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Edited Transcript of ORBC earnings conference call or presentation 30-Apr-20 12:30pm GMT

Q1 2020 ORBCOMM Inc Earnings Call

Fort Lee May 17, 2020 (Thomson StreetEvents) -- Edited Transcript of ORBCOMM Inc earnings conference call or presentation Thursday, April 30, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aly Bonilla

ORBCOMM Inc. - VP of IR

* Constantine Milcos

ORBCOMM Inc. - Executive VP & CFO

* Marc J. Eisenberg

ORBCOMM Inc. - CEO, President & Director

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Conference Call Participants

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* Christopher David Quilty

Quilty Analytics, Inc., Research Division - Research Analyst

* 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

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to ORBCOMM's First Quarter 2020 Results Conference Call. (Operator Instructions) Please note this event is being recorded, and a replay of this conference call will be available from approximately 11:30 a.m. Eastern Time today through May 14, 2020. The replay service details can be found in today's press release. Additionally, ORBCOMM will have a webcast available in the Investors 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.

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Aly Bonilla, ORBCOMM Inc. - VP of IR [2]

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Good morning and thank you for joining us. Today, I'm joined by Marc Eisenberg, ORBCOMM's Chief Executive Officer; and Dean Milcos, ORBCOMM's Chief Financial Officer. On today's call, Marc will discuss how the company is affected in this current COVID-19 environment, provide some highlights on the quarter and give an update on the business. Dean will then review the company's quarterly financial results and outlook. 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.

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [3]

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Thanks, Aly, and good morning, everyone. Before we begin, we hope you and your families are healthy, safe and secure during this challenging time, and our thoughts go out to those impacted by COVID-19.

Earlier this morning, we issued a press release announcing our financial results for the first quarter ending March 31, 2020. Let's begin with what is top of mind for many investors, how our business is impacted by the current environment. Starting with operations, nearly across the globe, ORBCOMM is considered an essential business. Not only are we a telecommunications company, but we also support a large share of the world's food distribution. Therefore, we continue to ship products, support customers and execute on our technology road map. That being said, much of this work is being done remotely, which certainly has its challenges, so we implemented a number of contingency plans to minimize disruption to global business operations. Our highest priority is to service our customers while ensuring our employees are safe. In an effort to hit the ground running as markets begin to stabilize and keep our employees engaged, we've implemented our 30 projects in 30 days program, which focuses on execution across all disciplines of the business, including new product introduction, incremental product features as well as process improvements.

Turning to our Q1 financial highlights. Our results were basically in line with expectations for revenue and adjusted EBITDA. Total revenue for the first quarter was $66.2 million, similar to the prior year. Service and product margins improved in Q1 over the prior year, with service increasing to 67.7%; up 110 basis points, and product increasing to 32.6%; up 300 basis points. These improvements led to an adjusted EBITDA of $13.7 million. Q1 was shaping up to be a stronger product quarter, but as market conditions worsened toward the end of March, a number of shipments pushed to the right. We generated operating cash flow of $8.2 million in the quarter.

Looking at the macro environment, many of our customers are also doing essential businesses and play critical roles in sustaining the flow of goods during this unprecedented time. However, looking across our entire base of customers, they fall into 2 camps. Those who are extremely busy and those who have increased downtime. Many of our customers have increasing demand for their services, such as our refrigerated transportation customers who are shipping food, pharmaceuticals and medical supplies to ensure supermarkets, drug stores, and hospitals are stocked. We're seeing stability in the maritime market where customers leveraging vessel monitoring systems, buoy tracking systems and fisheries management solutions are minimally affected.

In other accounts, starting with nonrefrigerated transportation, depending on what they typically haul, customers have seen lower demand due to a decrease in freight loads and are slow to spend on IoT solutions. Oil and gas is in an extremely tough environment and about 3% of our business.

About 60% of ORBCOMM's revenues are made up of recurring service. This revenue continues to be stable, where we typically see about 7% annual subscriber churn and are not trending off significantly. Foreign currency is a minor concern, leading us to provide limited concessions for some international customers. We are also focused on small companies in select industries such as trucking and oil and gas, which have been struggling for quite some time.

