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Edited Transcript of ORBC earnings conference call or presentation 26-Feb-20 1:30pm GMT

·47 mins read

Q4 2019 ORBCOMM Inc Earnings Call Fort Lee Mar 10, 2020 (Thomson StreetEvents) -- Edited Transcript of ORBCOMM Inc earnings conference call or presentation Wednesday, February 26, 2020 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Aly Bonilla ORBCOMM Inc. - VP of IR * Constantine Milcos ORBCOMM Inc. - Executive VP & CFO * Marc J. Eisenberg ORBCOMM Inc. - CEO, President & Director ================================================================================ Conference Call Participants ================================================================================ * Christopher David Quilty Quilty Analytics, Inc., Research Division - Research Analyst * David William Gearhart First Analysis Securities Corporation, Research Division - VP * Michael James Latimore Northland Capital Markets, Research Division - MD & Senior Research Analyst * Richard Hamilton Prentiss Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research * Scott Wallace Searle Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst * Thomas Michael Walkley Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, and welcome to ORBCOMM's Fourth Quarter 2019 Results Conference call. (Operator Instructions) Please note this event is being recorded, and a replay of this conference will be available from approximately 11:30 a.m. Eastern Time today through March 11, 2020. The replay service details can be found in today's press release. Additionally, ORBCOMM will have a webcast available in the Investor Relations section of its website at www.ORBCOMM.com. I would now like to turn the call over to Aly Bonilla, ORBCOMM's Vice President of Investor Relations. Please go ahead, Aly. -------------------------------------------------------------------------------- Aly Bonilla, ORBCOMM Inc. - VP of IR [2] -------------------------------------------------------------------------------- Good morning, and thank you for joining us. Today, I'm here with Marc Eisenberg, ORBCOMM's Chief Executive Officer; and Dean Milcos, ORBCOMM's 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 company's quarterly financial results and outlook for 2020. Following our prepared remarks, we will open the line for your questions. 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. 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 measures is included in our press release. At this point, I'll turn the call over to Marc Eisenberg. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thanks, Aly, and good morning, everyone. Earlier this morning, we issued a press release announcing our financial results for the fourth quarter and full year ending December 31, 2019. The quarter was highlighted by revenue growth and improved service and product margins, which led to solid adjusted EBITDA and cash flow generation. Total revenue for the fourth quarter was $69.7 million, up 5% from last year and in line with the midpoints of our guidance. Since 2018, the company set out on our initiative to improve margins. On the product side, we reengineered our portfolio to enhance functionality, reduce the number of components, integrate sensors and lower costs. As a result of these efforts, in 2019, our product margins grew nearly 600 basis points while lowering price points to customers. Of the roughly 75,000 devices we shipped in Q4, 80% were new products. From a service perspective, service margins grew about 200 basis points over 2018, as we deemphasize low-margin installations and added new subscribers at high incremental margins. The improvement in product and service margins led to strong adjusted EBITDA of $16.9 million in Q4, a 24.2% margin, also in line with guidance. While this is a $400,000 increase over the prior year, the normalized performance seems far greater, as last year included significant favorable nonrecurring accounting entries. Looking at cash flow, the company generated over $9 million in operating cash flow in Q4, a strong number considering the quarter included 1 of 2 $10 million interest payments we make over the course of the year. This is our sixth consecutive quarter of positive operating cash flow. In 2017, we took the strategic initiative to acquire Blue Tree and inthinc, our most recent acquisitions in order to enter into the fleet management business and complete our transportation offering. These 2 acquisitions marked a total of 13 between 2011 and 2017. Over those 6 years, we embarked on many facets of integrating these companies. However, there was still much work to complete. We found ourselves with redundant hardware, overlapping web platforms and multiple accounting systems, all of which contributed to significant inefficiencies across the business in areas such as accounting, engineering and customer service. This led to high levels of inventory, rising SG&A, diminishing margins and a slowdown in innovation. Since then, we set out to finalize our integration efforts by reducing hardware SKUs moving to 1 ERP system and consolidating over 20 web platforms down to 2. So where are we now? Our product assortment now totals 50 SKUs from our high of 160 and is projected to get as low as 40. Hardware margins at our lowest point were about 13% and are now hovering around 30%. Inventory is down 20% off the highs. Today, 98% of our revenues flow through the new ERP system with 100% expected by midyear. The first of our 2 platforms, our application enablement platform, or AEP became available over the last 6 months and is now fully deployed and combines our RFID, heavy equipment, device management and carrier's private label cold chain management platform. Roughly 30% of our solutions revenue runs through this platform. The second of our 2 platforms, the ORBCOMM platform combines our 15 legacy transportation portals and is currently running with 6 pilot customers. Cargo customers will have access to the new platform within weeks with refrigerated, in-cab, fleet and sea container customers to follow and be operational across all assets by the end of 2020. With these new integrated web platforms, customers will experience a complete view across all their assets, faster response time, greater capacity, allowing for additional deployments as well as more real-time visibility, especially as the world moves toward 5G. While the ORBCOMM platform is not 100% complete, we are in the home stretch. This project has taken longer than originally anticipated, as it was delayed by incremental scope in terms of features as well as competing priorities on legacy platforms as we on-boarded new customers. That being said, these 2 new robust scalable platforms are built for the future and are ready to address the industry's evolving requirements for greater processing power and data bandwidth. In a short period of time, our customers will have the ability to monitor and control more asset types, create far tighter reporting intervals, gain real-time visibility with our new camera cargo sensor and access advanced analytics to extract deeper insights about their business. We believe these enhanced features, along with a