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Edited Transcript of ORBC earnings conference call or presentation 30-Oct-19 12:30pm GMT

Q3 2019 ORBCOMM Inc Earnings Call Fort Lee Nov 18, 2019 (Thomson StreetEvents) -- Edited Transcript of ORBCOMM Inc earnings conference call or presentation Wednesday, October 30, 2019 at 12:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Constantine Milcos ORBCOMM Inc. - Executive VP & CFO * Marc J. Eisenberg ORBCOMM Inc. - CEO, President & Director * Michelle Ferris ORBCOMM Inc. - Director of Corporate Communications ================================================================================ Conference Call Participants ================================================================================ * Arun A. Seshadri Crédit Suisse AG, Research Division - Analyst * Christopher David Quilty Quilty Analytics, Inc., Research Division - Research Analyst * David William Gearhart First Analysis Securities Corporation, Research Division - VP * Michael Fawzy Malouf Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team * 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 Third 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 AM Eastern Time today through November 13, 2019. 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 conference over to Michelle Ferris, ORBCOMM Senior Director of Corporate Communications. Please go ahead, Michelle. -------------------------------------------------------------------------------- Michelle Ferris, ORBCOMM Inc. - Director of Corporate Communications [2] -------------------------------------------------------------------------------- Good morning, and thank you for joining us. Today I am 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 an update on the business. Dean will then review the company's quarterly financial results and outlook for the fourth quarter, as well as 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 has no duty to update forward-looking statements. Furthermore, the financial information we won't [talk about] 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, Michelle and good morning everyone. Earlier this morning, we issued a press release announcing our financial results for the third quarter ending September 30th, 2019. The quarter was highlighted by record margins, leading to higher than anticipated adjusted EBITDA, despite hardware revenues being lower due to continued weakness in the macro transportation environment. Total revenue for the third quarter was $69.2 million, down $1.8 million from last year. The decline is entirely based on hardware and it's almost exclusively in our North American transportation group. This is a result of the combination of the challenging macro transportation environment, as well as difficult comps due to large orders in last year's third quarter in support of the Defense Logistics Agency or DLA and JB Hunt. In Q3 of last year, we shipped $4.4 million of hardware to JB Hunt and DLA. Without this impact, total revenues were up over the prior year by $2.6 million. Both of these opportunities shipping in 2018, leading to the difficult comp participating by the first quarter of 2020. The improvement in margins more than offset the reduction in hardware shipments, leading to strong adjusted EBITDA. In addition, Q3 total revenues were up $2.1 million sequentially over the prior quarter. Looking back at the first 3 quarters of 2019, we executed on several key initiatives to streamline our business, improve profitability and make better use of working capital. We set out to raise margins and went from the lows of 13% in product to a record 31.4% this quarter and increased service margin to 69%, from the lows of about 58%. This substantial improvement led to Q3 adjusted EBITDA of $16.9 million, or a margin of 24.5%. We set out to replace a number of high-priced products in the market with our new cost-reduced feature-rich products making us more competitive. We reduced inventory levels that now run 30% lower, by reducing our skew count by over 70%. About 80% of the 80,000 devices shipped in the third quarter were the new products contributing to the higher margin. We set out to sell off older inventory and now just a fractional amount of our inventory is discontinued. We set out to reduce cost and take advantage of the leverage in the model and we're now running 20 people lighter than last year. We set out to converge 25 web platforms across our various solutions with the goal of 2, CargoWatch, our highest volume web portal, and FleetManager, our in cloud-portals will soon be on the new platform with our other 3 major transportation portals to follow over the next few quarters. We set out to move the entire company to one integrated financial system and we now have 98% of our revenues on our new ERP platform with the goal of 100% in just a few months. We set out to win a number of large opportunities in our 150,000 unit container opportunity, with carrier has started shipping in Q3 and we expect the deployments totaling 30,000 units starting of other large deployment starting in Q4. We set out to be a significant cash generator and cash flow from operations reached $10 million in Q3, which was the fifth consecutive quarter of positive cash flow. From an execution perspective, we accomplished an awful lot this year, but unfortunately was met with a difficult transportation environment, where year-over-year sales in our North American Group are down $12 million in hardware shipments and trending to $16 million by year-end. In this market, deliveries from OEMs are down to 10-year lows, for example, according to ACT Research, new reefer deliveries from North American OEMs to transportation companies are trending to 20,000 this year, versus 70,000 in 2018, dry van deliveries are trending 80,000 versus 260,000 last year, and truck deliveries are trending to a 160,000 versus 536,000 last year. Keep in mind, while we would not expect it would be installed on all of these deployments had they not been down year-over-year, we would expect to be on a good portion. In many cases, we would be replacing our existing hardware, so it has a larger effect on the hardware sales, in which US transportation is down about 20% year-over-year and a far less significant effect on transportation service, which is basically flat. In our Q4 guidance, we're not assuming that these OEM orders bounce back, however (inaudible) is our agent and we would expect to see demand improve over time. At the very least, we'll start to comp out 2018 record shipment levels in the first quarter of next year. With the work we did through the initiatives I talked about earlier, as well as the $12 million in revenue growth across our non-transportation products, we expect adjusted EBITDA to grow about 10% in 2019, even on a relatively flat revenue year. The growing industry trend we're seeing in our markets involves an increasing number of customers choosing to implement IoT solutions in a subscription model, where the hardware, connectivity and software are all bundled into one monthly price. Typically, these types of contracts average 5 years. Many customers like this model because they can avoid the upfront capital needed to purchase IoT devices and speed up their internal decision process. We like that we can substantially increase our closing percentage while making good use of our capital. As this model becomes more popular, a few of our new large customers are opting for this type of arrangement. As opposed to our current model, where our hardware revenues are recorded upon shipments and service revenues are recorded over the life of the unit, in this type of transaction all revenues will be recognized as subscription service revenue over the life of the contract, and while it will impact hardware revenues in the short term, starting in Q4, we believe this model benefits ORBCOMM over the long term. First off, the lumpiness in our hardware revenues that we sometimes experience historically should lessen. In addition, the subscription model should increase sales, predominantly in recurring revenues over time. Lastly, it's moving some of the opportunities that have been sitting out there for quite some time to closure. We are currently offering this model to solutions customers mostly in Transportation, which is approximately half of our hardware revenues and anticipate this model to be used on about 20% of our transportation deployments, or 10% of overall product sales. This translates to about $3 million transitioning of hardware revenue a quarter. We begin offering this model in the next Q4 and Dean will get into the effect on accounting in a few moments. Let's move on for business highlights. Starting with our container programs. We've made great progress on the large deployment with, who we can now say it's carrier, the largest refrigerated transportation OEM globally, in support of one of the industry's largest shipping companies. As a reminder, this is a fleet wide project, global deployment of 150,000 devices, leveraging our expertise to help create carriers, customer-specific refrigerated container, monitoring and control solutions. We shipped over 12,000 devices in Q3 and anticipate shipping an additional 9,000 