That being said, recurring service revenues after just $1 million to the end of the Maersk and AT&T contracts are trending roughly flat to last year, showing the stability in our model. The average 40% of our business in hardware sales is much more difficult to predict. Many of our OEM customers, which represents approximately 15% of our hardware business, have temporarily halted production and furloughed employees, which, in turn, delayed shipments of our products. We expect most of these factories to reopen in the quarter, but we are unsure when we will resume supplying products, creating uncertainty for hardware sales.

Regarding new business, the COVID-19 pandemic is making it difficult for sales teams to travel on-site to meet with customers as well as our solution delivery team to support new installations and provide training, thus, pushing many new opportunities to the right. Overall, in Q2, hardware is trending roughly about 2/3 of our recent run rate.

Keep in mind, the majority of our gross profit comes from service with margins in the high 60s as opposed to hardware with margins at about 30%. Said differently, over 75% of our gross profit comes from service that is extremely stable. It is difficult to determine the extent and duration of this rapidly evolving crisis. We need to be sure that our company's liquidity position remains strong. To ensure that we ride out the storm and hit the ground running as the market recovers, in Q1, we drew down $15 million from our revolving credit agreement, and in April, we received a $7.5 million loan through the U.S. Paycheck Protection Program. We are now evaluating whether we return this loan as the guidelines continue to evolve. To date, we have not reduced our U.S. employee counts. We've made multiple cuts to nonpayroll expenses such as travel and marketing and have reduced future production as the company turns a great deal of focus to managing cash.

Let's move on to our business update, starting with our container programs. We're continuing to support our initial projects with the carrier container group for one of the premier global shipping line companies, our largest deployment to date. In Q1, we shipped over 19,000 devices, bringing the total ship to date to nearly 48,000 devices or roughly about 1/3 of the entire 150,000 unit fleet. We anticipate shipping approximately 8,000 devices in Q2 and approximately 20,000 devices in the second half of the year. To be clear, we originally forecasted 80,000 devices this year and are currently looking at more like 50,000, as the customers experiencing difficulty installing as access to ports has become more challenging due to local restrictions associated with the virus.

In the end, we still expect to ship the same number of devices over the course of this program, but the program will most likely extend another couple of quarters. Partially offsetting this reduction is an additional order for 7,000 devices for a second shipping line customer, which is expected to start shipping in mid-year. Despite current challenges, we've made strides on some new opportunities, including a recent win with [Caravan] Logistic, a leading truckload carrier in Canada for 750 dry van trailers, utilizing our solar-powered asset tracking and monitoring solution. We're continuing to make progress on our plan to integrate the web platforms from our 13 acquisitions. All new cargo customers are now supported on the ORBCOMM platform with other market segments expected to go live at various stages throughout the year.

With our new integrated platform, customers will be able to monitor multiple asset types via 1 seamless application, create far tighter reporting intervals and uncover deeper insights about their business through advanced analytics. We've built this product for the future with the capacity to support the evolving need for increased data and more sophisticated solutions in a 5G IoT ecosystem. Our global ERP implementation is just about finished with the last remaining acquisition scheduled to transition in early Q3. Once completed 100% of ORBCOMM's revenues will flow through 1 ERP system, enabling significant efficiencies, simplified billing and improved inventory management.

We're continuing to focus on innovation as a key driver to growth. In Q2, we're planning to launch a new product that leverages ORBCOMM strength in satellite IoT integrated with our advanced telematics solutions, creating market-leading products with a dual-mode offering. Our satellites and accessory offering combines a satellite modem with antenna, adding dual-mode connectivity to almost every ORBCOMM telematics device as well as most other devices on the market. This product is priced at about half what customers currently pay for similar products. This makes dual-mode connectivity a significant competitive advantage for ORBCOMM as well as an easy, cost-effective option for customers through a simple plug-and-play connection. We see significant demand for this product and expect the share of dual-mode products to increase.

Wrapping up, we are pleased with our results in the first quarter despite a tough environment. We've seamlessly transitioned our employees to working remotely with minimal interruption. We continue to manage the business with fiscal discipline. We have a strong balance sheet. We are confident we will emerge from this environment as a stronger, more efficient company with our integration of 13 acquisitions behind us.

With that said, I'll turn the call over to Dean to take you through the financials.

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Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [4]

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Thank you, Marc, and good morning, everyone. I think we can all agree that the business landscape has changed significantly over the last 2 months. Fortunately, many of our products and solutions are crucial and deemed essential in supporting the supply chain during the COVID-19 pandemic. We're pleased our financial performance in Q1 came in as expected, and we enter Q2 with caution considering the business disruption around the world. We continue to make progress on many key initiatives and are focused on executing our cost reduction plan and conserving cash due to these uncertain times.