dynamic user interface are unparalleled in the industry. Let's move on to our container programs. In late 2015, we bought the WAM business and inherited an AT&T contract supporting Maersk. This contract represented the overwhelming majority of the WAM revenues and contain 2 components. First, a license fee associated with firmware WAM developed that was being amortized over a 60-month term that at its peak, represented about $3 million annually. These license fees had dwindled down and have now been fully recognized with the last $1 million accelerated over Q3 and Q4 2019. The second, which was the support components also represented about $3 million of revenue annually, supporting the program's operations from an engineering perspective and also ended in Q4 2019. In 2015, the strategy behind this acquisition was not to get into the engineering support business, but to add this vertical market to our transportation portfolio and market directly to our OEMs and customer base. The business model as acquired was not complementary to our strategy. Since then, we've created a hardware portfolio for this line of business. We're in the process of integrating the existing web application into the ORBCOMM platform and have customized a number of features across a diverse base of customers. That change in strategy is now starting to pay dividends, as we anticipate doubling our revenues in this market in 2020 despite the reduction at AT&T. To be clear, the anticipated outcome of these events in 2020 is a headwind to service revenues, offset by a significant tailwind to hardware revenues, leading to similar levels of adjusted EBITDA contribution from this group. Beyond 2020, we intend to surpass the service revenues generated in the past as hardware continues to get installed. Speaking in more detail, we shipped nearly 16,000 devices in Q4 in support of our initial project with Carrier. As a reminder, ORBCOMM is partnering with Carrier to provide a customer-specific refrigerated container monitoring and control system to help increase asset utilization and short temperature compliance and lower operating costs to one of the premier shipping line companies. In 2019, we shipped more than 29,000 devices for this project and anticipate shipping the remainder over the next 6 quarters as we outfit their entire fleet of 150,000 containers. In addition, we recently received a product order for the next opportunity with Carrier. Last quarter, we mentioned a container opportunity with a large producer and distributor of produce, anticipating a first quarter deployment. Unfortunately, their timeline has shifted, and we're hoping to kick this project off towards the back half of this year. Looking more broadly at this market, we continue to engage with a number of customers yet to launch IoT solutions across their supply chains that are expected to deploy in the near future. We entered 2019 on a high note in transportation, growing at a strong rate, having just completed the deployments at J.B. Hunt and the U.S. Postal Service. However, we faced headwinds that increased throughout the year from a challenging U.S. transportation macro environment that was impacted by fewer new orders of reefer, dry van and trucks contracting to 10-year lows. This led to hardware sales in our North American transportation group in 2019 being down year-over-year by about $9 million as opposed to growing about $8 million as we were anticipating. Looking back, the 2018 tax incentives, which resulted in record OEM orders of reefer, dry van and truck assets, coupled with a reduction in demand, led to a significant contraction in delivery rates that dramatically affected transportation companies. Through the first 3 quarters of 2019, 800 carriers went out of business, which was double the number in 2018. While analysts were projecting a recovery starting in Q2 this year, the economic uncertainty as a result of the health issues in China will likely push this back further. Continuing with our transportation group, our double play and triple-play offerings continue to be a key differentiator for ORBCOMM. By enabling customers to gain a comprehensive view of multiple asset types through one integrated platform, they can increase efficiency across their business operations and make more informed decisions about their fleet. A great example of a double play that we mentioned last quarter is our recent win with one of America's largest grocery retailers, who we can now say is Kroger. Kroger operates nearly 3,000 stores under a variety of brands and selected ORBCOMM to track their 10,000 assets including dry and refrigerated trailers. A new opportunity for ORBCOMM is in the bus market. Autobus Oberbayern, a large bus and coach operator in Germany, recently selected ORBCOMM's in-cab telematics solution, gaining visibility, monitoring and management of their drivers and passenger buses. By leveraging our detailed data analytics and reporting, they are improving their operational efficiency, driver performance, fleet safety and regulatory compliance. We also signed a number of new transportation customers in Q4, including Howell's Motor Freight, Watkins Trucking, Hilco Transport, Boost Transport, Feld Entertainment and Rail Delivery Services. Summing up, revenues in Q4 grew 5% despite some challenging headwinds. Service and product margins were strong, leading to adjusted EBITDA of $16.9 million and significant operating cash flow of $9 million. We're in the final stages of our SKU rationalization initiative, global ERP implementation and customer beta testing on our new ORBCOMM platform, all of which are key to increasing our efficiency and profitability across the company. Overall, as a result of these initiatives, ORBCOMM will emerge as a fully integrated, better scaled, more productive company. Our focus can then turn to advancing our technology and better serving our customers, leading to faster growth and further cash generation. With that, I'll turn the call over to Dean to take you through the financials. -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [4] -------------------------------------------------------------------------------- Thank you, Marc, and good morning, everyone. We finished the year on a strong note. Many of our financial measures improved over the prior year, and we continue to make progress on several key initiatives across the business. In addition, we're pleased that our cost reduction program is beginning to deliver the savings we anticipated. Let's start with the company's fourth quarter financial results. Total revenue for Q4 was $69.7 million, up 5% compared to the same period last year and up slightly from Q3. This result was in line with the midpoint of our revenue outlook. The year-over-year growth in revenues came from both service and product sales as we were able to overcome the negative impact associated with the U.S. transportation market correction that affect our sales for most of 2019. Q4 service revenues were $41.3 million, up 6.9% compared to the prior year period. Recurring service revenues in the quarter grew 7.3% over the prior year and were up sequentially from Q3. This improvement was primarily driven by subscriber