Q4 2020 ORBCOMM Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to web Coms fourth quarter 2020 results conference call.
All lines have been placed on mute to prevent any background noise. After.
After the Speakers' remarks, there will be a question and answer period.
Ask a question you May Press Star then one and you touched on song to withdraw your question. Please press Star then two please.
Please note. This event is being recorded and a replay of this conference call will be available from approximately 11, a M eastern time today.
On March 10th 2021.
The replay service details can be found in today's press release. Additionally, orbcomm will have a webcast available and the investors section of its website at www Dot Orbcomm Dot com.
I would now like to turn the call over to Ali EMEA Orbcomm as Vice President of Investor Relations. Please go ahead.
Good morning, and thank you for joining us today I'm joined by Marc Eisenberg, Orbcomm as Chief Executive Officer, and Dean Milk Kos Orbcomm as Chief Financial Officer on today's call Marc will provide some highlights on the quarter and give a strategic update on the business Dean will then review the comps.
<unk> quarterly and full year 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 SEC filings for a full discussion of the risks and uncertainties that pertain to these statements or comments assumes no duty to update forward looking.
Furthermore, the financial information and we will discuss includes non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures is included in our press release at this point I'll turn the call over to Marc Eisenberg.
Thanks, Sally and good morning, everyone.
We finished 2020 strong with Q4 coming in at the high and if our guidance for both revenue and adjusted EBITDA margin.
Net subscriber additions bounce back to about 55000, and bringing the total through 2020 to over 170000.
While the pandemic caused significant disruption we showed our resilience we made major strides and the integration of our 12 acquisitions by moving to a single ERP platform going live and our two customer facing web platforms and rationalizing our product portfolio.
In addition, we expanded our agreement with Inmarsat, extending our partnership expected to last through at least 2035, we began rolling out and many of our newest products some of which have already begun to hit the market.
And just last quarter, we significantly improved our capital structure with a new debt facility that dramatically reduces our interest payments clearly it was a busy year and we're emerging from this pandemic as a stronger more agile company with good momentum and strong financial results.
Earlier. This morning, we issued a press release announcing our financial results for the fourth quarter and full year ending December 31 2020.
Total revenue for the fourth quarter was $63 8 million.
Up sequentially from Q3 as hardware sales continue to recover.
Higher service and product gross margins combined with effective cost management led to Q4, adjusted EBITDA of $14 9 million or a 23, 3% margin.
And as a reminder, we guided revenue between 60 and $64 million and adjusted EBITDA margin between 22, and a half and 'twenty three and 5%.
The combination of being at the high end of both revenue and adjusted EBITDA margin led to the increased levels of adjusted EBITDA and <unk>.
The improvements in revenue and adjusted EBITDA also contributed to another strong quarter of cash flow generation in Q4 operating cash flow was $9 million, which brought our full year cash flow total to over $48 million a new record for the company.
This not only demonstrates the resilience of our business to withstand a difficult macro environment.
But should also support further cash flow generation over time.
The scalability of our model is our business focuses on future growth.
Beyond the record cash flow as I mentioned earlier, we have completed our debt refinancing, which is a major milestone for the company, providing us with greater financial flexibility converting about $20 million a year and interest expense.
Two 8 million and interest expense and approximately $12 million and principal reductions.
This refinancing enables orbcomm over the next five years to significantly cut debt levels by nearly half and reduce our net debt leverage to negligible levels.
Let's move on to our future growth initiatives as a reminder, from last quarter with the integration mostly behind US. We have now transitioned to the next phase of work comes evolution, which is centered around innovation for long term growth.
We call. This our 10 and 20 initiative, which includes three key areas launching new innovative products, adding new channels to market and developing incremental offerings.
Our 10 and 20 initiative is focused on achieving our long term annual targets of 10% organic revenue growth and 20% adjusted EBITDA growth. Many of these efforts are underway and starting to yield results.
Starting with product innovation, we launched our two next generation dual mode telematics devices and Q4 targeted for a wide variety of Iot applications. The first is our satellite is and accessory that we discussed last quarter, which provides customers a cost effective way to add dual mode connectivity to almost any or.
Calm telematics or third party device.
The second is a full dual mode telematics device, which has embedded cellular and satellite connectivity, primarily geared for fleet management and vessel monitoring and better utilization of construction and utility equipment.
This device also uses orbcomm as new global Sim to enable multiple cellular network connectivity options with one SKU, providing customers with reliable and cost effective communication and most areas of the world. We currently have over 90 customers developing on these two products.
In addition, we're launching multiple other products over the next couple of quarters, including our new video solution for the and cab market, which has been well received by customers and field trials, who are seeing the benefit of advanced AI drivers safety features to help decrease undesired behavior, such as heart stops lane driven sales.
<unk> and other traffic violations.
We're beginning field trials and Q1 for our cargo camera solution and expanded portfolio of sensors, which enables visibility and control for remote monitoring of assets and cargo condition. We believe these products will drive market share and organic growth as they gain traction throughout the year and into the future.