Let's start with the company's first quarter financial results. Total revenue in Q1 was $66.2 million, similar to the prior year and in line with our outlook provided last quarter. Q1 service revenues were $40.5 million, up 3.9% compared to the prior year period. Recurring service revenues were $39.9 million in the quarter and up 6.2% over the prior year. The improvement was primarily driven by new subscriber additions and recognizing $1.9 million of accelerated deferred service revenues associated with the expired AT&T and Maersk contracts. Excluding these contracts in both years, recurring service revenues improved $1.5 million or up 4.1% year-over-year.

Product sales in the first quarter were $25.7 million compared to $27 million in the prior year period. The decrease in revenues was primarily due to decisions made by some customers late in the quarter to hold off purchasing hardware given the current environment. Partially offsetting the revenue decline were increases in our container programs, which benefited from the 19,000 devices shipped in support of our container project with Carrier.

Turning to gross profit margin. The company realized a margin of 54.1% in the first quarter, a 270 basis point improvement over the last year, driven by growth in both product and service gross margin. Product margin in Q1 grew 300 basis points to 32.6% compared to the prior year period. Improvement was primarily driven by lower warranty expenses, specifically with our IDP product line as the actual warranty expense has been trending lower than our estimated warranty accruals and also by lower manufacturing costs.

Service margin in Q1 was 67.7%, 110 basis point improvement over the prior year period driven primarily by incremental service revenues and lower indirect costs.

Looking at operating expenses. The company incurred $37 million in Q1 compared to $34 million in the same period last year. Keep in mind, Q1 of 2019 included a $2 million favorable net benefit associated with the inthinc acquisition. Excluding the benefit from last year, operating expenses in Q1 increased $1 million year-over-year, driven primarily by higher SG&A of $500,000 and depreciation and amortization expense of $700,000. While SG&A was up $500,000, there were $1.9 million of bad debt expense and receivables in Q1 2020 compared to the prior year period, largely related to disruptions caused by the COVID-19 pandemic. Offsetting these market-driven increases in SG&A expenses were decreases in employee compensation of $1 million, largely from prior year headcount reductions and from lower professional fees of $400,000.

As we move forward in the year, we will continue to focus on our 2020 cost reduction plan, while recognizing the full year benefits from previously implemented cost savings initiatives.

Adjusted EBITDA in Q1 was $13.7 million, near the midpoint of our outlook, with margin at 20.7%. Keep in mind, there were significant accounting adjustments in both directions in Q1 2020, resulting in no material net benefit compared to the $2 million favorable net benefit recognized in Q1 2019. Excluding these adjustments, adjusted EBITDA in Q1 increased $600,000 over the prior year.

Turning to the balance sheet and cash flows. The company ended Q1 2020 with $70.1 million of cash and cash equivalents, an increase of nearly $16 million from the end of Q4 2019. The majority of the increase came from drawing down $15 million from our revolving credit facility as we felt it was prudent to strengthen our cash reserves and our liquidity during the pandemic should business disruptions continue for an extended period.

In addition, in Q1 2020, we repurchased over 800,000 shares of common stock for a total cost of approximately $2.5 million. Concerning the current environment and our focus on preserving cash, we put our share repurchase program on hold for the foreseeable future.

In Q1, cash flow from operations was $8.2 million, and CapEx was $4.8 million, resulting in $3.4 million of free cash flow before financing activities.

Let's move on to our outlook. Despite these uncertain times, we do have some visibility into Q2 based on orders already received and those currently being worked on. As Marc mentioned earlier, there's uncertainty surrounding product sales in the second quarter as some OEMs have temporary suspended production lines. And due to reduced on-site support, some fleets have delayed deployments. Looking at service revenues, we completed the AT&T contract and anticipate continued fluctuations in foreign exchange rates, both of which will slightly impact the second quarter. As a result, we anticipate recurring service revenue to be flat to down 3% over the prior year period. We believe total revenues in the second quarter to be $55 million on the low end and $60 million on the high end, depending on how market conditions evolve. We anticipate adjusted EBITDA margin in the second quarter to be approximately 19%.

Due to uncertainties surrounding the level of business disruption caused by the COVID-19 across the multiple markets ORBCOMM serves, we're withdrawing our previously announced full year 2020 outlook and expect to provide better visibility on our Q2 earnings call.