additions and the acceleration of deferred service revenues relates to the AT&T contract expired on December 31, 2019. Let me take a moment to talk about our billable subscriber count as we have a couple of end of year adjustments. Prior to making any adjustments, we added over 73,000 net subscribers in the quarter, which would have made our billable subscriber count, 2.66 million at the end of December 2019. This is roughly a 12% increase over the number of subscribers we ended with in 2018. As we have communicated over the last few quarters, our agreement with AT&T expired on December 31, removing approximately 425,000 subscribers from the base. In addition, we deactivated approximately 85,000 devices, not generating revenues as part of our cost reduction initiative that we'll talk about in a few moments. The net effect will result in an increase in ARPU of about $1 production cost and a starting count of 2.14 million subscribers to begin 2020. Product sales in the fourth quarter were $28.4 million up 2.5% from the prior year period primarily driven by new orders from existing transportation customers and soft shipments of our satellite IDP products. Q4 product sales also benefited from shipping nearly 16,000 devices in support of our initial project with Carrier. So on a year-over-year comparison basis, this revenue nearly offset the revenue in Q4 '18 from shipping nearly 14,000 devices to Savi for the Defense Logistics Agency or DLA. Turning to gross profit margin. The company realized a margin of 52.3% in the fourth quarter, a 140 basis point improvement over last year driven by growth in both product and service gross margin. Product margin in Q4 grew 170 basis points to 29.2% and compared to the prior year period. The driving factor for the year-over-year margin improvement continues to be the higher mix of sales of our new portfolio of cost-reduced products compared to the prior year. During the quarter, we did see an uptick in orders for transportation products, which carry lower average margins. As a result of this shift in product mix in Q4, margins fell just below our 30% goal. Q4 service margin was 68.2%, a 50 basis point improvement from the prior year period driven primarily by incremental service revenues. In 2019, as we started to achieve the synergies anticipated in our integration effort, $2 million of operating expenses were taken out of the business. Starting in 2020, as we execute on further efficiencies, we anticipate realizing another $4 million of savings spread across cost of service, cost of product and operating expenses. For example, the 85,000 deactivations I just mentioned were composed of field of units have not yet been activated, unassociated subscribers picked up an acquisition or demonstration units. Overall, these 85,000 subscribers were generating no revenues, but were costing us about $500,000 annually. In addition, we have negotiated lower pricing on new product builds from our contract manufacturer, eliminated redundant positions and renegotiated or terminated multiple vendor and contract relationships. Operating expenses in Q4 were $32.9 million roughly flat to the same period last year. Adjusted EBITDA in Q4 was $16.9 million, up $400,000 with margin at 24.2%, in line with the outlook. Both operating expenses and adjusted EBITDA benefited from a favorable $1.5 million in Q4 2018 from nonrecurring accounting entries associated with inthinc and Blue Tree acquisitions. Without this benefit, operating expenses were lower and improved $1.7 million, and adjusted EBITDA grew $1.9 million over the prior year period. Turning to the balance sheet and cash flows. The company ended Q4 2019 with approximately $54 million of cash and cash equivalents, an increase of about $3 million from the end of Q3 2019. I'd like to point out that the increase in our Q4 cash balance was accomplished in a quarter that included a $10 million interest payment and $1.6 million deployed in stock buyback activities. In August, the company announced a $25 million share repurchase program. Through the end of 2019, the company has repurchased over 1.9 million shares for a total cost of $9.4 million. We continue to be opportunistic buying back shares. We believe these actions represent a good investment for shareholders. Cash flow from operations was $9.3 million in Q4, marking our sixth consecutive quarter of positive operating cash flow. CapEx for the quarter was $4.8 million. Turning to our full year results. Total revenue was $272 million in 2019 and compared to $276 million in 2018. The slight decline stemmed from lower product sales as the company faced several headwinds in 2019, including a downturn in the U.S. transportation market, global trade tensions and comping up several large deployments in 2018, such as J.B. Hunt, U.S. Postal Service and our partnership with Savi for DLA. Considering these headwinds and having our newest large anchor customers starting to deploy late in the year, we're pleased that we successfully navigated through this environment, we're able to hold total revenues nearly flat. Service revenues improved in 2019 to $160 million, and we grew recurring service revenues by approximately 5% compared to 2018. This increase was primarily driven by an addition of over 281,000 net subscribers, not including adjustments I mentioned earlier. Also contributing to the improvement with steady growth from our AIS business achieving a record high of $12 million in 2019, an increase of over 8% compared to the prior year. As a result of improvements to service and product margins, full year 2019 adjusted EBITDA reached a record $63 million, a 23% margin and marks the second year in a row, we achieved significant incremental growth from both a dollar and a margin perspective. I'd like to remind everyone that 2018 and Q1 of 2019 included nonrecurring favorable net benefits, mostly associated with inthinc and Blue Tree acquisitions. If we exclude the net -- the favorable net benefits of $6 million recognized in 2018 as well as the corresponding $2 million realized in 2019, then on a normalized basis, adjusted EBITDA increased $10 million over the prior year, with March improving 400 basis points. This achievement demonstrates our focus on improving operating efficiencies, better operating results to improve margins, net operating cash flow of $30 million in 2019. This is a remarkable $19 million improvement over 2018, even in a year in which we made substantial investments to further expand our business, includes the course that ORBCOMM can generate significant operating cash flows. As I mentioned last quarter, we made some changes internally in order to improve communication, visibility and forecast accuracy across the business. We've hired new talent into the financial planning team, with professionals who have extensive experience with several large public companies. Our planning team is working with deeper industry data to better understand trends and provide insight and greater visibility into the market shifts. With that being said, let's move on to our first quarter outlook. We expect total revenues to be in the same ballpark as last year, which was $66 million. This is just a bit lower