Turning to new channels to market, we're seeing increased activity with our inside sales team, which added over 100, new small to medium sized transportation customers last year, our inside sales revenues quadrupled in 2020 with the staff increasing and size. We're now expanding their focus to include small.
And mid sized fleets in the intermodal container and heavy equipment markets, where we see good potential for growth.
Just this week, we announced the project exactly a large construction firm and North America to monitor about 500 of their heavy equipment assets. Historically orbcomm sold heavy equipment exclusively through Oems Zachary is the first large opportunity sold directly into private fleets.
Our third area of focus centers around enhanced customer offerings. One of our latest service offerings is our subscription model, which bundles hardware and service costs and to a single monthly rates. We started offering the subscription model to transportation fleet customers last year and have seen demand increase over the last few quarters.
We're pleased to have won a number of new subscription opportunities and Q4, including <unk> motor freight a great double play opportunity to monitor their reefer, and dry assets and TLD logistics, who selected our in cab solution to improve their fleets ALG compliance and driver safety, we believe the subscription model.
Offering is proving to be attractive to a variety of customers.
Moving onto and overview of market conditions, we're seeing momentum as the global economy shows continued signs of recovery from the pandemic.
And the transportation market continues to improve with new builds and freight volumes rising occur.
According to ACG research and FTR transportation intelligence, New OEM orders, and Q4 increased 98% for trailers and 144% for trucks compared to the prior year keep in mind after customers place orders for new trucks and trailers, we typically see new purchase orders for.
Our products three to six months later.
The container market continues to perform well with shipping line companies benefiting as a result of increased intermodal cargo demand.
And heavy equipment OEM builds are down year over year, but signs point to a modest recovery in 2021 and Q4, we shipped over 76000 devices to customers across vertical markets, including 30000 and transportation nearly as an additional 30000 and our satellite business and <unk>.
Thousands refrigerated container customers.
As markets continue to recover the number of devices, we ship should also improve.
Looking at our transportation business, we closed a number of opportunities and Q4, including food transport, perhaps mid transport and the coal transport dollar general convenience transportation Rambler trucking SDL transport innovate and <unk> freight on <unk>.
And transport EG, Great transportation, Conagra brands free and logistics Lackner Rodriguez enterprises and capital distributing many of these wins are double and triple plays that involve multiple asset classes and enable our customers to have complete visibility and control over their operation.
And through our single unified platform.
We're also making progress and converting many of <unk> enabled devices for customers and preparation for the sunsetting of <unk> wireless service expected to start shutting down at the end of this year.
Some of Orbcomm customers and the process of upgrading include hub group Prime Knight Swift and CNS wholesale.
This effort involves upgrading existing assets with Orbcomm is latest LTE asset tracking products, providing customers and advanced Iot solution for many years to come.
We expect to swap out as many as 60000 devices and 2021 and anticipate many of which will leverage our subscription model offering contributing to higher recurring service revenues.
In Q4, we are pleased to have been selected as the prime for a single award multiyear contract for up to $45 $6 million with the U S Army.
Through this contract Orbcomm is providing cellular satellite and dual mode devices and connectivity for the government's next generation transponder program to support their mission critical logistics and asset management efforts for government assets. This is an exciting win for Orbcomm and we look forward to providing our <unk>.
<unk> Iot technology to the U S government over the next four years.
I wanted to take a moment to talk about the global component shortages that you've probably been hearing about.
And the impact on Orbcomm we.
We experienced a number of component shortages over the last year, but as a company. We typically inventory a number of long lead items. So prior to Q1 and 2021, it's resulted in little financial impact.
As you probably noticed our inventory is now down to three year lows as we've worked through this long lead inventory.
Our engineers have designed around many hard to obtain components and.
And today, we are predominantly focused on LTE chipsets.
Many of work come cellular based products come in a north American and global version and the global version operates across most of the world's cellular frequency bands and North American version has been far more difficult to source and we've been able to fuel our global version to domestic customers without interruption or change and.
<unk> and.
In some cases, we need to get further approvals from regulators and cellular carriers to sell these alternate skus across various geographies, which takes time, which should be concluded towards the end of Q1 or the beginning of Q2.
And as a result, we anticipate approximately $2 million to $3 million of product revenue that was expected and the first quarter, but due to the uncertainty of timing could now slip into the second quarter that being said, we'll most likely achieve analysts' consensus for Q1 revenue anyway.
Overall, we are extremely pleased with the work from our production team and navigating through a difficult environment and we are confident that we have dealt with this shortage better than most.
Summing up we.
We're pleased with our financial performance and the momentum we're seeing as we begin 2021, we've made significant strides and our integration efforts expanded partnership agreements and achieved record operating cash flows despite a challenging macro environment.
With market showing signs of recovery, new product launches scheduled and a strong pipeline of opportunities we are well positioned to execute on our 10 and 20 initiatives and build a strong foundation for 2021 and beyond.
With that I'll turn the call over to Jim to take you through the financials.
And thank you Marc and good morning, everyone and.