In closing, we're pleased that our performance in Q1 came in line with expectations. Despite business disruptions causing revenues to be dissimilar to prior year, we continue to improve on our service and product margins. The second quarter will be challenging for many of us, but we have taken necessary steps to enhance our operations and strengthen our liquidity position, so we can emerge in this environment a fully integrated and stronger company.

This concludes our remarks for the call, and we'll now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from Ric Prentiss of Raymond James.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [2]

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A couple of questions. Obviously, very uncertain times. But focusing on the recurring service revenue, you mentioned, Marc, I think that you haven't really seen any real change in the 7% annual churn rate -- or excuse me, churn rate. And how about any effect on ARPUs? Are people using it less? How much of the revenues are kind of monthly recurring versus usage charges? And does it vary by segment?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [3]

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Yes, Ric, I think you're kind of hitting to the heart of it there. We're going to add subscribers this quarter. There's no doubt about it. But we are focused on, first and foremost, some foreign exchange. And don't get me wrong, most of what we sell is priced in dollars. But in places like Brazil, when the real has gotten weaker by about 30%, in some cases, you're charging your customer more than they're charging your reseller, more than they're charging there. So there's hundreds of thousands of dollars that, that's going to affect us, but not millions of dollars. So that is the first thing that you're seeing. And then the second, which is pretty clear in our financials, is the other thing that you're monitoring is your ability to collect, and we just came out of a transportation recession. It was improving early in Q1. It was just beginning to make the turn. And then some of these companies in the trucking side that were already struggling kind of walked into this environment. So we're focused on them as well. But if you kind of look at the Q1 versus Q2, we're predicting it down a little bit, assume 50% of it is the end of the AT&T and Maersk deal and the other 50% are just these maybe $1 million in the dogs and cats. But that being said, after the -- service revenues will be within 97% of last year, but maybe even as high as 100%.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [4]

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Okay. And have you experienced any bad debt collection issues yet? I don't think you mentioned anything, Dean, but what are your thoughts as far as your reserve and what might happen on the bad debt side?

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Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [5]

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Yes. No, we're actually seeing very good collections through the first month of the quarter. So nothing significant on the bad debt side. We did clean up some stuff in Q1, some stuff from the transportation market slowdown last year, and we were a bit aggressive in just cleaning up at-risk accounts. But I don't see it coming anywhere near that in Q2.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [6]

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Okay. And then you mentioned some of the factories that have temporary shut their lines. I know you guys are doing some stuff in Mexico. How is Mexico doing from its lockdown? And I would assume, you mentioned you guys are considered an essential business, not just because it's telecom because it's food distribution. But is it Mexico where some of the factory issues have been felt? And what is your visibility on them returning to open?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [7]

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So our factory in Mexico is open because we're deemed an essential business. And I believe we could be the only lines open in this massive Sanmina factory, but we are open, continuing to produce goods. We've taken so far this year -- I know there's a different answer than what you asked, but we've taken about $8 million of cost over the next 2 quarters and pulled it out of our production plan. So we are going to produce less to make sure that we focus on cash.

Separate from our factory, in Sanmina. In Mexico, you're also focused on every factory that builds a component that's used in your devices. And there's products coming out of China, which is actually pretty stable right now. There's stuff coming from all over the world. And so far, we believe we'll be able to make our entire Q2 build. So where we struggled with the component, we were able to find another component. I mean it's pretty wild. We got a letter the other day from Gemalto. They just can't supply sim cards because their factory in the Philippines is closed down. So -- but we do have another supplier for that, and we were able to find that product from somewhere else. But it is something that every company that manufactures in the world is focused on right now.

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Operator [8]

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Our next question today will come from Mike Walkley of Canaccord Genuity.

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Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [9]

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Dean, maybe I'll jump in with you. Just obviously, some higher bad debt expense in Q1, but there's cost savings ongoing. How should we think about overall OpEx levels into June and going forward? Can you kind of help us with the run rate of the business?

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Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [10]

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Yes. No. OpEx was high with some of the cleanup we did in Q1. I expect SG&A in Q2 to be about $17.5 million, which is a pretty big drop from the $19.6 million, $19.7 million we had in Q1. And product development of $3.8 million should be pretty consistent going forward for the rest of 2020. So that's the Q2 plan. And I wouldn't expect SG&A to grow much beyond that in the remaining quarters for the 2020 year.