sequentially from Q4 2019, as the first quarter is seasonally our lowest revenue quarter of the year. Exchange to experience softness in the U.S. transportation market, and in addition, have modeled in the loss of revenues from the expired AT&T contract. We anticipate adjusted EBITDA to be between $13 million and $15 million. This would be up 6.5% when normalized for last year's positive accounting adjustments, assuming the middle of the range. For the full year 2020, we expect total revenues to grow between 5% and 8% over 2019, as we continue to deploy Carrier, start replacing devices with expiring network technology, add new customers and launch new products. We expect this will offset several of the macro headwinds we previously mentioned. We expect recurring service revenues to grow between 2% and 4% compared to 2019, influenced by the loss of revenue from the AT&T contract, which is about a 250 basis point impact. Product sales in 2020 are expected to increase 7% to 15% over 2019. We expect subscription sales to be approximately 5% of our products shipped. For 2020, we expect service margins to be between 67% and 68% and product margins to be between 29% and 31%. We expect full year adjusted EBITDA margin to be between 23.5% and 24%. Walking you through our thinking on 2020 adjusted EBITDA, we start with last year's run-rate of $63 million, reduce that by $2 million for accounting adjustments and additional $4 million from the expired AT&T contracts, which gets us to $57 million to start the year. We then add $4 million in anticipated cost savings, plus the contribution from incremental revenues and a higher margin run-rate, which gets us to our range. For 2020, we expect operating cash flow to be approximately $40 million, led by revenue growth and improving margins with capital expenditures anticipated to be approximately $27 million this year. The CapEx estimate is based on roughly flat expenditures to last year's $22 million, plus potential investments in the subscription service model. In closing, we made progress across many financial measures in both Q4 and full year 2019. Total revenue growth turned positive in Q4. Both service and product margins had significant improvements over the prior year. Full year adjusted EBITDA reached a record of $63 million, and operating cash flow grew $19 million over 2018 with Q4 marking our sixth consecutive quarter of positive cash flow generation. With a solid pipeline of opportunities, new product launches anticipated in the year, entering the final stages of our integration efforts and further cost reductions and operational efficiencies expected, I look forward to a promising 2020. This concludes our remarks for the call, and we'll now take your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question will come from Ric Prentiss with Raymond James. -------------------------------------------------------------------------------- Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [2] -------------------------------------------------------------------------------- A couple of questions. First, let's start on guidance a little bit, on the recurring service revenue guidance of 2% to 4% for the year. Help us understand, obviously, there's been a lot of moving pieces, accounting things from previous acquisitions. How should we think about that playing out throughout the year 2020? And what the exit rate into '21 would look like? -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [3] -------------------------------------------------------------------------------- Sure. Yes, we're adjusting for the -- for that AT&T contract, which you mentioned in the past couple of quarters. So it does look like we will be probably in that 2% to 4% range quarter-over-quarter for most quarters this year and then exiting the year, when you back out that comping with the AT&T contract to be closer to 6% growth rate. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [4] -------------------------------------------------------------------------------- The AT&T contract is 2.5%. -------------------------------------------------------------------------------- Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [5] -------------------------------------------------------------------------------- Okay. And as we think long-term in this business with 5G on the cusp, Marc, you talked about a little bit and Internet of Things out there. What should we think the ability for ORBCOMM to grow this recurring aspect of service revenues could be as we look out over a longer term period? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [6] -------------------------------------------------------------------------------- Yes. I think historically, the company grew closer to the 8% to 10% range in service revenues and certainly higher in product. And these macro issues over the last year and transportation certainly affected that. So I think we should be able to get right back to that area as we kind of build-out of that and kind of keeping it on. -------------------------------------------------------------------------------- Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [7] -------------------------------------------------------------------------------- Okay. And on the product side, Dean, you called out how transportation has a lower margin. And as we think about the 2020 guidance and then looking longer term, maybe for some recovery in the transportation segment, where should we think about product margins, the effect on product margins in 2020, but then also longer term, what the product margins might look like, given mix? -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [8] -------------------------------------------------------------------------------- Yes, we still think 30% is the range of product margin for 2020. We still have a few products that we're going to be rolling out this year, the in-cab product. We have a new version coming out later in the year. So we think product margins could even come potentially better beyond 2020. -------------------------------------------------------------------------------- Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [9] -------------------------------------------------------------------------------- Okay. And then let's touch on the larger, broader issue. You touched on it a little bit, Marc, to the China and the coronavirus. What are you seeing right now from customers, any change in activity slipping out of orders? And what might impact be through the rest of this tinting time frame? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [10] -------------------------------------------------------------------------------- Yes. So let's start with the supply side, Ric, and then we'll talk about the demand side. So from a supply side, the overwhelming majority of our product is produced in Mexico with Germany being a pretty far distant second. That being said, some of the device components are sourced from China, especially cables. And some of these components, we are in pretty good shape because we've got inventory on hand, where we've been able to secure a secondary source. So from a supply side, we're pretty confident these efforts in our Q1, and for the most part, our Q2 supply. So unless it goes longer than that, I think we're probably in better shape than most companies that you listen to from a supply side. From a demand side, what happens when less goods from China or other places flow into the United States. And does that mean less trucks on the road and lower trucking rates? The answer is kind of maybe. That's like late-breaking stuff, which is why we changed the lower end of the guidance that we're talking about. I mean, have we've seen reductions in demand yet, not really. The shame of it all was, in Q4, transportation was actually up. Company returned to growth, we grew 5%. And transportation, in the tough parts of the year, were down $4 million in a quarter, actually kind of popped positive to a positive $1 million or $2 million in Q4. So we were kind of moving toward a little bit better market there. And if you look at the guidance that we gave this year because of the uncertainty, we kind of kept the top end where it was, and we reduced the bottom end a little bit. Obviously, that moves the middle of the range down a little bit. But if you kind of look at those hardware numbers, what you really have is, year-over-year, mediocre hardware numbers or less than mediocre from last year, plus the Carrier deal and a couple of 3G trade-outs almost gets you to the middle of the range. So we've taken a pretty conservative approach that there is no rebound in transportation to even get to the middle of the range. So you can kind of see what we're thinking. And if the flu season ends, and this thing starts to come back, hopefully, we'll be closer to the upside there. So to answer your question precisely, I mean, we'll see what happens to trucking rates and everything else. Right now, we're kind of living through the close down in China from the holiday anyway. But we'll certainly see. But I think the guidance reflects it. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Our next question will come from Mike Walkley with Canaccord Genuity. -------------------------------------------------------------------------------- Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [12] -------------------------------------------------------------------------------- Marc, just to clarify on your last answer there. For the transportation market, are you assuming flattish with the disappointing 2019 in your updated guidance or even down again, just given the uncertainty in that market? Because it appears the container deal alone can get at least to the bottom end of your guidance, if I'm doing my math correctly? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [13] -------------------------------------------------------------------------------- Yes, at the bottom of the range, you're saying business is flat to down. And at the top of the range, it's seeing some type of recovery, but nowhere near to the levels of 2018. So -- and I know on the hardware side, it's a pretty wide range. So it's just our timing in terms of reporting is a little unfortunate that this virus news has really changed in the last 72 hours, and we've actually changed our guidance number since our board meeting last week. Had we reported last week, it would have been different. -------------------------------------------------------------------------------- Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [14] -------------------------------------------------------------------------------- Okay, great. That's helpful. And on the large container side with Carrier, there's no signs of that slowing down. And you can talk about the overall pipeline for additional deals in that area? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [15] -------------------------------------------------------------------------------- Well, we've got firm commitments through at least the first half of the year, and we've already shipped them a good part of Q1. So we're pretty comfortable there. But once these guys say, go, they don't really get the return they're looking for until it's fully deployed. So the most painful thing that happens in these businesses is a 50% deployment. And think of what we're deploying on, we're deploying on refrigerated containers. What's in refrigerated containers? Medication, vegetables, fruit, blood, those are the things that are in reefers. And regardless of what the macro environment is, those are some pretty damn important things or maybe even more important. -------------------------------------------------------------------------------- Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [16] -------------------------------------------------------------------------------- Yes, absolutely makes a lot of sense. And Dean, just a question on the model force, reset the sub numbers here. You talked about ARPU up maybe $1 with the reduced sub count. How should we think about kind of ARPU trends going forward as, to my understanding, some of the large container deals on sea containers or the Carrier, those would be kind of below ARPU over time. So maybe another way to ask it, too, is what's kind of a good way to think about net adds, implied in your guidance of the 2% to 4% growth for services? -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [17] -------------------------------------------------------------------------------- No, you're right. The container deals are typically lower ARPU, including this Carrier deal we're working on. So that will -- given the larger proportion of shipments this year being in the caps business, that will lower the ARPU this year slightly. But looking out in subsequent years as other markets come back, then ARPU should bounce back to the range we're at now. -------------------------------------------------------------------------------- Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [18] -------------------------------------------------------------------------------- Okay, great. And last question for me, and I'll pass the line. In terms of cleaning up the subs, are there any other kind of onetime things that you guys see heading into this year of a big contract coming to an end or some of these non-revenue-generating subs still on your network? Just trying to get an idea of what might still be out there in terms of net sub growth longer term? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [19] -------------------------------------------------------------------------------- Yes, I don't think we see anything like that. These 85,000 subs that we shut off. I mean, that's pretty good news, right? You shut off these 85,000 subs, you get rid of $500,000 worth of cost of service, and it doesn't change your revenue one bit. And it really falls into 3 pools. I mean, first of all, the first thing that we're looking at is a $63 million adjusted EBITDA year, which is starting off at a run-rate of $57 million because of the accounting adjustments in AT&T deal. And then you're building it back up to the middle of the range, which is in, I think, $68 million to $69 million. So as you kind of build that up, you start scouring for these opportunities to begin to build that up. And one of them was this subscriber change that we made, but it's really 3 pools. The first is, when we did some of these acquisitions, you had someone like inthinc that had 12,000 more subs that you were paying for than you were billing for, but you couldn't shut them off because their ability with the systems that they had to reconcile which ones you need to shut off wasn't there. And then you could severely affect the customer if you shut off the wrong subscribers. And then you start moving subs from these acquisitions through the new ORBCOMM platform with all the tools that we have and then, voila, you see the access to these subscribers. The second pool that we had was, we kind of changed the thinking in terms of when you ship subscribers, you ship them active because they need to work, and you've got a very quick turn in getting them installed and getting them out there. And you also need them turned on when you build them in the factory for testing. So a good part of our resellers, literally, when you ship them within just a week or 2, they're registered on the platform, and we start billing. But sometimes they hold them in inventory or there's some sort of push, and they don't get registered immediately. And on a day-to-day basis, it's a couple of subs, but as you kind of reset how you count subs, all of a sudden, it's a much bigger number. So these units probably will be subs, as they go and get installed, it's just a timing thing. But, boy, it's hard to resist $500,000. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Our next question will come from David Gearhart with First Analysis. -------------------------------------------------------------------------------- David William Gearhart, First Analysis Securities Corporation, Research Division - VP [21] -------------------------------------------------------------------------------- Marc, I just wanted to ask if you could give us an update on the bundled program, if you can talk to take rates and how that's trending? Because you talked about it a bit last quarter. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [22] -------------------------------------------------------------------------------- So the guys are translating what the bubble program is for me. It's -- I mean our subscription program. So we guided that the subscription program would be something like $9 million this year. And there's a couple of components to that. One is this produce customer that's kind of moved back in the year, and you've got some transportation groups. And I think, it's probably still going to track close to that $9 million number. If we miss it, we'll be missing on the low side, not on the high side, as we've got a pretty strict range in terms of how much of our cash we want to deploy from this perspective. So at this point, let's say, it's on par. But let's say, it's in the $7 million to $9 million range as opposed to just the $9 million range. -------------------------------------------------------------------------------- David William Gearhart, First Analysis Securities Corporation, Research Division - VP [23] -------------------------------------------------------------------------------- Okay. And then lastly, with all the initiatives that you've been working on in terms of consolidating platform SKUs. And cleaning up the sub count and everything. Can you give us a sense of when you think ORBCOMM will be roughly at a normal operating state quarter-to-quarter? Is that more in back half of '20, early 2021, just your high-level thoughts there? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [24] -------------------------------------------------------------------------------- Well, I think we're weeks away. So -- well, the hardware is basically done. The ERP system really only has South Africa left, which is 1% or 2% of our revenues. The application enablement platform, which is 30% of our solutions revenue, not 100% is in full swing and going. And then if you look at the ORBCOMM platform, which is the transportation one, it's -- there's degrees of readiness of what you're referring to. Number one, all of those 15 transportation platforms are running through it now. So that particular platform is seeing 6 million messages a day today. And already with it all flowing through one platform, we're going to start the transformation for accounting to be able to bill on one system and everything else, and we'll get the planning and all the advantages of getting that done is relatively soon as this thing is really just ready. New customers that aren't running on the old platforms are, at least for the cargo business, which is the largest business that we have are going to be put on this platform this quarter, and this quarter has only got another month left. So that feels pretty good. We'll have reefer and in-cab completely for new customers converted by the end of the second quarter. But in terms of leaving the old platforms around, just to have the data filter in both platforms, as we kind of move features, there's no real-time line on that. We're not doing any more development on those platforms, but we'll let them run in parallel. So if there's specific features that are looking for, they'll continue to be able to run. But in terms of getting our -- all our horsepower behind one engine, we're just a quarter away from the overwhelming majority of it. -------------------------------------------------------------------------------- David William Gearhart, First Analysis Securities Corporation, Research Division - VP [25] -------------------------------------------------------------------------------- And if I could sneak in one more. Can you give us the AIS revenue for the quarter? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [26] -------------------------------------------------------------------------------- What was the AIS? -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [27] -------------------------------------------------------------------------------- 3 point -- It's probably $3.1 million. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [28] -------------------------------------------------------------------------------- $3.1 million yes. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Our next question will come from Michael Latimore with Northland Capital Markets. -------------------------------------------------------------------------------- Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [30] -------------------------------------------------------------------------------- Just -- I don't know if you've giving us or not, but the CapEx outlook for the year? Can you give that in any sort of subsegments of that? -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [31] -------------------------------------------------------------------------------- Yes. So for cap expenditures, I think we're thinking close to $30 million. We said $27 million on the call, right, $27 million. It depends on the range of subscription model uptake with the customers. But we expect CapEx with ex subscription model be relatively flat, around $22 million, and subscription model could be, as Marc was saying, anywhere from $7 million and $9 million, maybe on the lower end, $5 million? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [32] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [33] -------------------------------------------------------------------------------- Okay, got it. And then I'm just curious in some of your bigger deals, do you have like a win rate number and where that's been tracking over the last couple of years? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [34] -------------------------------------------------------------------------------- Oh, boy, it depends on which business you're talking about. It's -- in the reefer business, it's north of 50%, in the container business, it's north of 50%, in the in-cab business, it's south of 50%, in the fleet business, it's south of 50%. In the satellite business, it's super way high because there's only 1 or 2 competitors out there, it really ranges. But what we've learned is like in the transportation business, when you're bidding on like dry van, maybe you win 35% of the time. But if it's dry van and reefer, like in the Kroger deal together in one opportunity because that's very unusual for someone else to provide multiple assets, then it grows north of 75%. And then if it's a triple play that includes all 3, then it goes significantly higher even than 75%. So I think close counts. If we're talking about historically, maybe over the last year or 2 while we finish these integrations, they were a little lower than we'd like it to be. But as we get this complete and kind of return to innovation and get all our SKUs out there and polished and piloting and working perfectly. I think we're going to exceed the historic close count numbers. -------------------------------------------------------------------------------- Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [35] -------------------------------------------------------------------------------- Great. And then on the sub count for the year. Should we think about sub adds being similar to a little bit better than last year? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [36] -------------------------------------------------------------------------------- Yes, I think subs will probably be somewhere around that 300,000 number even though hardware continues to grow. And because some of the 3G trade-out stuff we're doing isn't going to result in a sub. It's going to be a plus 1, minus 1. So you can grow 5% or 7% at the low end, still keeping your sub counts. If we get closer to the 15% of the high-end range of where those subs are, and then you know our ARPUs, it's got to be a little bit higher than that, right? -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Our next question will come from Chris Quilty with Quilty Analytics. -------------------------------------------------------------------------------- Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [38] -------------------------------------------------------------------------------- Marc. I think you indicated North America was obviously down big. North American transportation was down big and in '19, and you're expecting no recovery, but how do we think about the international market in the context of the coronavirus. Are you in your forecast, expecting international transportation to be down or flat or what's baked in the guidance? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [39] -------------------------------------------------------------------------------- So what's basically baked into guidance is the Carrier opportunity is in the hard -- from a hardware perspective, it's over a $10 million increase. And we think these 3G trade-outs which moves back and forth depending on what T-Mobile is doing with Sprint and how they're allocating spectrum and all that stuff. But that is a few million dollars more. So if you look at those 2 things, and let's say that's $13 million or $14 million, that's 9% growth right there. And we're guiding from what was it, 5% to -- 7% to 15%. So you get to the middle of the guidance just from that. So at the low end of the range, you're actually guiding it all down. -------------------------------------------------------------------------------- Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [40] -------------------------------------------------------------------------------- Got you. And how large is -- I mean, excluding Carrier and 3G trade out, which presumably wouldn't be impacted by virus effects? How big is the balance of the international transportation relative to the U.S. market? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [41] -------------------------------------------------------------------------------- Maybe 15%. -------------------------------------------------------------------------------- Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [42] -------------------------------------------------------------------------------- 15% the size of the U.S. market? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [43] -------------------------------------------------------------------------------- Yes. I mean for ORBCOMM, Chris, right? That's -- otherwise it's bigger. -------------------------------------------------------------------------------- Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [44] -------------------------------------------------------------------------------- Okay, obviously. Understand. Can you give us a sense of how much the IDP business grew in 2019? And what are the prospects there either for domestic or international or if there are specific applications where you're pushing that solution? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [45] -------------------------------------------------------------------------------- Yes. So there is definitely a convergence where if you look at the ORBCOMM network, the ORBCOMM network is predominantly OEM business and has been for a very long time. And then almost all of the reseller business, the VAR business has been shifted over to the IDP network over time. And as you know, the IP network is smaller antenna an awful lot quicker, quicker than anyone's network. Just about 8 second response time. So when you look at some of these markets that either are very, very stringent on battery or security related. That is a -- the attributes of that network are pretty strong. We bought the IDP network in 2015. We had about 225,000 subscribers on that network, as I remember, in 2015, and it's about 450,000 today. So you can get a good feel for the CAGR based on that. -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [46] -------------------------------------------------------------------------------- And Chris, it grew about 7% last year, both product and service. -------------------------------------------------------------------------------- Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [47] -------------------------------------------------------------------------------- And were there particular markets or applications where you're seeing the highest growth? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [48] -------------------------------------------------------------------------------- So a number of the international markets actually did extremely well last year, especially in places like Brazil. And the company really never had a footprint in the Middle East. And last year, I think we announced a call with that division of Saudi Telecom in the middle of the year and ended up shipping thousands of units into their -- off a base of 0. So we're not as U.S.-centric as we are in the transportation business, where the overwhelming majority of our business in the IDP group is international. -------------------------------------------------------------------------------- Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [49] -------------------------------------------------------------------------------- Great. And final question on the AIS business, any update on the timing of your 2 CubeSat launches? And are you still expecting the sort of modest growth we've seen in that business, top line revenue that has occurred in the last couple of years. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [50] -------------------------------------------------------------------------------- Yes, I think there's a couple of things growing that. We've always told you 10 to 15, Chris, probably since the day we met you, and we're sitting there at 12 as it continues to grow. So I don't know, before I answer that question, December. You said the first launch out of Vandenberg on a SpaceX rocket in December. Second one, roughly 6 months later. But back to your original -- my original thought, the -- in order to grow that business and keep it going, there's other things that we need to do to continue to make it grow. Number one is launch those things and get into that class B. Where all of a sudden, you have new customers because you're monitoring a new class of ship with a new class of customer. So you're actually raising the market size, and then that's exciting to us. The second thing is kind of ORBCOMM 101, where you productize the AIS business, kind of like we do in our solutions markets. The AIS business all along is collect the data, turn on the faucet and let the data run to your resellers. And now, we're building this portable Hali product for these class B ships that don't have these big AIS communications on it. So we think there's a pretty big market for that. And if you look at some of these bids out there that we're kind of looking at, some of them could be in the tens of thousands. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Our next question will come from Scott Searle with Roth Capital. -------------------------------------------------------------------------------- Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [52] -------------------------------------------------------------------------------- Marc, not to spend too much time on the coronavirus. But just to go back to your earlier comments about some pushouts that you're expecting to start-up in the second quarter. Could you frame that for us a little bit in terms of the size and magnitude of that? And maybe, what you guys were thinking about from a growth perspective last week to help us understand and frame it? And then as well, on the ARPU front, certainly, some near-term blended issues from a container standpoint being lower ARPUs. But could you help us understand what the pipeline is looking like, the visibility of the pipeline because a lot of the applications weren't talking about Blue Tree and inthinc or higher ARPUs? And how we should expect that to be trending over time and your visibility to what that pipeline looks like? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [53] -------------------------------------------------------------------------------- Yes. So to begin with, on Q2, I don't know that I said pushed out. What I said was, I don't know. I think we're first beginning to understand, and it's evolving. So the one thing I do know is, it's not good news, and it's not helping business. So I'm not a 100% sure in Q2, what the impact is. Q2 already has some good sizable orders. And Q2 is historically, gee, and every year I can think of better than Q1 because of the seasonality of the ORBCOMM business. So we'll wait and see in terms of Q2. But to your point, we did take a more conservative look at guidance. Especially even over the last 72 hours, as we watch the data continue to come in. The ARPUs in the container business, depends on what we're doing in the container business. So for Carrier, we are not in the Telco business. We're in the hardware and the software business. That is the -- that is what we're doing with that particular first opportunity for that customer. So as you sell the hardware and recognize the licenses on the firmware over a period, it leads to lower ARPUs. The rest of the container business so far that we see, including what's most likely our next deal with Carrier is different in that you're still not necessarily doing the Telco and the communications, which also is a cost, but you are offering your web platforms and everything else. So the ARPUs are closer to the mid-range of the ARPUs for those deployments. But Dean is right, as you average that out with the big Carrier deal, it's a slight negative effect. So moving forward, and inthinc ARPU is multiples of a cargo ARPU and a reefer. It's almost like reefer is like 3x dry van and then in-cab might be 3x reefer. And we're always focused on our mix to see where we end up. But if we do 300,000 subscribers this year and 80,000 of them are tied to this one particular opportunity at Carrier, then it probably will have an effect. But it's not going to -- it's maybe going to come nowhere near beating down the $1 that's just going to pick up. -------------------------------------------------------------------------------- Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [54] -------------------------------------------------------------------------------- So Marc, but looking at that pipeline, if we were to look at the 2021, is there a bias than to the upside in terms of the blended ARPU mix? And if I could just throw in as well. What's the number in terms of the 3G trade-off trade-up this year that you're kind of factoring into that 7% to 15%? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [55] -------------------------------------------------------------------------------- Gee, the 3G, if we were to trade out every one, which we won't, would be something like $20 million. What we've modeled in as opposed to that is more in the $3 million to $5 million range for product. So relatively small, but I don't think we're going to get it all done this year, which is why it's relatively small. But what I know is that these companies can't wait, some of them have deployed in the 10,000 units out there and to get these things swapped out, might take a year. So they can't wait until the end or they can't wait until next year. So we -- one of our largest customers, we expect the first 2,600 units between now and the end of Q2. But I think we've sized it pretty well for you right there. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- At this time, there are no further questions, and the company thanks you for participating on the call and looks forward to speaking to you again when they report fourth quarter results. Have a great day.