devices in Q4, representing just over $4 million in hardware revenue in 2019. Looking ahead to 2020. Revenues for this opportunity will continue to ramp and should average between $4 million and $6 million a quarter until the full retrofit deployment is completed in 2021. After this retrofit is completed, assuming this deployment is like most others, we would expect to continue to supply roughly 15,000 assets per year, as reefer containers typically get upgraded over a 10-year cycle. The customer is scheduled to go live with this project in the fourth quarter and we anticipate there will be more to share with you on our next call. This project represents one of our largest opportunities to date and we hope our collaboration with Carrier yields many more customers. We're excited to report on another significant refrigerated container opportunity, with a producer and distributor of produce who operates their own private fleet of ships and containers. We are pursuing this opportunity directly for a fleet-wide deployment of our refrigerated container monitoring solution, to be filled in on between 15,000 and 20,000 assets, as well as our vessel monitoring solution on 5 vessels. Through our on-board cellular network, our application captures location and operational status data from the containers and sends it back to the land-based portal via satellite connection, extending visibility and control of their containers at sea. We have integrated the latest controlled atmosphere technology, which regulates carbon dioxide, oxygen and nitrogen levels inside the container to enhance the shelf life of perishable produce into our platforms to enable complete command and control of these assets. We expect that they will be one of our first customers to utilize our new subscription model that I mentioned earlier. So, while we had been projecting a good portion of this project hardware revenue in Q4, instead, we expect it to be recognized through an all-in-one monthly pricing within recurring service revenues over the life of the contract. We're working through the final details of this contract and hope to make an announcement with them at the Intermodal Europe trade show next week. Digging into our transportation business. Despite the difficult challenges for trucking companies, we continue to win a number of new customers, many of which one's private fleets that are not as sensitive to the macro transportation environment. They're choosing ORBCOMM for ability to deliver solutions for multiple asset classes, using a single integrated platform. Last quarter, we mentioned an opportunity with one of America's largest grocery retailers that selected ORBCOMM to track and monitor about 10,000 assets consisting of both dry and refrigerated trailers, a great double play opportunity. While the initial shipment to this customer was pushed from Q3 to Q4, which had an impact on Q3 revenues, we expect to ship about 2,000 devices the quarter starting in Q4 and hope to finish in 2020, representing one of our largest opportunities expected to close this year. We're expecting increased activity at our long time customer Walmart, America's largest private fleet, and we'll be ramping up to extend our dry and refrigerated solutions across the remainder of their assets, increasing the speed of deployments. An additional fourth quarter winning Cargo is with paddles transportation, who is using our drive and solution to enhance visibility, improve utilization and lower costs for their trailer fleet through location in (inaudible). We continue to gain momentum with our integrated in-cab and cargo product offerings and closed multiple single and double play opportunities in the third quarter, including [Alan Ritchie], Westside Transport, Texas Freight and Clean Transportation, which represent a total of over 2000 assets. Alan Ritchie, a leading provider of transportation services, is using our integrated in-cab and trailers solutions across their fleet which transports mail for the US Postal Service. Westside transport, a mid-size trucking company, is using both our in-cab and dry van solution to track and monitor their trucks and trailers. Clean Transportation, an asset-based truckload carrier and logistics provider, and Texas freight, a dry van truckload carrier, are both using our in-cab solution across their entire fleet of trucks. These customers are already seeing improvements and driver safety, productivity and ELD Compliance through our best-in-class fleet management solution. In all, we shipped over 3900 in-cab units in the third quarter, which should lead to stronger service revenue growth, as they get installed. Looking ahead, there is significant demand for our solutions across our markets that leverage our advanced functionality, value-added services and deep industry expertise. We're working through the final stages of a number of contracts totaling nearly 100,000 units. Many of these opportunities represent double and triple plays, ranging in size from a 1,000 to over 30,000 units, and we anticipate about half to utilize our new subscription model. While we expect most of these deals to close in the short term, we expect the majority of these units to ship throughout 2020, leading to a strong year for deployment. Turning to AIS, Q3 revenues were $3.2 million, up over 10% year-over-year. Global Fishing Watch extended their contract to receive our AIS data for another 3 years, so we can continue to aid them in monitoring global commercial fishing activities and supporting ocean resource conservation, Oceaneering also extended its contract with ORBCOMM through 2022, and will continue to use our data to support vessel tracking platforms, which improved navigation and safety for ports and river waste, and its environmental and emergency response applications, which monitor undersea pipelines and offshore oil and gas operations. Continuing with our satellite offerings. We had another great quarter and shipped about 34,000 IDP satellite devices. We won a large opportunity with Vishipel, a leading provider of telecommunication services and maritime equipment in Asia, to provide our vessel monitoring system or VMS for commercial fishing vessels throughout Vietnam. ORBCOMM's VMS is helping Vishipel customers improve maritime safety and operational efficiency, while ensuring compliance with Vietnamese fishing regulations. Technological advancement is paramount and our greatest differentiator in the market. While we completed a number of key product development initiatives in 2019, continued innovation will be pivotal to our success in 2020, to highlight a few. The FM 5000 supports the features and capabilities required for both fleet management and safety and compliance in one comprehensive solution. The FM 5000 will have the option of an integrated vehicle camera system that significantly improves fleet safety, with in-cab notifications on aggressive driving, as well as driver coaching and instant feedback. We expect commercial launch in Q2 2020. For the maritime market, we're in the process of having 2 additional AIS satellites built at incremental visibility of ships at sea, as well as the capability to detect small class B vessels, including pleasure craft and fishing fleets. We expect to launch the first AIS satellite in the second half of 2020, and the second one in 2021. We've also developed a handheld product called Hali that combines AIS data along with ORBCOMM's satellite IoT technology for small vessels, with an addressable market of over 2 million vessels. Hali will be the only AIS solution in the market that provides two-way messaging. We currently have started fielding trials for Hali and expect to make it commercially available in mid-2020. We've also made great strides in converging our 25 Web platforms down to 2, thereby reducing integrations across multiple platforms and better utilizing our resources. We began field testing the new platform, which we branded as the ORBCOMM Platform, with a select group of transportation customers in Q3 and received great feedback on the ease of use and functionality of the user interface. Once beta testing is completed in Q4, we'll begin the first phase of customer migration. New customers will be automatically integrated into this platform, ensuring optimal performance in advanced reporting and diagnostics. There are over 10 key additional product and service innovations planned for launch in 2020, such as a chassis solution for managing utilization and maintenance on chassis that transport containers. The consolidation to one global ReeferTrak trailer device, dual mode products for vehicle monitoring and asset management, as well as several new peripherals, including a wireless sensor hub and camera-based cargo sensor for low detection, cargo volume estimation and monitoring of asset conditions. We're also expanding our products for Reefer's dry-vans and refrigerated containers to include analytics, enabling us to provide greater value and ROI-driven insights to our customers about business operations. With our accomplishments in 2019 and plan for innovation in 2020 and beyond well underway, we're executing on our strategic plan to drive ORBCOMM to a higher level of growth in the global industrial IoT. We are