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Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [11]

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Okay. Great. That's helpful. And then Marc, just on kind of -- I know the visibility it's challenging out there. But -- and talking with some of your larger customers, any comments maybe on kind of how the year plays out? I know you're pulling guidance, but any comments just on how they're maybe thinking about orders? Are these canceled or just pushed to future period, just given logistics challenges to open up? And then just with the difficult getting to your customers to install equipment, how should we think about the impact to net adds on the shorter term that's implied in your guidance?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [12]

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Yes. I think I almost have a separate comment for all thousand companies because they're all experiencing something different, right? You're experiencing from our refrigerated guys is, gee, we're struggling to install because we're so busy. And then your marine guys out in the fishing fleets and the buoys, their business really hasn't changed at all. And then every trucking company has a completely different story depending on what you install. The commodities guys are off a little bit, the guys that ship on rail. If you're -- a lot of our guys ship auto parts when their business is struggling. And then some of them are shipping consumer goods, and their business is through the roof. There is a separate story, which is what makes it hard to guide because it's literally 1 plus 1 plus 1 plus 1, you need to keep going until you get to 1,000 to figure out what the story looks like, and then it's evolving because if you're delivering auto parts, then you're not just sitting there, you're moving. You're now bidding on other types of goods that you don't typically carry, and then that affects other guys, right? So it is just a wildly evolving scenario.

From an OEM perspective, that one is tougher to predict but -- or tough to predict. But if you look at like the Carrier's and the Terex's and the JLGs, they furloughed their employees for like 30 days, and then we expect them to open. And I imagine that they're sitting on the product that they were expecting to build over the last month, and it will probably take a month or 1.5 months for them to work through that product and have us begin to ship, which you can understand is why it's so difficult to predict what we're going to ship in the second quarter, right, versus the third quarter. But I'm not aware that any orders that we have in hand have been shut down or canceled. But what we are experiencing is almost like that Carrier deal, we're still going to take the 150,000 units, but it may just take another quarter or 2 to get this done because it's not an ideal situation to be installing at these ports, and they don't want us in there doing what they consider nonessential activity. So -- and it varies port by port everywhere in the world, which is why we're still shipping 50 of those 80,000. So like I said, it's a complex story. It's kind of all over the board. And I think 55 million, I think it's in play, but maybe on the less likely side. And then you kind of look at 60 million and you say, all right, Q1 was 66 million. You pull out the Maersk, makes it 64 million. Carrier is going to be a couple of million instead of 4 million, that's 62 million. And then at the high end, you're at 60 million out of 62 million, you're right there. So we are certainly less affected than most, but there are -- I guess, at the 55 level, we are concerned about lots of moving parts and are afraid something is going to slip through the cracks.

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Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [13]

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Okay.

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [14]

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I'm sorry, so we -- so let me tell you what I know for a fact, right? We're going to end April at about 7,000 to 8,000 positive net subs, and the Carrier subs are all put it in one day, and that doesn't include that. So you're going into May with roughly 15,000 subs in hand. And the first month of the quarter isn't always the strongest number providing subs. I think the worst-case scenario would be something like a positive 25,000. And the best-case scenario would probably be closer to 40,000. But we are not anticipating negative sub growth. Even in the 2009 time frame, ORBCOMM never went negative on a sub count.

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Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [15]

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Great. That's very helpful. One last question, and I'll pass it on. Dean, with the lower kind of hardware levels, how should we think about gross margins that were very strong in the quarter, but kind of your visibility on what you expect in mix and maybe a little lower hardware usage? How should we think about gross margin trends going forward in the short term?

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Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [16]

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Yes. For Q2, it depends -- depending on where the product revenues are. There's a fixed component to similar class of product with our warehouse and employees that support that warehouse. And we're not changing that fixed cost component, at least not in the near term. So on lower product revenues, I would expect a lower product margin for the quarter. And I think something in the 27% to 28% range, if revenues come in lower on the product side, like we're thinking right now.

On the service margin side, we should stay to close to 67%. I know we're losing this deferred revenue, which doesn't have much cost or very little cost, but actually no cost in Q1, the deferred revenue, which was going to hurt the service margin slightly. But that's what we're thinking for Q2 right now. And beyond that, we're really not giving a forecast right now just because we're just waiting to see how things evolve.