We continue to make progress on multiple key initiatives with our financial performance in Q4 coming and at the high end of our guidance range.
Total revenue for Q4 was $63 8 million.
<unk>, 5% sequentially from Q3.
Product sales and the fourth quarter was $24 $7 million and 12% sequential improvement as customers continue to ramp up business and never closed in Q2.
And total we shipped over 76000 devices and Q4.
And is approaching our pre pandemic quarterly average and was 10000 more devices and we shipped in Q3.
You put service revenues and $39 $1 million with recurring service revenues of $36 8 million up sequentially and 400000 from Q3.
And Q4, we added over 55000 net subscribers greener.
Bringing our total billable subscriber count to $2 2 million at the end of December 2020.
And the rest of the 4% increase over the number of subscribers and ended with in 2019.
Look forward to turning to higher subscriber growth as customer demand for Iot solutions continues to increase.
And the gross profit margin.
Your line is a margin of 52% and the fourth quarter.
The 70 basis point improvement over the prior year period.
Given up higher by a higher mix of service revenue and also higher product gross margin.
Our net margin in Q4 was 29, 8% and improvement of 60 basis points over the prior year period, and 80 basis points sequentially.
And margin improvement was primarily driven by reduced standard product cost and other and address expenses.
Q4 service margin was 67, 6%.
And 60 basis points from prior year period, and up 20 basis points sequentially from Q3.
Operating expenses in Q4 were $31 8 million.
The decrease of $1 1 million compared to the same period from 2019.
The year over year improvement was primarily driven by lower travel and entertainment and labor costs as well as lower product development cost.
We recognized nearly $1 $3 million of bad debt expense in Q4.
Turning to normalized levels and the back half of this year, which historically closer to 600000 a quarter.
Sequentially higher revenues and reduced operating expenses led to adjusted EBITDA in Q4, and $14 $9 million and <unk>.
And three 3% margin, which was at the high end of our guidance range and up sequentially $500000.
Turning to our cash flow statement cash flow from operations was $9 million and Q4, marking our 10th consecutive quarter of positive operating cash flow.
Unusually high interest payments of $14 million me and the quarter as well.
And retire the senior notes and pay the first month and the new debt.
Capex for the quarter was $3 9 million a decrease of 900000 compared to Q4 of 2019.
As Marc mentioned earlier, we're excited to have completed the debt refinancing in December.
This transaction extensive replacing our outstanding high yield senior notes with a new $200 million five year term loan and a $50 million revolving credit facility.
And of which $20 million and strong in December.
The new arrangement of results and a number of benefits orbcomm.
Firstly and reduced our total debt balance by $30 million.
Second we are able to reduce the interest rate from 8% to starting level of 375% savings.
And anything about $12 million and annual interest expense and 2021.
More specifically our interest rates as close of LIBOR plus two 5%.
With a 50 basis point floor, and the spread and go lower as our net leverage ratio improves.
Most importantly, we share debt service payments from paying $20 million and annual interest.
And making similar payments that split between interest and principal.
And the deleveraging our balance sheet and positioning orbcomm for greater financial flexibility and the future.
Looking at the balance sheet. The company ended 2020 with $44 million of cash and a sequential decrease of about $36 million from the end of Q3, but that doesn't really tell the story, let me walk you through the main cash drivers and the quarter.
Total repaid 10 million semi annual interest expense and also pay down $3 million and our senior notes.
In December we paid nearly $9 million fleets the call premium on the remaining senior notes.
The $10 million.
And debt refinancing fees.
And $3 million of interest accrued from the call date and.
Another 700000 of interest with a new term loan and volume for the month.
And to finalize the cash outflows you spent just under 4 million and the fourth quarter for Capex.
Partially offsetting these outflows and it really strong approximately $24 million of cash generation from operations.
And for all of the noise associated with the net refinancing this was a pretty awesome quarter in terms of operating cash flow generation.
Now, let's turn from our full year results.
Total revenue in 2020 was $248 million compared to $272 million and 2019.
As we've mentioned previously the global pandemic impacted our product revenues from the second and third quarters.
As many of our customer deployments were delayed.
And as a result product sales and 2020 and were just under $91 million and service jams and 2020 remains stable at $158 million.
And 2020, we laid out of the cost reduction plan and a $4 million spread across cost of service cost of product and operating expenses.
All of which was incremental to the $2 million and cost savings realized in 2019.
And please you reported that we doubled our $4 million savings goal in 2020.
Number of our customers, who were negatively affected by the pandemic or the oil and gas industry slowdown.
Let us to unusually high levels of bad debt this past year.
And 2021, we expect net debt to moderate and likely offset expected increases from 2000, twenty's low level of travel expense.
As a result of the cost reduction this initiatives coupled with improvements in gross margin full year, 'twenty and 'twenty adjusted EBITDA was $55 million and <unk>.
Two 1% margin.
I'd like to remind everyone that Q1 of 2019 included a $2 million favorable net benefit associated with the <unk> earn out.