becoming the vendor of choice in our markets by integrating multiple asset types on a single platform. We are developing more best-in-class products, with the most options such as dual-mode, an array of sensors and customer-specific integrations to meet the evolving needs of the industry. We are continuing to reduce costs and add new disruptive technology, including 5G connectivity, video and in-cab scanning. We are continuing to support the world's largest OEMs and deploying our solutions globally to solidify our future market position. We are creating incremental value in our solutions to bring us closer to the customers, enabling us to serve, not just as an IoT product company, but it's a consulting group helping companies in their operations over the long term. We are focused on continuing to scale the business and driving revenues of high incremental margins expanding the leverage in the model. We are confident in our plan and believe that we are in a strong position to support the future success of the company. Wrapping up, we've made significant progress in the third quarter across a number of initiatives, such as taking cost out of the business, improving our operating efficiency and deploying new products, while increasing service and product margins to record levels. We raised our adjusted EBITDA margin to 24.5% and generated $10 million of operating cash flow in Q3. With several new opportunities, expected to begin shipping in Q4 and several more high-profile customers starting to fall in line, and the introduction of our new subscription model, we're setting the stage for a strong start to 2020. With that, I'll turn the call over to Dean, to take you through the financial. -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [4] -------------------------------------------------------------------------------- Thank you, Marc, and good morning everyone. Let's start the company's third quarter financial results. Total revenue for Q3 was $69.2 million, down $1.8 million compared to the same period last year. As Marc mentioned earlier, Q3 revenues were lower mainly in our North American transportation group, due to a larger-than-expected downturn in the transportation market in 2019, as well as the comparable period from 2018, which included several large deployments that did not repeat in the current year period. Sequentially, total revenues in Q3 were up $2.1 million over the prior quarter. We anticipate revenues continue on an upward trend for the next several quarters. Product sales in the second quarter were $28.6 million, down $3.9 million from the prior year period, and up $1.3 million sequentially from the second quarter's revenue. Q3 service revenues were $40.5 million, up 5.4% compared to the prior year period. Recurring service revenues in the quarter grew 5.3% over the prior year and were up sequentially from Q2. Contributing to this improvement was addition of about 80,000 net billable subscribers in the quarter, bringing our total base to 2.6 million at the end of September 2019. For 2.2 million, excluding the to the AT&T contract from (inaudible). Looking at gross profit margin; the company realized a margin of 53.5% in Q3, a significant improvement compared to 47.3% last year, driven by growth in both product gross margin and service gross margin. Product margin in Q3 was 31.4%, an increase from 24.2% in the prior year period and up from 28.4% in Q2 2019. The improvement was primarily driven by a higher percentage mix of sales of our newer products in the current period versus last year. We made great strides over the last year in transitional product lines and the newer products and as a result have greatly improved our product margins. With regards to our traditional product sales and recurring service revenues, we're seeing growing interest in the market, with respect to a subscription service model, as Mark mentioned earlier. The basic structure of the model allows the customer to contract for data service offering at a fixed monthly subscription rate, with ORBCOMM retain title and control over the device asset. Under this contract model, there is no product sale. Any of the devices we utilize will be maintained on our balance sheet and depreciated over the useful life of the asset. Over the life of the contract, total revenues will be similar. However, there'll be no upfront product revenue and there will be higher recurring service revenue over the contract term. Our expectations are for the subscription models and pet product sales by approximately 10% in the upcoming quarters and this levered incremental positive impact on recurring service revenue over a longer time period. Moving onto service margin results. Our Q3 service margin was 69%, a record service margin low for the company and a significant improvement compared to 66.8% in the prior year. The increased service margin was due to incremental service revenues and reduced costs in the quarter, and to a lesser degree, the acceleration of deferred service revenues relates to expiring AT&T contract. Normalizing the margin with respect to the accelerated deferred revenue would result in the service margin of over 68% in the quarter, which is still record margin for the company. Operating expenses in Q3 were $34.7 million, up approximately $3.6 million compared to the same period last year. This year-over-year increase was primarily driven by 2 items. The first was a net benefit of $2.5 million in SG&A in the prior year period, composed mostly of reduction and net fair value. And the second is from an increase in depreciation of $700,000 in Q3 2019, compared to Q3 2018. Adjusted EBITDA in Q3 was $16.9 million, a decrease of $550,000 in the prior year period. But once again, there was a large earn out adjustment in the prior year period, to benefit adjusted EBITDA by approximately $2.5 million net. Our normalized basis adjusted EBITDA improved by approximately $2 million from the prior year period and adjusted EBITDA margin improved from 21% to 24.5%, an increase of 350 basis points. The increase in margin was primarily driven by improvements in both service and product gross profit. To be clear, a significant increase across our margins, offset by relatively small increases in costs led to a 15% improvement, adjusted EBITDA which is central to our 2019 plan. Turning to the balance sheet and cash flows. The company ended Q3, 2019 with approximately $51 million of cash and cash equivalents. Total debt at the end of the third quarter remained at $247 million. During Q3, 2019, the company purchased 1.6 million shares of common stock under the stock buyback program announced in August, reducing the outstanding shares by approximately 2% and using $7.8 million of cash. Cash flow from operations in Q3 were about $10 million and free cash flow before financing activities were $4.7 million in the quarter. Cash flow from operations was strong, despite a working capital use of cash of $3.8 million in the quarter, as inventory levels grew in anticipation of upcoming sales. This was our fifth consecutive quarter of positive operating cash flow, and since June 30th, 2018, we've generated positive free cash flow of $18.9 million before the stock buyback activities, $11.1 million after buyback activities, based on our cash balance from $39 million on June 30th, 2018, to $51 million on September 30th, 2019. This positive free cash flow improvement over the past 5 quarters was produced during a period of continued investment, with regards to our product transitions and skew count reductions. Our integration activity of the back offices and global ERP system and ongoing integration, with respect to our customer-facing platform conversions, our improving margins and our revenue growth forecast for 2020, should result in even greater cash flow generation, what we experienced over the past year. CapEx for the quarter was $5.7 million, in line with the recent average trend and expectations. Looking ahead to 2020. This is my first planning session as CFO of ORBCOMM. Clearly, planning was not one of our strengths in the past and we're working to improve this area through the following initiatives. We've hired a new leader of planning who has years of public company experience, we are incorporating more industry data and trends in our planning analysis, or more closely collaborating with the business units, and we're also taking a more conservative look at our numbers. I'm confident these steps will lead to a more accurate planning and forecasting across our business going forward. Looking to our outlook in the fourth quarter of 2019. We expect total revenues to be between $68 million and $72 million below previous expectations, due largely to the slowdown in the North American transportation market and a number of opportunities moving to a subscription model with revenues recognized as recurring service revenue over the life of the contract. We anticipate adjusted EBITDA margin to be approximately 24%. Moving on to 2020. We are providing preliminary guidance as we finalize our budgeting process. We see a large hardware tailwind based on a number of factors. First, assuming we deploy 80,000 of the remaining 128,000 units in 2020, as part of the carrier contract for the first