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Operator [17]

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Our next question will come from Mike Latimore of Northland Capital Markets.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [18]

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Just on the supply topic. I guess, Marc, it sounds like pretty much you have access to components and contract manufacturing up. So there's not really any kind of supply issues that are sort of lingering out there?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [19]

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We don't see it yet, but we're constantly concerned that we're going to turn over some stone and because sometimes these letters just come out of the blue. I mean you build the telematics box, and there's literally hundreds of different components in there. But I don't see anything at this point that is going to interrupt Q2 production.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [20]

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And then from a churn perspective, I know you kind of touched on that a little bit. But I guess how are you thinking about that sort of 7% number? Does that become 8%, 9% in the second quarter? Or do you think 7% is kind of where it holds?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [21]

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In April, shockingly, we're seeing less than 7% on that run rate. So we're not seeing it yet, but to say that, that couldn't flare up would be silly because we just don't know. But we're not expecting that. But what I can tell you from history in that 2009 time frame, when we went through that recession, churn was 6%.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [22]

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Okay. And then historically, you've talked about kind of a base hardware revenue level, I think, in the $15 million, maybe $20 million range. I know it's kind of a different environment now, but is there a way to kind of frame what a base hardware number looks like?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [23]

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Just for Q2 or looking beyond Q2? Because when you're shipping to your heavy equipment OEMs and it's a pretty stable amount every single quarter and they're furloughed, it's a tough question to answer, right? But typically, that base hardware business is somewhere between $15 million and $20 million of hardware. So maybe if you're asking me of that $15 million to $20 million, how much are you going to ship to those very customers in the second quarter, which might be what you're asking, I would take a wild guess because I don't know that number of something like $12.5 million.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [24]

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Okay. And just last one. Obviously, you're doing your food transport business, your customers are very busy. Does that lead to -- are they looking to add more units? Or do you have a little bit of pricing flexibility there? Or is it just like really good visibility because of their -- how busy they are?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [25]

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First of all, Walmart and Kroger are busy. They're putting on units. They're -- Walmart typically buys units when they have budget more than it's market dictated. But we have today roughly 70% of Walmart's fleet, and we think by the -- which is over 60,000 devices. And we think we'll be at 100% by year-end. So they continue to do well. Kroger's entire fleet, we're in the middle of installing. We're about 25% to 30% of the way through. So still a lot to go there. But that's the strength of ORBCOMM, right? I don't know if you know CNS wholesale. They're kind of a quiet giant out there, but if you were to ever look them up, the amount of grocery stores that they supply. Food chains, the Piggly Wiggly and a bunch of these guys, massive ORBCOMM customer doing well. Wakefern that does the ShopRite business, also doing well. There's probably 15% to 20% of our business that is refrigerated over-the-road trucking, and those businesses are very strong.

And in the first quarter -- the end of the first quarter and the beginning of the second quarter, I mean, you sensed it, right, I mean these guys, all of a sudden, there's this transition from people spending half their time in offices and restaurants and eating out, moving to grocery stores where no one's leaving home and everyone's eating being home. And you can imagine the incredible work that these guys did moving those goods and filling these stores and what heroes our truckers are.

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Operator [26]

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Our next question will come from Chris Quilty of Quilty Analytics.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [27]

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Just a couple of housekeeping questions here. AIS revenues for the quarter, Dean?

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Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [28]

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AIS revenues were $2.9 million for the quarter, pretty consistent with the prior quarter.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [29]

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So I think it's actually down a little bit. I just didn't -- I didn't go into my model. Was there a particular reason, I mean on a sequential basis, it might have been down?

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Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [30]

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Okay. It might have been down $50,000 or $60,000. It wasn't down more than that. Maybe there are a couple of customers that are usage-based where the usage was down slightly, but I'll have to get back to you, Chris.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [31]

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Okay. But I mean no major changes to the outlook for that business, so continued growth.

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Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [32]

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No, no major changes on that business.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [33]

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Okay. You also talked about some continued cost savings going forward. I think most of the employee reductions were done last year. And obviously, if you do hold that PPP loan, those wouldn't be part of any of the cost savings for 2020. Can you characterize where you expect to see those savings going forward?

