy by quarter Gotcha, and if I could just follow up on the Oh.
The new targets of 10, 20 or top line growth EBITDA growth looks like net you're right. We're starting to set up for recovery and easier comps did a lot of new products coming when do you start to think you hit that model you certainly do you need Oh Gee action 22 to get to that type of a topline growth, particularly on the recurring front end as well.
On the new product hardware front, just want to confirm you guys are still targeting the same gross margin about targets are 30%. Thanks, you know.
Scott we looked at your model and your model it kind of looks like 10 and 20 next year.
You know you're already there aren't yet so you know it does at this point I Wouldnt change my model at all so I think we've got Tailwinds tailwinds are the new products and the new services and you know.
You've also got a natural recovery from coated.
You know I you know, maybe Q1 looks you know kind of a flattish, but Q2, we're going to be up right unless there's either you know one hell of a of a second or third wave.
So you've got that.
You know that Tailwinds, you've got new products, you've got one little headwinds you you know, which is you know really isn't a headwind in the business. It's just a headwind in the 10 and 20 and not be subscription model.
Pulls hardware sales and.
Then recognizes it as service over three or four years. So once you do $8 million of Ah Ah you know subscription we mean, when we say 8 million were talking about you know the cost of the hardware that we're capitalizing you know we're looking at it the way a finance guy would not the way a marketing Guy would right you know that.
$8 million, but that $8 million also you know kind of polls from you know it pulls from your hardware sales you know and recognizes it. So that's the one little headwind in terms in terms of 10% organic growth, but I think as you kind of way you you know the tailwinds with the headwinds you know.
We think the 10 20 is a you.
You know something that starts in 2021.
You don't need of Gx, although that will certainly you know help in the future.
Great. Thanks, so much.
And our next question comes from Matt well from Baird. Please go ahead with your question.
Hey, guys lots of questions have been answered, but mark maybe one big picture one for you.
You talked about the complicated nature of your dealings with Inmarsat [laughter], what's your longer range view for the company did did it ever make sense in those conversations for Inmarsat, just by you guys or how do you look at where the company goes from here.
You'd have to ask that Inmarsat right you know no we never considered inmarsat buying us in his view.
You know look look at their current strategy.
I don't know you know that they could or would make sense. So you know not not a consideration, but these you kind of look at the.
The Inmarsat business plan in Orbcomms business plan.
You know there are some incredibly complementary skill sets there where you know they understand satellites they understand their satellite resources. They understand government you know channels, a whole lot better than we do.
And what what Orbcomm understands is aiotv in hardware in battery efficiency and ROI from a customer perspective. So you know US building you know this private network.
You know that you know kind of lives onboard their satellites made perfect sense.
And you know if you look at I'd P., you know, even though we kinda partner and pay them you know for it it was not the partnership that we have with Inmarsat today in that you know Orbcomm you know had our access to IP and did our thing and they did their thing and there was very little overlap.
You know looking at the way the relationship looks now with Inmarsat is one set of hardware projects. It's orbcomms hardware, we both have access to it we both enjoy in share in the scale and when they went to sub there's upside for both of US when we win a sub there's upside for both of US and it's a you know it's a good.
It's quite a a well struck marriage and took three years to kind of dream it out.
You know and how we deal with you know dual mode subscribers and how we deal with solution subs and you know how we deal with hardware sales and how we sell through their channels and.
You know it came out and we like where we are you know right now and not I don't know that I would change that relationship at all and if you have a little time on Monday.
You know you can get a little a little more from that.
Are you in terms of you know where we are the company you know evolves you know and should there be some sort of acquire what we're a public company you know where a are you know in I O G company, where a a satellite company what all those things haven't come in you know eventually you know they do get across.
Fired.
I think you know the struggle you know that some of the people have you know with you know Orbcomm is a you know the satellite guys look at the satellite assets do you guys look at GE assets and you know the way we're kind of baked into one is it was a little bit odd compared to you know other oh.
There are companies out there, but you know more and more every day you know GE were kind of looking like an asset light you know I O T software company aren't we.
So you know you know maybe moving in that direction, but you know I don't focus on that what I focused on is you know improving you know improving my share profit price for my investors you know among safety for employees and a million things you don't want to hear about but.
You know one is as you kind of you know worry about you know were common share price and everything else. There's three ways you know I can affect the business right and you know we trade on a multiple of EBITDA. So from a multiple perspective, you know the largest contributor to the multiple is growth and you know we're going to show you broke up that's the goal we're going to show you growth we've always.
He is grown we took a year off to integrate we you know it was you know he got even more complicated because of the transportation slowdown and you know we're gonna grow and we think that will affect the multiple you know we're a multiple of EBITDA. So we need to continue to grow EBITDA and that's what we're you know that's what we do when we do it almost every year you know they'll be me.
Be a little tick down this year, you know because of coated but you know we can we can show you you know rising EBITDA, whether we do it through cost we do through margins, we do through growth at all get to EBITDA in the third thing we can zoo or we are doing to affect our our share prices.
We're going to creep our market cap, you know closer to our enterprise value by de levering The company and I don't think we've talked a whole lot about that in the past, but it's been you know very central to this call and because the world changed right. You know the market has changed worldcom, you know ability to generate cash has changed the way.
The banks look at Orbcomm has has changed and.
You know we're in the process of de levering, we'd some questions. You know Gee you know you to what is your used for this capital you know this $30 million.
And you know I guess my answer is you know we have an opportunity to take cash on our balance sheet that it doesn't even generate a percent you know generates fractions of a percent and I have an ability to take down you know 8% notes shirt you do it right you know in especially in a in an M&A light environment you know strategically.
So that's the future orbcomm, but I see it that's very helpful. Mark. Thank you very much tort. Thanks.
And ladies and gentlemen at this time there are no further questions. The company. Thank you for participating on the call and look forward to speaking with you again when they report fourth quarter results in late February.
Good day.
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