And we exclude this favorable net benefit and adjusted EBIT margin in 2020 remain relatively consistent with the 2019 normalized basis.
Thank you and the cash flow statement regenerating and New company records catastrophe from operations of over $48 million and 2020.
This is significant and $18 million improvement over 2019, even and a challenging year with reduced product revenues.
This strong cash flow performance clearly shows resilience from our pumps business and high margin recurring service revenues.
Keep in mind, we are anticipating a significant reduction in interest expense from 2021.
Let's move onto our outlook.
Continue to see some level of business disruption from the uncertain macro environment.
Even though we have visibility and some significant number of purchase orders and the.
And the pandemic as low as a global component supply shortage and makes it difficult to forecast the timing of revenues.
Therefore, we continue to provide quarterly guidance and at this point, we will not provide a full year outlook.
With that noted we're seeing customer demand for Iot products and solutions at high levels, the component shortage and around the world.
Actual revenues in Q1 between $2 million to $3 million.
And the results we expect total revenues in Q1 to be between 61 and $65 million.
Keep in mind Q1 is seasonally our lowest revenue quarter of the year.
We anticipate adjusted EBITDA margin in Q1 to be between 21, five and 22, 5%.
You and margin is typically lower considering the higher seasonal costs and started share.
Assuming the middle of the adjusted EBITDA range. This would be a 370 basis point improvement over Q1, 'twenty and 'twenty, we normalized from last year's one 9 million and solely to consumers revenue.
While we intend to provide more specific second quarter guidance. During next earnings call, we anticipate significant comp increases and that quarter.
In closing we are.
With our two core performance with total revenues adjusted EBITDA and cash flow generation exceeding expectations.
We've reduced operating expenses achieved record cash flows and taken major strides to improve our capital structure and significantly reduced annual interest expense.
We closed the year on strong note and have great momentum entering 2021, and look forward and students achieving our 10 and 20 initiatives.
This concludes my remarks for the call and we'll now take your questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
And this time, we will just pause and materially too simple a roster.
And the first question will come from Ric Prentiss with Raymond James. Please go ahead.
Thanks, Good morning, guys, who can continue to be well.
Good morning, Rick.
Sure.
First question I've got the army contract.
Sounds pretty interesting can you walk us through maybe a little bit of the pace and what you think.
And that might play out what kind of margins that could bring and as it does it just products or as their services.
Alright.
Products and connectivity.
So it's product plus the associated airtime.
So that includes cellular satellite and dual mode airtime.
And plus the <unk>.
Product.
And I don't know that we can comment on the exact margins.
But they're not far off from from normal margins.
It's we're already starting to ship limited amounts of product.
But there is some development that were in the.
Process.
Completing for the U S army, including.
You know a web interface that.
Allows them to.
Change the settings on board. These are these units even though the.
The web platform.
And customer facing web platform.
We are integrating into a.
The U S Army and.
Interface, so theres, a little bit of work to be done we're starting to sell.
Uh huh.
Hundreds of units and.
And we anticipate it will be you know thousands of units by the back half of the year.
Alright.
Contracts.
And you mentioned and the inventory situation, you're managing through is there any difference and kind of the product margins by using the global chips, instead of and North American chips.
Yeah.
A buck or two.
It is not.
Drastically different I mean, maybe.
It will cost us across the.
And tire business, a quarter of a point and margin or something but.
You got to keep the customers happy and this three G replacement is significant and we've got a year to get it done so.
And we've got to get those products out there.
Sunset and Sunset, yes.
And obviously a large part of the story here is the free cash flow story, and you've laid out a lot of what you've done on the debt side help us understand where you see capex heading.
Both for the subscription model, but also the total capex.
Sure Dean you want to take that one.
Yes, yes, sure Rick we think capex, excluding subscription will be pretty stable with 2020.
About 18 and half million and right now, we're expecting subscription model investment to be somewhere between $7 million and $9 million.
But it depends on how quick to customer uptake is on the customer side.
Okay and.
You mentioned, obviously the refinancings the spread can come down as the leverage comes down.
How do you think about leverage heading down and at some point does leverage get too low and you wanted to stay somewhat levered.
Yes, right now our net leverage ratio is about 3.2, and and what Wendell and when the ratio comes down below three we listen and a 25 basis points on the spread with our term loan.
But at the end of five years, we do expect to pay down the remaining balance right now by about half and.
That would get us down to some negligible level of net.
Net leverage ratio.
And it's just something that we have to keep keep monitoring I think being in the and the one range Rick is kind of appropriate for us.
Idiot solution company that we're driving towards.
And that did something we manage every year.
And does that allow us and flexibility for stock buybacks to us and monitor what's happening obviously, the stocks had a nice recovery from the COVID-19 deaths, but his.
And the stock buyback something else those option and the long term.
And the long term it just gives us a lot of financial flexibility.
Whether it's a <unk>.
Buy back and like we did two years ago or whether it's the larger investments somewhere it just gives us flexibility to do those types of things and the future.