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Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [34]

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Yes. Sure. Well, in the immediate quarter, we're definitely going to see lower travel, entertainment and commissions and marketing costs. Those were part of our plan going into 2020, but we're going to see a more significant cost savings there in Q2. We also have professional service fees. We did renegotiate some contracts. We'll have lower fees for both legal and audit. And then on the consulting side, we did reduce some of our external consulting costs.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [35]

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And marketing is running at about 50% of the original plan?

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Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [36]

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Yes. Some of that is trade shows, which we typically do a number of quarter, which we're not doing right now, a lot of the trade shows aren't happening either.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [37]

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So I guess, hopefully, those savings will be temporary, once the world gets moving again.

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Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [38]

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Some of them will be temporary. And some of them were already -- some of the vendor contracts, professional service fees and consultants were already baked into our cost savings for the budget.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [39]

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Got you. And number of devices shipped in the quarter?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [40]

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Just under 80,000.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [41]

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Got you. And so do you expect the mix of devices to turn more favorable just in the current environment, in terms of the usage patterns? I mean should there be any kind of a benefit to ARPU?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [42]

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Well, anything -- any benefit that we think we're getting in ARPU is kind of being liked out from the foreign exchange offset. So the base is so big. And based on shipping another 30,000 or 40,000 assets at $1 or $2 higher or lower isn't going to change the company's ARPU at 2.2 million subs.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [43]

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Got you. And if you want to maybe -- is it -- as you look at your business and the way business is changing, are there any silver linings that you see coming out of this in terms of FIMSA had already started a trend towards improved asset tracking, but do you see any of your customers or potential customers that you think might be more aggressive coming out of this due to the impact of the coronavirus?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [44]

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Yes. Well, there's 2 things. I mean the customer based ones are the guys that have full IoT deployments, and they're able to command the control over the air instead of getting to a place, traveling where you can't travel, getting to places you can't go. The guys that can command and control their assets via IoT is massive advantage, right? I mean could you picture running out and setting these containers as opposed to hitting a button with your mask and your gloves and you're soon on in places that you can't get into. And I mean massive advantages for the people that have already deployed. And I think there's a big disadvantage for the guys that haven't done that.

In terms of ORBCOMM, there's definitely a silver lining for us in that. We spent the last 12 months kind of paying the price for 13 acquisitions and then getting the integration finally done. And we're onboarding all these new customers. We're shipping 80,000 new products in a quarter. And at the same time, we're balancing, getting the integration done new developments and new features and supporting and implementing what current customers want and trying to do that while trying to reduce costs and scaling the business put us in a very difficult position. And this kind of slowdown in the last quarter, we're kind of taking a deep breath and, wow, are we executing and really taking major strides toward getting this integration done, which is welcome if there (inaudible). I would say the second silver lining is, I think you guys are getting a sense of it. We're doing 75% of our gross profit through our service revenues. The service revenues aren't going anywhere. And you go into Q2, and you're like, gee, this could be the worst quarter. 20 years looking backward or 20 years looking forward for the entire markets, and you've got ORBCOMM that's focused on, hey, are we going to burn $1 million of cash? Are we going to burn $2 million of cash? Or maybe we're going to make $1 million in cash. But we're not blowing through $70 million in cash on the worst quarter. So the fact that our stock traded down because people are worried about liquidity, just don't understand the model. But that being said, if you look at ORBCOMM kind of marching forward, integration behind us. 60% of our business is in service revenues. We've got this capital and coming out of this recession when our competitors are going to be drastically weaker who are not sitting there with 60% service revenues. And we see them cutting heads and not able to hit the ground running as this thing progresses, I think we can take an advanced step. So a big step forward. So that would be the silver lining.

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Operator [45]

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(Operator Instructions) Our next question will come from Scott Searle of Roth Capital.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [46]

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Dean, just quickly to -- just make sure I'm properly calibrated, I may have missed a couple of things. AIS was $2.9 million for the quarter for product gross margins. In the second quarter, you're expecting in the 27% to 28% range and OpEx should be down about $2 million sequentially. Is that correct?