customer, that would represent about $17 million in 2020 revenue, versus the $4 million we expect to do in 2019, or a $13 million increase year-over-year for this one contract. Second, we have a large number of opportunities totaling nearly 100,000 units that we anticipate closing shortly, which is a far higher figure lead into the next year than in prior years. Third, as most of your cellular networks are announcing 3G sunsets over the next 18 months, we're already working with customers, as well as customers of competitors, to deploy next generation hardware to beat these impending deadlines. Based on these tailwinds, we expect hardware revenue to grow 10% to 15%, even with as much as $12 million of hardware projected to be deployed through a subscription model. Looking at service we anticipate current service revenue to grow at low single-digits to start the year, versus last year due to the expiration of the AT&T Maersk contract and then approaching higher single-digit growth as we execute our deployments and start to recognize our subscription revenues and greater numbers in the back half of the year. Other service revenues are expected to be flat. We expect SG&A to grow about 4%, which is 2% after the non-recurring adjustments in 2019. We expect CapEx to be around $3 million to $5 million, based on the quantity of deployments using our new subscription model. Adjusted EBITDA margin is expected to be in the 24% to 26% range. In closing, we're pleased with the progress we've made with many of our financial metrics in Q3, 2019. Revenues grew sequentially from Q2, as more opportunities continued to fall in line. We continue to make significant year-over-year improvements in product margin. Service margins reached a record 69% in the quarter, adjusted EBITDA margin grew 24.5% in Q3, 2019, and we generate our fifth consecutive quarter of positive operating cash flow and continued free cash flow generations excluding the buyback activity. This concludes our remarks for the call. And we'll now take your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Ric Prentiss with Raymond James. -------------------------------------------------------------------------------- Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [2] -------------------------------------------------------------------------------- I want to start off with the questions on the subscription model. We've seen one of the other people in satellite space KVH have a pretty good success with our agile plan, similar concept reduce the upfront CapEx hurdles for people to get into the many VSAT market for maritime. They had really good success as far as take rates. Help us understand a little bit, why do you think just 20% of the transportation deployment will take it? And then, that would be 10% of total obviously. What would keep it from not being higher than that 20% take rate in that segment? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Sure. So, let's talk about why transportation first as opposed to the satellite group or others. And then we can talk about within transportation. The reason it's starting in transportation is, in transportation, people buy an entire solution from us. So, it pays to get that type of financing across the entire asset, as opposed to our satellite group, where you're buying almost an accessory to some sort of telematic solution. So, imagine if you had a sell card that was going into a Dell laptop and you're financing just to sell. You know what I mean, it's just doesn't really lend itself, that business to financing. And then, in our Heavy Equipment business. Most of the people that we sell through their OEMs, OEMs are the lower cost of capital in ORBCOMM, so we're charging ourselves something like an 8% or 9% cost of capital, where the customer builds into that model. So, once you get into the transportation group, it's just starting. And there are 2 contracts that we expect to close imminently. And in that group, just those 2 deals are something like 50,000 units between them and that's off to a relatively quick start, a big portion of that in Q4 and then spread over the next year. So, when you look at ORBCOMM customer base, looking at some of the names that we announced today. Some of the smaller transportation companies that have similar cost of capital ORBCOMM, will definitely take advantage of these solutions, which is so exciting for us because that's the part of the business that we really want to grow, but a good portion of our customers as well are the Walmart's of the world, guys like that, and JB Hunt where their cost of capital is lower than us. It's not a perfect model for them, so we put it that way. -------------------------------------------------------------------------------- Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [4] -------------------------------------------------------------------------------- Okay. And then, I think Mark, you mentioned 5-year contracts. Why just 5-year contracts will take some of these assets longer life, like maybe a 10-year life of some of the items are being put on? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [5] -------------------------------------------------------------------------------- Of the 2 that I just referred, one of them is a 7-year one of them is a 6-year, and we need to leverage this across what we believe the expected life of LTE is. If LTE was sure 10 years, then we could do it over 10 years. But we're just not that confident. -------------------------------------------------------------------------------- Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [6] -------------------------------------------------------------------------------- Okay. And then if we think about this, and sorry for the question, obviously it's a new model for us to look at -- -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [7] -------------------------------------------------------------------------------- Do it, do it. I'm sure everyone will ask us the same questions. -------------------------------------------------------------------------------- Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [8] -------------------------------------------------------------------------------- And if we think about maybe, and Dean, you mentioned also maybe $12 million of what would have been previously hardware revenue will show as this subscription model within calendar '20. If we assume a 5-year life on that $12 million sales, should we be thinking that over time that turns into $2.5 million of service revenue, than a year for the sales that happened this year? Is that the way to think, take the $12 million and divide by 5 years? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [9] -------------------------------------------------------------------------------- No, and a little bit higher than that because service is in there too. If you think about the (inaudible) that was the product and then recurring service, and now it's going to be the 2 combined spread over a 5 or 6 or 7-year term and the interest income. -------------------------------------------------------------------------------- Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [10] -------------------------------------------------------------------------------- Right, to get your return on capital. So, how should we think about, if we move $12 million out of hardware sales, how much should we be putting in, whether it's monthly, quarterly, annually, for that on our services revenue line? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [11] -------------------------------------------------------------------------------- Well, as you mentioned, the hardware translates to the current service, and then you a few dollars more for the monthly traditional service and we're not going to be recording interest income, but then of course there is some financing component that we factor into building that model and the monthly price. -------------------------------------------------------------------------------- Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [12] -------------------------------------------------------------------------------- Sure. And then, I think you maybe hit my other question. Working capital is an issue, obviously when you start this kind of program you get paid over time. So, it sounds like the CapEx of $30 million to $35 million is up versus maybe what people might have thinking of what would have been in the low $20 million range. Is that how we think about the working capital item, it really hits the CapEx? -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [13] -------------------------------------------------------------------------------- The inventory will flow through CapEx and then go into fixed assets. So, that $12 million is on top of our normal $20 million, $25 million of CapEx. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [14] -------------------------------------------------------------------------------- I think what you were thinking in terms of low '20s, we think that's right. It's still low 20s and just layer this plan on top of it. So, when you take $12 million of hardware and then you take it down to cost year under $10 million and you add that to CapEx and the number's clearly just that simple. -------------------------------------------------------------------------------- Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [15] -------------------------------------------------------------------------------- Sure. Okay and last one from me, I apologize, obviously there's a lot of that subscription model. When you're talking about recurring service revenue starting out in the low single digits in the first part of '20, and then approaching high single digit, what are you expecting, either for the year, or help us kind of bracket? What does low mean and what is approaching high mean? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [16] -------------------------------------------------------------------------------- You know, I think we tried to give you some visibility as we finalize the business plan for next year. I think for your model, now, I would probably stick in the 3s, maybe at the beginning of the year and then by the fourth quarter kind of trending to 7s, 8s or 9s. -------------------------------------------------------------------------------- Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [17] -------------------------------------------------------------------------------- Okay, great. I apologize. I appreciate all the answers, guys. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [18] -------------------------------------------------------------------------------- Sure. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- Our next question will come from Mike Walkley with Canaccord Genuity. -------------------------------------------------------------------------------- Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [20] -------------------------------------------------------------------------------- Great. Congrats on the strong margins in both products and services and peers, with all the moving parts of the 2020 adjusted EBITDA guidance is roughly in line to maybe even above consensus. So, just on the margins, how should we think about the synergies continuing, as you talk about combining all these platforms? And how should we think about product and services margins trending into '20 that's implied in your guidance? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [21] -------------------------------------------------------------------------------- So, on service margin, I think that normalizing on the close, normalizing the recurring service revenue and the pickup we had on the deferred revenue with AT&T cuts in the 68% range. We see that trending slowly up as we do more work on the synergy model with the platform conversions, so there should be some cost savings as we get the program finished over the next year. So, we do see incremental growth and service margin, also just from adding more service revenue, the incremental margins are typically higher. On the product side, the 31.4% we did in Q3, we think that's the range going forward. It's depending on the mix of what we sell, but we see those kind of where we're landing with the new products we've rolled out. -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [22] -------------------------------------------------------------------------------- There is still 20% of our base, it needs to move to the new skews. I think we went over some of them likely FM 5000, which is (inaudible) business and the Blue Tree business that still has converted. So, maybe in a revenue quarter where we go up 15% or 20%, because it's a little more large deals-centric, which lowered a little bit, kind of offset by the higher margins on the last 20% of the products that still need to be filled, maybe they average out but we're hoping that north of 30 is the new normal. -------------------------------------------------------------------------------- Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [23] -------------------------------------------------------------------------------- Right. And a follow-up question from me, just on the outlook for the 10% to 15% product growth. And I understand now some of the bundled deals against that, but the transportation markets industrial transportation market's weak, you can see it from some of your end customers, their weak trends implied in your guidance, are you expected that market flat next year, bouncing back, taking a conservative look in that market? Obviously just that one large carrier deal almost can make up your full 10% type guidance growth. Just wondering what you're assuming for that transport market and how it might bounce back or not, implied in your guidance. -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [24] -------------------------------------------------------------------------------- If Carrier takes their 80,000 units next year you're up 10%. -------------------------------------------------------------------------------- Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [25] -------------------------------------------------------------------------------- Exactly. -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [26] -------------------------------------------------------------------------------- So, that feels pretty good. And then, there is a little bit of excitement here and there is not included in Carrier, we're sitting here in the final negotiations of another 100,000 devices and this isn't the base business. The 34,000 satellite hardware we ship every quarter. That's not what we're talking about, including this new container win that we're talking about, we wanted to throw the name out there, but we were forbade until next week's conference. There is a lot of opportunity there and I don't believe that $12 million is but a straight pull from hardware revenues to subscription model. I think $6 million of it is, but I think the other $6 million are deals, that if we didn't have this model, we couldn't have closed. -------------------------------------------------------------------------------- Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [27] -------------------------------------------------------------------------------- Got it. Understood. And last question for me and I'll pass it on. Looking at your guidance ex-Maersk, on the services roughly 6%, 7% services growth in, is that what you guys are implying in your guidance, and if so, is that potentially conservative, given your high single-digit outlook over time on an organic basis? -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [28] -------------------------------------------------------------------------------- I think if we're saying 6% for the full year general range, yes, that's the direction we're going in for the full year. And we'll have to see how much the recurring service revenue picks up with this remodel on top of that. I think if you pull out that $3 million to $3.5 million or so of Maersk next year, on the guidance that we've given we think we are at high single-digit. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Our next question comes from Arun Seshadri with Credit Suisse. -------------------------------------------------------------------------------- Arun A. Seshadri, Crédit Suisse AG, Research Division - Analyst [30] -------------------------------------------------------------------------------- A couple of questions from me. First, in terms of the model that sensitizes higher capital expenditures. What do you think if you look at the overall range of $30 million to $35 million, if you're wrong, how much higher over the long run can CapEx go? -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [31] -------------------------------------------------------------------------------- I think if we're more successful then CapEx can go higher. But, we're not worried about a $12 million model at all, because the $12 million model, its cost is closer to -- let's just specifically look at 2020. The $12 million model, its cost is really a $9 million investment and of that $9 million investment, as one of the analysts said before, 20% to 25% of it you get back in the first year. So it really looks like a $7 million investment and then as you take that $7 million investment and buy a bunch of these deals we've been kind of pushing towards closure for a long time. So you're not deploying new capital, a large portion of this you're shipping out of the current inventory. So we're kind of looking at $4 million of capital for 2020 which are now on a -- on the guidance we've given maybe $25 million in cash that you generate and putting $4 million toward this plan, it seems like the right thing to do. I think going forward if we can continue to grow this business, this high single-digit service person on service growth and significantly higher in hardware. I don't think that small investment just puts a whole lot more risk and play it off. -------------------------------------------------------------------------------- Arun A. Seshadri, Crédit Suisse AG, Research Division - Analyst [32] -------------------------------------------------------------------------------- Great, that's very helpful. And then as far as the -- as far as the cadence. I may have missed this earlier, but the $13 million on the large contract, if you give us some sense of the cadence there through the year and then the 100,000 units that you're the larger contracts that you expect to close in a relatively soon. Any color in terms of the stage year-end in terms of -- in terms of sort of closing those would be would be helpful. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [33] -------------------------------------------------------------------------------- Yes. So, we're expecting the first trying to think of the exact math 28,000 to close within the next -- let's say, weak although I think it's closer because we've got some shows that are going towards. And then just over 30,000 we're kind of just starting to work through the documents on that as well. So that would be in the next, I don't know, 45 days, because we have to start shipping a portion of that in Q4 and there is some sensitivity there because it's replacing a large 3G deployment that dies at the end of next year. So all 30-some odd-thousands of those need to be deployed in 2020 otherwise it's going to drastically affect their operations and then after that there is 15 or 21 but I think there's going to be a number of press releases, hopefully in November. -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [34] -------------------------------------------------------------------------------- And on the carrier cadence. I think it will be pre-even throughout next year in the $45 million a quarter brief quarter next year. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- Our next question comes from Chris Quilty with [Quilty Analytics]. -------------------------------------------------------------------------------- Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [36] -------------------------------------------------------------------------------- Quick question for Dean, I can't type and do the math at the same time, but if we looked at your 2020 guidance backed out the AT&T subs and also made the adjustment for the subscription. Does that, are you at high single-digit growth or does that really implies something almost that they low double-digit? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [37] -------------------------------------------------------------------------------- Are you talking about a year or a quarter? -------------------------------------------------------------------------------- Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [38] -------------------------------------------------------------------------------- No, for the full year 2020. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [39] -------------------------------------------------------------------------------- Well, on service revenue -- we're looking at blended probably in the 6% range for the full year, year-over-year. -------------------------------------------------------------------------------- Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [40] -------------------------------------------------------------------------------- And does that adjust for the impact of the AT&T subs going off and the $12 million subscription. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [41] -------------------------------------------------------------------------------- That's, yes. The full impact all in with the AT&T's prescription altogether. -------------------------------------------------------------------------------- Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [42] -------------------------------------------------------------------------------- Got you. Going to taking about -- -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [43] -------------------------------------------------------------------------------- I'm sorry, Chris. You're taking about a $3 million step backwards. And then the $12 million subscription, even though it should be generating $2 million or $2.5 million on an annual basis, you're only getting, let's say, 6 months on average for the -- as they rollout over the course of the year and not on the first day. So now you're taking about a million dollar step forward. -------------------------------------------------------------------------------- Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [44] -------------------------------------------------------------------------------- Got you. Okay, Marc. Makes sense. So the other question on the planning side of things you've obviously got the issue with the North American transportation. What are you doing to try to assess some of the global markets and understanding the trends going on there with their growth. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [45] -------------------------------------------------------------------------------- Yes, I mean, we're certainly watching the closer than ever. The various industry trends is getting this our hands-on as much research as we possibly can. And even the US transportation thing as we kind of monitor the data, I don't know if 2019, is a huge glutton transportation or whether it's just an over expansion and in 2018, I think the comp numbers are worse than the industry is if you were to average 2018 and 2019 as bad as 2019 is and divided by 2, you'd still be at a pretty good run rate. So we're kind of hoping that the balances out. You know, like a Reefer, does you historically it's pretty consistent between 30 and 40,000 Reefer's that could shift in a year and then boom last year, it goes to 70,000 and this year it goes back down in 20, but you look at 70 and 20 and like grew 45,000 average, that shouldn't be so bad. So we are hoping that next year, you just kind of go back to a normal run rate. But we're certainly not guiding to that, we are guiding to these new opportunities, some of the 3G trade out plus this carrier contract easily gets you to our guidance. -------------------------------------------------------------------------------- Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [46] -------------------------------------------------------------------------------- Got you. And Marc, one thing that wasn't totally clear with the new expected orders and rollout. You know, is the percentage of in-Cab going up or staying steady as we move forward and what becomes the impact on the ARPU. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [47] -------------------------------------------------------------------------------- Yes. So, in-cab has gone up, but we were thinking in-cab would be about 4,500 units this quarter and the transportation and an effect on it, but not a massive effect, we did 39,00. So let's say, we were 15% off from our expectations. Based on the macro environment out there but 3,900 is still in effect. And I think it has -- I think incrementally, it's a big deal, but I think in terms of measuring ARPUs across 2.6 million units, you know you're dealing with (inaudible) there but incrementally as these things get installed 4,000 units, $40 ARPUs, that's a pretty big effect from a relatively small amount of that. -------------------------------------------------------------------------------- Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [48] -------------------------------------------------------------------------------- Got you. And just specifically on customers that are adopting subscription type plans, is that fair to assume that there are all -- those are all customers doing in cab type solutions. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [49] -------------------------------------------------------------------------------- The first one is that we talked about on the call is actually this refrigerated container Group, that's the first one. The second large one is monitoring intermodal containers. So I think the first deployments, just because of necessity in timing and getting some of these things on Jarden moving there. Actually, the significantly large group. I don't think the getting $12 million deals this year is going to be difficult. These few deals get to 85% of the way there. -------------------------------------------------------------------------------- Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [50] -------------------------------------------------------------------------------- Got you. Final question, Dean. It sounds like you still have a pretty high level of new product development. I didn't hear you specifically talk about the R&D side of things. Is it fair to assume that we're looking at fairly steady on a go-forward into 2020. -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [51] -------------------------------------------------------------------------------- Yes, I think it'll be pretty steady. We've been running around $3.8 million a quarter on product development and we're pretty much looking to keep that number consistent for the next year. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- Our next question comes from Mike Malouf with Craig-Hallum. -------------------------------------------------------------------------------- Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [53] -------------------------------------------------------------------------------- Great. I just have a quick question. When we sort of look at the guidance of 24% to 26% margins. Can you just give us a sense of what are the major impact that would sort of cause you to be at more at the lower end. And then what maybe we could be looking forward to get you to the higher end, just some color on that would be helpful. -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [54] -------------------------------------------------------------------------------- So, I would hope that we wouldn't then below the range because the trend in there now. Yes, so in the incremental sales of higher margins, but I'm just (inaudible) It's the larger opportunities that could close that lower margins potentially. -------------------------------------------------------------------------------- Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [55] -------------------------------------------------------------------------------- So those opportunities and a subscription model which Spitzer model would generate a higher EBITDA margin, maybe some less EBITDA dollars next year because of the pushing out of some of the revenue, but it depends on the large deals and what the margin is on those deals and also how much disruption model revenue we do next year. Okay. And then these new contracts, especially the one that you're sort of looking for closure next week. Are those in your guidance numbers right now or are they incremental. -------------------------------------------------------------------------------- Michelle Ferris, ORBCOMM Inc. - Director of Corporate Communications [56] -------------------------------------------------------------------------------- They are -- in our guidance numbers, but in our guidance numbers as the subscription model. So in 2020, It's in our guidance number as roughly to 7-year deal, so roughly 20% of the total contract value and that deal by the way also 6000 -7000 of those units would be shipped in Q4. So there, you would get the subscription model of the -- you know of that -- for the entire 2020. And then, because those are the environmental control unit. And then the other units, which are more like your standard Reefer units will start to get deployed in the second half of the year. So let's say, if you average that maybe you're going to get 2/3 of the year's subscription there but there is, when you look at our Q4 guidance. You know when you first look at it, you like who hardware looks kind of low, it's going on there, but we think 15% of our hardware for this quarter for Q4, up to 15% move to a subscription model. -------------------------------------------------------------------------------- Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [57] -------------------------------------------------------------------------------- Okay. And then just a quick, how big roughly or maybe exactly what are the number of shares that you have outstanding at this point. Because the Q is not ALMs kind of get there. I know you've been buying back some stock to so. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [58] -------------------------------------------------------------------------------- Yes, shares outstanding. So I'm sorry, I really have that handy. I know it's going to be roughly 1 million less than last quarter. Based on the way the average, but I'll get back to you with the exact number. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- Our next question comes from David Gearhart with First Analysis. Please go ahead. -------------------------------------------------------------------------------- David William Gearhart, First Analysis Securities Corporation, Research Division - VP [60] -------------------------------------------------------------------------------- Marc, you had mentioned in your prepared remarks on some of the projects that ORBCOMM is working on, and you had mentioned video, video is obviously a hot market, just wondering if you could provide some more detail on the video product that's going to be released next year fully proprietary how much left, can we expect on the frictional subscription model. And is it, are you anticipating it being subsidized with the fully bundled model as well. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [61] -------------------------------------------------------------------------------- Sure. So there's 2 video products. So, and I mentioned them in 2 different parts. One of them is the video model that's in-cab that is monitoring driver and roads and there is a partnership that we're working with one of the big-video providers out there, I don't think we've given their name yet but and absolutely. I mean we would finance that just, just like anything else and that one is coming sooner, it's already being piloted at the -- in Group and there is already a large analytics products that were project that we're working on, if you, using video. So that is the earlier of the 2, the second one that we talked about towards the middle of the year is different, that's using video and cargo. So in other words, using some sort of photography or video to monitor your cargo shipments, so that you're not just monitoring full or empty, you're kind of monitoring what percent full or some additional security features. And that's the one that's towards the middle of the year and it's going to be built into the completely built into the GT-1200, so we would finance it just like we would finance GT-1200. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from Scott Searle with Roth Capital. -------------------------------------------------------------------------------- Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [63] -------------------------------------------------------------------------------- Just a couple of cleanups here on the legacy hardware front, can you give us an idea of what you still have within your existing inventory, what sort of risk there is, if any, to write-offs. And I have a couple of follow-ups. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [64] -------------------------------------------------------------------------------- I think Dean takes reserve based on any inventory on a quarterly basis. So that's something that we monitor constantly. -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [65] -------------------------------------------------------------------------------- Yes -- no, we're constantly have slow-moving inventory. So there is no real risk there. With the inventory obsolescence. As far as the older SKUs. I don't think there is much left of any significance to work-through. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [66] -------------------------------------------------------------------------------- Believe it or not, the 20% of the old inventory that we sold this quarter, the overwhelming majority of that is all the inventory that we're still building. So we're not really telling you an old inventory story there. What we're really telling you is, hey, some of our customers haven't moved on to our new products. So in terms of the lift in margin, you're basically getting 80% of it. A huge portion of that 20% are people that still haven't moved to the GT-1200 and it's still moving GT-1100 because of some ancillary features or like an example Walmart, still use this the GT-1100 because it's the only one that dual mode and has the satellite on it. The GT-1200 product with satellite has not been released to the market, So they continue to buy the old product or JB Hunt, does that it's not really a function of old inventory. -------------------------------------------------------------------------------- Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [67] -------------------------------------------------------------------------------- Got you. And just a couple of quick questions on the sun setting front, Marc if you could provide a little bit of color in terms of your existing subscriber base. How many of those customers are 3G. So the transition opportunity there, what you see in the broader market like how big is that market when you're talking to some of your customer base to go out there and continue to upsell and steel some share, what's built into the model in effect for next year, when you're talking about your mid-go into high-single digit kind of growth, what are you thinking about on that front, in terms of conversion and success. And when do you start to see you're coming into play? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [68] -------------------------------------------------------------------------------- Yes, I was just going to, -- it's just going to add to it, if you want me to talk about 3G or do you want me to talk about North American 3G, because we're a minimum of 3 years or 4 years from consider in Europe -- Europe still field 3G. So we're not really looking at Europe, we were doing the rough math on North American 3G, for -- across all of our different product lines. And clearly the overwhelming majority was the Maersk steel, right. That's roughly 400,000 units that are 3G, but that one seems to be a little bit part of AT&T's problem the mine at this point but separate from that. Yes, there is somewhere between 100 and 150,000 3 G units out there. In our $2.6 million base and there is one customer that has 25% of those 3G units and we will announce what the solution is with that one customer, and within before we announced on our next earnings call. -------------------------------------------------------------------------------- Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [69] -------------------------------------------------------------------------------- Got you. And, Marc, just in terms of what's embedded into your guidance there you're assuming that you keep relatively large portion of that existing base, but you're not assuming big share gains in terms of the rest of the market converting. Is that correct? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [70] -------------------------------------------------------------------------------- Yes, well, I think from a hardware perspective, I mean there is no 2 ways about it, even though there is some potential risks on service, there is no risk there on hardware. I mean, you know what got for digital only closed 60% to 70% of your base is still a massive hardware opportunity. Right. So it is, certainly, I mean whatever you're experiencing now in the next year. All of these hardware kind of headwinds in Q3 and Q4. Those are certainly going to be tailwinds, but just to be clear, I mean if you look at that guidance at the bottom end of the range, if you can tell just flat to what we did this year. And keep in mind, there weren't a lot of those big lumpy deals this year, and then you were to do nothing but execute on our relationship with Carrier, not just relationship with Carrier, our relationship with Carrier, just on the first deal. If you were to execute just on that, you're up 10%. So I'm hoping we're giving you a feel, you know 10% there, lots of new opportunities that we're announcing that we're in the process of closing plus this 3G, we're hoping you're feeling that the 10% to 15% is conservative. -------------------------------------------------------------------------------- Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [71] -------------------------------------------------------------------------------- Got you. And lastly, if I could just on subscription front. Not to beat a dead horse too much, but a couple of questions, just the sales cycle, it seems like it would compress under this was wondering if you could kind of put some numbers around what you're seeing from, or your expectation from a sales cycle standpoint as you shift into the subscription model. Dean, just want to clear. By on the gross margin front for services that it should be in the same line or improving even with the conversion to the subscription model and it sounds like overall, when you normalize for AT&T and Maersk that you're growing in high single digits over the course of the year is that the normalized growth rate that we should be looking for in services as we get out beyond 2020 and 2021. Thanks. -------------------------------------------------------------------------------- Constantine Milcos, ORBCOMM Inc. - Executive VP & CFO [72] -------------------------------------------------------------------------------- So what was the first question, I guess the I'm sorry, Scott, what was the first question and I will let Dean handle the second one. -------------------------------------------------------------------------------- Scott Wallace Searle, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [73] -------------------------------------------------------------------------------- Michael, is the sales cycle right? -------------------------------------------------------------------------------- Michelle Ferris, ORBCOMM Inc. - Director of Corporate Communications [74] -------------------------------------------------------------------------------- The sales cycle around -- the subscription model. Well, let me give you an idea this customer that on the Reefer front, we had a handshake and we were selected over a year ago. And from that point it becomes 50% about development and 50% around their budgeting cycle and once we kind of came through with this model. It closed very quickly. So on the large opportunities in terms of the development that these guys need or folks like them to, get the product out there, I mean that's obviously still in play, but that waiting the extra in some cases, 6 months or in some cases the CapEx doesn't get approved in the way the year something in some cases, that is a little bit more out the window. So I think we're going to do really well with it. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [75] -------------------------------------------------------------------------------- On service gross margin, the 68% that we're running at roughly right now that should incrementally improve over time. And for next year, the year-over-year growth in service revenue. I think directionally, we're looking at 6%, although we're still working on the budget, partly because of this AT&T contract that's going away, that's going to create some headwind next year. But long term, we should be growing service revenues in the high single digits every year; that's the model that ORBCOMM has. -------------------------------------------------------------------------------- Operator [76] -------------------------------------------------------------------------------- Our next question comes from [Mike Vermut with Newland]. -------------------------------------------------------------------------------- Unidentified Analyst, [77] -------------------------------------------------------------------------------- I like you're doing a great job in the environment. A few quick questions. When you look at the underlying, I guess deals that we're going after now just come to the returns in the payback period on them. And then I guess if the life of the asset is longer than expected. I assume the cash flow becomes pretty significant later on in the life. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [78] -------------------------------------------------------------------------------- Yes, I think that's right. When you see the payback. Do you mean the payback Included in the high-margin service that's bundled in when you repeat that the cash that you put out there. I think it certainly varies deal by deal, but in the average example you would probably start to just recoup your capital keeping in mind the product costs, somewhere around 40% to 45% through the life of the contract. -------------------------------------------------------------------------------- Unidentified Analyst, [79] -------------------------------------------------------------------------------- So then it becomes significantly cash flow positive in the back half of the contract. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [80] -------------------------------------------------------------------------------- That's correct. -------------------------------------------------------------------------------- Unidentified Analyst, [81] -------------------------------------------------------------------------------- Excellent. So would you be pushing. I think the returns are much better on this and I assume you'd rather push the majority of your contracts in this direction overtime? -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [82] -------------------------------------------------------------------------------- No, I think we walk a tight rope right and we don't want to come back to the market for capital. We think we're going to generate $25 million next year of cash and we think putting $9 to $10 million of that to work teams responsible, we're sitting with roughly $50 million of cash on our balance sheet and, but keep in mind, like we've said before, there is maybe 50% of our business that it's not like a good fit, because of what we sell and how we sell it and then within transportation -- within transportation, there are folks out there who have a lower cost of capital. Keep in mind, Most of the, or a good portion of the Fortune 500 do business with ORBCOMM, but I guess if you're asking how much, what percent of our hardware could this growth. You know, if things go well, as opposed to the -- you know that 10%. Maybe you can grow to 20, but I would doubt that it will grow beyond that. -------------------------------------------------------------------------------- Unidentified Analyst, [83] -------------------------------------------------------------------------------- Perfect. And yes, stocks; I don't know -- some of it is down 50% right now. I assume the buyback still in place and your plans be to expedite that a little bit down here. -------------------------------------------------------------------------------- Marc J. Eisenberg, ORBCOMM Inc. - CEO, President & Director [84] -------------------------------------------------------------------------------- Yes, I would, I would imagine. So I think maybe it's down $0.50 because there is a misunderstanding in terms of what we're saying. So a little bit of a complex story of this quarter, but we will buy stock, when we think it's in the best interest of our shareholders. -------------------------------------------------------------------------------- Operator [85] -------------------------------------------------------------------------------- At this time there are no further questions. 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 good day.