I guess that Tees up my last question, sorry from excuse me couple of rapid fire ones, but obviously M&A you've seen it up from me there Mark what are you thinking about the marketplace do you need any acquisitions people love seeing the execution, you're doing but how should we think about.
Large M&A and and when you might have the appetite again.
So we're trying to achieve the record Rick.
Guinness World record from converting analysts in Q2 from do you have enough cash to what are you going to do with all your debt and cash.
And we've got there.
There is there is.
No M&A on the books this year for 2021.
We've just been through a very difficult integration.
We got it done and the company is behaving exactly the way we would hope.
It would and.
And.
I mean, you could see it's become easier for us to forecast with less skus.
And of these quarters across platforms and.
We're.
Really focused on these multiple new products that we really wanted to.
And kind of an ace out there with customers.
And I don't know that we can ingest something on the M&A side and pull off is 10 and 20 plan.
In 2021.
And do it well so we're not really considering Emma.
M&A this year.
And the out years, maybe but.
Just not just not this year.
That's a good plan and execute and deliver so appreciate it and stay well guys.
Thanks, Rick.
And the next question will come from Mike Walkley with Canaccord Genuity. Please go ahead.
Okay, great. Thanks for taking my question and hope everybody is healthy and well on the call.
And Mark just wanted to follow up on the 10 and 2000 and targets.
Realized and that can supply issues and uncertainty around the pandemic.
But can you maybe talk about the 10 and 20 potential for Ya man This calendar year and he has given to easier comps.
Start to lap and then on top of that you have all these new products coming into the to the model how should we think about that.
Impacting growth throughout the year. Thanks.
Yes, I mean, we're kind of riding into a you know a little bit of a perfect storm here right.
Got very easy comps, especially in Q2.
Sorry, I Shouldnt say, especially in Q2, starting in Q2.
And you've got these three G replacements and.
There's a lot of exciting stuff the reefer business is on fire.
Seeing growth and the transportation macro industry, you know that we really haven't seen since the end of 2018.
There's a lot of stars aligning and.
Wow, I mean I'd be disappointed if we didn't grow 10% this year.
You know really disappointed and then with all the work that we did.
And you know around cost reduction and the efficiencies and getting.
And getting this integration done.
I think.
Pretty easily youre getting to see adjusted EBITDA growth for every one point of revenue.
Our revenue growth so we're comfortable there.
And I had to take the over under on the 10 and 20.
Gee I'd take the over but.
I am focused on.
And I think we've got a pretty good handle on the component issue you know based on our global variants and other stuff and you know we.
We're not kind of reliance on third parties to reengineer, we do it in house, we submit for own regulatory approvals and Theres a lot of bench strength here that we can kind of fix their own problems. So we're confident so.
If I make a bad I changed this year yet.
Great that's helpful and Marc maybe way to flush it out and the other way on the 10% growth side.
A lot of tailwind you talked about and just.
Organic growth so how should we think about just the organic growth of the business and then maybe you can layer on top of that you know I know, there's different timing of when new products hit, but if you just look at new products separate what could that maybe add to growth based on what youre hearing from field trials and your anticipated timing when they might hit the model yes.
Yes, I think it could be 4% to 5%.
These new products as you know and unfortunately, and our industry you know it's like that.
<unk> hundred 5500 rule customer tries five they moved to 50 before they get to 500 and that takes a couple of months to get them converted the good news is once you get them on those new products, our churn is like 7% and year.
So.
It's a little bit of a lung.
Cycle in terms of selling it but there is a massive tailwind and so you do.
So I would say it's there.
And understand I think.
And when we talk about the 10 and 20.
Converting Dean said, seven and $9 million of product at cost.
And to the subscription model so seven to nine and cost is what 12% 13 at retail and then 12 or 13 and retail is something like 4% right there right.
And that we're compensating for so 10, and 20 isn't really 10 and 20 years.
And it's.
<unk> and 'twenty.
And.
Alright. Thanks last question from me and I'll pass the line just a couple of clarifications and Dean I think you mentioned it.
Q1, without the supply shortages you could've done with it two to 3 million can you just clarify that and then also just on operating expenses going forward. It was better than expected on the execution at least relative to my model and Q4 is that a good run rates for Q1 or are there. Some things I think you mentioned, some higher salaries or something that would come back and.
And our model and Q1 implied in your guidance. Thank you.
Sure, Yes, yes, we mentioned on the call.
And $3 million of a potential.
Cash because because the components are maybe not available to do the full build for the March purchase orders, but low.
And we're still chasing chasing those components and seeing what we can do.
On the operating expenses.
We do expect our SG&A to be relatively flat from.
From 2000 points doesn't and 2021.
And I don't really expect and any any growth and SG&A for the full year.
And and maybe close to <unk> development as a small increase from last year, something and a 5% to 6% range, but operating expenses are going.
And going to be relatively consistent and in 2021.
Great well congrats on the strong execution and.
And look forward to another good year for you guys. Thanks.
Thanks, Mike.
And the next question will come from Anthony Stoss with Craig Hallum. Please go ahead.