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Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [47]

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Yes, that's correct.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [48]

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Okay. And then, Marc, you've made a couple of comments throughout the call in some of the different end markets. I think you said oil and gas was 3%. Refrigerated food and grocery, 15% to 20%. Can you kind of take us through the 2.2 million subs, kind of how they break down by end markets? I know in certain cases, you don't always know, but just kind of help us understand what the exposure is? Maybe give us an update on inthinc and Blue Tree? And as well, maybe some color in terms of large customers versus smaller SMB, like trucking guys, for example?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [49]

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Well, there's a lot there. So let's start breaking down our subs. 62% of our subs are in transportation, which is made up of -- it's made up of a lot of things. It's made up of our container business, which is the reefer containers, which today is probably sitting at about 80,000 subs, but it's going to be at about 200,000 within a year. You're looking at the refrigerated, which is 15% or 20% of our entire business, which means it's 30% or 35% of our transportation business. But the transfer -- in terms of in-cab units between Blue Tree and inthinc, there's roughly 80,000 out there. But that 62% also includes what we resell on the satellite side to the guys in Brazil and around the world. So that would be a portion of the remainder of that. And then there's another maybe 200,000 dry van stuff out there, whether it be J.B. Hunt or HUB Group or stuff like that.

The other 38% of our business that's not transportation is heavy equipment, is a big one and heavy equipment is -- let me think, equipment at 800,000 subs, subs and 2.2 million. It is like 20% or 25%. And then the rest is a lot of marine, government and other -- I'm sorry, here it is. Transportation is about 62%. Heavy equipment is about 15%. Marine is about 11%. Oil and gas is 7% and government is 5%.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [50]

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Great. Very helpful. And then, Marc, I know things have certainly changed into fluid environment out there. But there were some larger deals from an RFP standpoint that we're percolating out on the horizon. Have they completely gone away? What is the general tone, tenor expectation on that front? Are these things that start to come back this year, start to get decided if we have some stability in the marketplace? Or are have they been withdrawn?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [51]

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So I think -- I don't think anything has been withdrawn. I think if you want to move to an IoT world, I think, if anything, you're seeing more of the benefits there. But that being said, it may not be the best time to allocate your capital and it may not be the best time to install and figure out how to get in touch with your employees in order to get trained. That's the bigger issue. But as I was saying to Chris before, the silver lining is, if you didn't understand the need for IoT before, you sure as hell do now. So stuff is shipping to the right. In Q2, we're guiding to 2/3 a normal hardware quarter, 2/3 of the normal hardware quarter. It's a -- I'm hoping it's a blip of the radar. There's some V- or U-shape recovery. We did half of that back in Q3 and then Q4 looks like a regular quarter. That would be a really good outcome. And Q4, people start buying and getting out and starting new programs.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [52]

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Marc, probably premature, but upgrade cycles and end-of-life opportunities that are out there, is there any sort of dialogue or potential for that starting to build later this year, particularly during time periods like this when assets are less active, there's the opportunity to install and upgrade. So is there anything going on on that front?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [53]

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Oh, yes. I mean in some cases, it's a great opportunity to swap out some of those 3G units. So incredibly busy places like the Hub Group, getting stuff installed, swapping those out. In our fixed asset business, we've got our ISAT M2M format, it's been replaced by ADT and is approaching an end of life. And we're in the middle of replacing out 15,000 of those, and that has been a big part of our hardware business.

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Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [54]

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Great. And lastly, on the balance sheet, how much do you need to really run the business? And talking about silver linings, you do have cash flow, you do have a large services business, and some of your competitors are potentially a little impeded as we start to recover at some point. Do you go on the offensive? Are you opportunistic in terms of pursuing M&A or too early to think about those things?

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Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [55]

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So strategically, we have not been looking at M&A because I think the bigger issue is the -- I would say it's 50% operations and 50% strategic. While we were doing this integration, as I was describing before and trying to onboard these new customers and close these large opportunities, literally, there wasn't enough time in the day to onboard a new acquisition, and that was a struggle. But on top of that, we -- from a technology perspective, we really found that we had every technology that we needed. So when you went into a J.B. Hunt or Walmart and you looked at their assets and you looked at the technology they had after Blue Tree and inthinc, you really had a good fit there, right? Whatever they have you had and you strategically completed what you had to own.

Going forward as our stock starts to kind of trade at a normal pace on a normal valuation and kind of gets healthy. I mean if you can build up some scale and buy at multiples similar or less than yours and synergize it to a good opportunity at a point that you can onboard it. Would we consider that in the future? We would. Would we consider it in the next 3 or 6 months? Probably not. We still have another 3 or 6 months to finish integration and then the company is going to evolve in a much different spot.

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Operator [56]

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And at this time, there are no further questions. The company thanks you for participating on the call. Hope you and your families remain healthy and safe and look forward to speaking to you again when they report second quarter results. Have a good day.