Good morning, Marc and Dean my congrats as well and the continued strong execution and getting the integration behind you Marc.
I wanted to focus and on the dual mode products you were talking about I think you mentioned there is 90 customers that are in process of design and good Ed.
How important are these products for new customers, maybe if you can give us the mix of existing versus potential new customers within that 90.
Tally and then presumably with the satellite functionality that this would imply likely larger customers.
Any details you can share related to that and then I did have a follow up.
Yeah, So the 90 kind of <unk>.
Following that $5 5500 roll rate.
So it's a small amount of units right now you know as these guys get their development and John.
And the dual mode is theirs too.
Separate and distinct customers for it number one is our reseller network and.
And basically are selling satellite connectivity and a modem or a telematics box to a third party seller typically these are international folks.
And.
We see a really good market for that but probably the largest user of.
This dual mode service is going to be Orbcomm itself.
And.
And that's literally our transportation customers.
And coming off of <unk>, Sunset, saying, Gee I'm never going to deal with that again, let me.
Get a dual mode deployment.
You know through our channel and.
And we've closed some <unk>.
Super exciting deals here already.
None that we're able to talk to you on this.
Paul but.
Thousands of them and.
And.
Yeah.
And I think.
I think the trick and dual mode as you know.
How do we turn it from 2% of our deployments to some larger number 20%, 30% 40% of our deployments.
And that's really the game changer, there because then orbcomm has.
A.
In a competitive advantage that really no one can can touch certainly at the price points that we're at.
And B.
And just better service right. So.
I think it's exciting it's a game changer. These price points that we're talking about for these products.
From a hardware perspective, I don't think customers have ever seen.
Anything like this and it will definitely affect the elasticity of the market.
Got it and then Mark following up on I guess Dean commented that he doesn't expect SG&A to necessarily go up this year after having doubled the sales force and 2020 are you comfortable that that's the right level to take a board for the next couple of years.
And then lastly, if you wouldn't mind, taking a shot you your sub growth continues to be quite strong any guesses, where do you think you exit calendar 2021 in terms of number of subs.
So he said we doubled the inside sales staff not the sales staff right.
Right right.
So the inside sales staff and when we say double it and I think we.
We went from like three to six.
Which is why youre not seeing massive.
Increases in.
And SG&A.
And.
Most of our sales.
Historically, you have been through these large customers or Oems that don't require a large staff or internationally, we mostly sell through a reseller network, where they are typically the ones that are adding staff. So.
Again, that's why we've got this incredibly scalable model.
So that's.
And so that's kind of the way.
The way we're looking at it.
What was your next I'm sorry.
And just a bunch of 2021 day.
And our subs.
So.
And my guess is and the.
First quarter.
Should be at least as good as Q4, probably a little better.
In terms of subs.
And we're about two thirds the way into the quarter and.
We're probably looking at like a 40 number right now with a whole month to go so were trending just a little bit better I looked at it this morning.
But it should creep back you know closer to the 60 and 70, thousands which is.
And where we used to.
You know kind of where we used to live right before the pandemic and then you know at some point John.
Hopefully it starts creeping forward.
Six or 7% and year.
So that we can achieve our 10 and 20 plan keep.
Keep in mind.
New products.
And.
New Skus are also going to end up meaning more and more subs.
Thanks for the color best of luck guys. Thanks. Thank you.
And our next question will come from Mike Latimore with Northland Capital markets. Please go ahead.
Great Thanks, and congratulations on the year.
Okay.
I guess Mark you touched on the sub.
Some commentary for the year, what about how do you think <unk> sort of trends throughout the year here.
Arco should remain relatively constant and you know I think.
You know I think what we're focused on is mix when it comes to <unk> and.
And mixed means two things in my book it means.
Subscription versus selling the hardware upfront generates five far higher <unk>, but as you heard me say its on three or 4% of the business. So it moves.
Nichols, but not times our quarters.
And.
You know I think also.
Mix.
We're selling a little bit higher percentages of and cap versus the basic trailer and as that stuff.
And a steps up that can affect our foods as well, but if you are expecting like massive moves and our booth.
It's really hard to move a base of $2 2 million subs.
Every year, let's say you're adding.
253000, subs and $2 2 million.
It's hard to budge right.
Is why you do so well and the middle of the pandemic right.
Oh, Yeah definitely good okay, great and then if you get to your 10% goal for the year I guess can you achieve that while there is still a supply constraint out there or do you need the supply constraints and basically get to 10% do you think.
I'm knocking on wood here, Mike I think we got the supply and covered that being said I don't know what the next model is that we're going to have to whack.
And the ones that we're looking at right now.
You you know.
The last one being this.
LTE modem.
You know, we're going to get a redesigned modem from new blocks.
By the end of the month that the North America and a.
Version that we've been referring to and.
And.
And we haven't been struggling so badly with our other modem supplier. It quick tell and so we're going to have enough for our Q2 demand.
So.
And I don't know what the next mall is that we're going to have to whack, but.
It does feel good to have 400 engineers running around.
So that when you do run yourself into a problem that they can take your way out.
Alright, great and then.
And I guess just last question on the <unk> upgrade opportunity.
I guess, one did you say that youre expecting about 60000 units to upgrade this year and then two is that sort of the entire <unk> baseband or because they obviously need to be occupied by year end.
Yes, so they need to be out for a year and if they are on tmall and.
And then you've got a little more time if it's.
The other vendors.
No T. Mo is predominantly on our Reefer fleet, which is why you heard a spit out a lot of reefer names.
Okay.
I think the whole issue is about 100000.
And.
The biggest.
One out there is hub and hub has been dealt with and we've already started fielding their units maybe to the tune of about a third in 2020, and then two thirds and.
2021, and maybe some sneaks into 2022, because they're on AT&T.
The next biggest one is prime.
And.
Primarily one of the larger companies and some people haven't heard of but believe it or not they're the largest reefer fleet and the nation.
And they started upgrading at about 150, a week and we will continue doing that all year.
So two customers almost gets you to have.
And then you've got a bunch of other guys I think we've got this.
There really isn't a wonderful.
Second option that delivers the kind of value that we do and the kind of return that we do that.
So embedded with these customers.
And integrated with these customers I mean, there is.
And you look at some of these guys like a prime there is 10 years of work together.
Developing a product together that works for them.
Great Alright, and thanks, a lot and good luck with Sir.
Thanks.
And the next question will come from Chris Quilty with Quilty analytics. Please go ahead.
Alright, Thanks, a follow up for Dean.
Beaten on the SG&A, but I just wanted to clarify.
Didn't catch the number the incremental bad debt expense. This year I think was around $8 million is that correct and if I understand your SG&A guidance bad debt goes down by $8 million back to normal, but the spending on marketing and travel and entertainment goes up to offset and you end up flat.
Is that correct.
Yeah, Let me just clarify.
Chris you bet bad debt was $2 $4 million, and 2019, and and it went up to $6 $1 million and 2020. So it is an increase of $3 $7 million.
And we expect that to be $7 million to drop off and get back down to that normalized level of about $2 $4 million a year.
Flip side, we did see no travel come down about $3 million and and expect that to increments and go back up but I don't know if it ever gets back to the pre pandemic levels.
And then just just note down on SG&A, just just to clarify we did have a reduced head count.
For the year were down about 50 employees from the end of 2019 to the end of 2020.
So some of those employees you might might get.
Backfill, but that is also a big driver of SG&A.
Staying down to the low levels that we're seeing today.
Got you and product margins.
Still good model those around the 30% level.
Yes, yes, I think that's the level we're at now.
Yep.
Alright.
And Aaas revenues in the quarter and any updates on your small boat class b initiatives and what Youre seeing there.
So and revenues.
I'm, sorry, $21 million revenue still let Marc take that yeah. Okay. The revenue was $2 7 million consistent with Q3 and I'll, let Marc take the small boat and initiative.
So.
The thermal testing is beginning on the first spacecraft and.
And.
It's set up for a.
June Spacex launch but.
It is this pace business.
So I don't.
Maybe Q2, maybe Q3.
Understood and any other movements youre seeing and the Aaas market in terms of.
Either your strategy once you have the new satellites online or competitive changes.
Well, there's definitely three competitors out there right and.
You know the.
The good news is theres only three guys out there.
But you know the offerings are definitely similar.
I think.
The thing Thats really going to give us.
Legs going forward is.
The <unk> product, which is something you know.
Super Cool from a product perspective, as opposed to a space Chris craft perspective, and then the second thing on that.
Launches back to growing the <unk> business would be.
Launching those satellites and getting those <unk>.
Class B vessels under under wraps.
Got it and.
Anil question.
Any updates on Brazil, which has been problematic or you see and a recovery and net market.
Brazil is kind of back to normal levels. So I think.
It's a struggle and Brazil in terms of the economy, but trucks are still moving right.
And so.
Brazil is certainly up Q4 from Q3.
Very good thank you very much gentlemen.
Thanks, Chris.
Once again, if you would like to ask a question. Please press Star then one.
The next question comes from Scott Searle with Roth Capital. Please go ahead.
Hey, good morning, Thanks for taking my questions.
Marc couple of cleanup items, I guess I'm not sure did you given elas number for the quarter and then two two.
Dive and again on component availability and the impact on product gross margins it sounds like youre comfortable at that 30% range.
For the year, which I think has been your target level, but specifically as we're looking in the first quarter here.
Are you expecting any impact or pressure on gross margins because it still seems like theres and availability issue or potentially read that $2 million to $3 million that could get pushed.
And this quarter and maybe throw on top of that as well.
And the guidance of 61% to $65 million, what are you factoring in of that $2 million to $3 million kind of for the midpoint of the range is that some of that $2 million to $3 million comes into the quarter and none of that comes into the quarter, how should we be thinking about that call it $2 million to $3 million at risk at the current time versus the current guidance.
Sure.
It was.
And so I'm going to just ask and it was flat to last quarter.
Okay.
And.
In terms of the margins.
You know I think we.
And we pretty clearly guided to the.
Adjusted EBITDA margins, which are kind of in line with Q4, just maybe $8 lower because expenses jump up and first quarter and they always have so that's what we're predicting but.
I don't think that hardware margins are going to vary.
How much from Q1, four and despite the component shortages that we battle and Q4, we still came in and I think 29, eight which is kind of right at that 30 number.
So we are comfortable if the two to 3 million tonnes in Europe.
Closer to the 65 number.
If it doesn't come in you're probably closer to the 63 number.
You know and.
All $3 million doesn't come in and maybe you were at the low and but you know Gee, we're not planning to be at the low end.
But it is there.
Yeah.
So that's kind of how we're looking at it.
And then Marc just in terms of the new products and enhanced services kind of kind of getting later and and sounds like the middle of this year and how you're bundling.
Both service and hardware components or at least hardware components.
Hi, how are you.
What are the indications of demand that youre seeing on that front. So as we go forward and you think about getting back to your normalized sub growth what percentage do you think are going to moving that direction. It seems like the $7 million to $9 million, probably implies like 10% to 15% kind of conversion rate is that is that and the ballpark. How are you thinking about it how is that stacking up against initial indications.
So we don't really looking at and as a percent of the.
The entire hardware, we look at it as a.
A higher percent of the solutions part of our business not every piece of hardware, we sell would lend itself to a subscription model when we're selling a satellite modem.
It is not really you don't really sell a satellite modem and bundle and the airtime because the satellite modem as a component and someone else's product right.
Financing the serious.
Receiver and your car and not the car you know what I'm, saying.
So when we look at that eight to 10 it Jay.
Higher percent of the solutions business that we sell to and then even within the solutions business. When you look at Orbcomm Super large customers you know like a Walmart.
Or.
J D. Hans their cost of capital is lower than ours. So they don't really need us to help them finance their product. So once you kind of factor out the products that don't really lend themselves to subscription and some of these.
Larger.
Customers.
And we're kind of factoring and like a $30 to 40%.
Got you, Okay, and lastly, if I could just.
Just to dive in.
In terms of lack of annual guidance it seems like you're pretty comfortable with their component availability situation that you guys have done a good job and the fourth quarter, you have pretty good visibility and in the first quarter here, you've got a nice demand profile kind of shaping up.
Key markets that have been headwinds like oil and gas have bottomed out for your guys transportation is starting to come back and I guess what is what is the.
The hesitance in terms of providing that annual guidance is there something else thats going on up there that's causing you some concern or is it just level of caution kind of given where we are basically and a COVID-19 recovery cycle.
Okay to be clear I'm on record for taking the over.
But.
I think we're just being cautious and I think the way, we're kind of guiding to the year is still a more aggressive and all our peers right I mean, there a lot of guys.
And that we deal with arent, even giving first our first quarter guidance and it's.
February 24th.
So.
I think.
We'll continue to be conservative, but I don't want you to think that we're doing anything different than we normally do Scott, we always kind of give that annual guidance on the next call I know you haven't been following us that long.
But this is.
Work comp par for the course.
Great. Thanks, guys.
Thanks.
And the next question will be from Adrian Doria Medina with ADM Capital management. Please go ahead.
Hey, guys.
And congratulations on a good quarter.
And I wanted to ask you and circle back to the $10 20 plan. So in order to achieve this goal does that mean that you guys are going to incur higher capex I know 2020 with about $20 million of Capex.
So should we think about that or the run rate or should we think about you know I guess more normal levels pre COVID-19 levels.
Definitely not getting back to pre COVID-19 levels.
We only have very minimal.
And managed satellite Capex being launched but.
In terms of the run rate Dean do you want to take that one.
Yes, Yes, I think when you mentioned the $20 million.
Capex in 2020, it was really two pieces there was about $18 $5 million of I'll call. It <unk>.
Capex and $1 million.
Investments and the subscription model.
I think the Capex projects will stay consistent at about $18 $5 million, but but we are.
Looking to do more and more of the subscription model and and that investment will grow and and.
We are thinking that will be and the.
And the $8 million to $9 million range.
So all in your investments and <unk>.
Cash flow will be and the $27 million range and 2021.
But I hope that clarifies.
And.
Yes, you.
And youre, saying that for 'twenty and 'twenty, one we should think about close to $27 million is that is that right.
We're investing yes, again split between Capex, and eight and $9 million for subscription amount of investment.
Alright, and should we think about that number going forward.
Decreasing or staying at that level.
This is for modeling purposes more than anything.
I think in the short term that that Capex budget expenses should be at that level.
And the subscription model and it really depends on the demand and the marketplace from customers for that for that that model structure, but we do see that that demand.
Growing and incrementally.
Alright, perfect alright, thank you very much growth.
Sure.
Ladies and gentlemen at this time there are no further questions. The company. Thanks, you for participating on the call and look forward to speaking to you again and we report first quarter results and late April have a good day.
Okay.
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