ORBCOMM Inc.
Q4 2019 Earnings Call Transcript

Published: 26 Feb 2020

[Operator:]

Good morning, ladies and gentlemen. And welcome to ORBCOMM’s Fourth Quarter 2019 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions]Please note this event is being recorded and a replay of this conference will be available from approximately 11

[Aly Bonilla:]

Good morning, and thank you for joining us. Today, I’m here with Marc Eisenberg, ORBCOMM’s Chief Executive Officer; and Dean Milcos, ORBCOMM’s Chief Financial Officer.On today’s call, Marc will provide some highlights on the quarter and give a strategic update on the business. Dean will then review the company’s quarterly financial results and outlook for the 2020. Following our prepared remarks, we will open the line for your questions.Before we begin, let me remind you that today’s conference call includes forward-looking statements and that actual results may differ from the expectations reflected in these statements. We encourage you to review our press release and SEC filings for a full discussion of the risks and uncertainties that pertain to these statements. ORBCOMM assumes no duty to update forward-looking statements.Furthermore, the financial information we will discuss includes non-GAAP financial measures, a reconciliation of these non-GAAP measures to GAAP measures is included in our press release.At this point, I’ll turn the call over to Marc Eisenberg.

[Marc Eisenberg:]

Thanks, Aly, and good morning, everyone. Earlier this morning, we issued a press release announcing our financial results for the fourth quarter and full year ending December 31, 2019. The quarter was highlighted by revenue growth and improved service and product margins, which led to solid adjusted EBITDA and cash flow generation.Total revenue for the fourth quarter was $69.7 million, up 5% from last year and in line with the midpoints of our guidance. Since 2018, the company set out on an initiative to improve margins. On the product side, we reengineered our portfolio to enhance functionality, reduce the number of components, integrate sensors and lower costs.As a result of these efforts in 2019, our product margins grew nearly 600 basis points, while lowering price points to customers. Of the roughly 75,000 devices we shipped in Q4, 80% were new products. From a service perspective, service margins grew about 200 basis points over 2018, as we deemphasized low margin installations and added new subscribers at high incremental margins.The improvement in products and service margins led to strong adjusted EBITDA of $16.9 million in Q4, a 24.2% margin, also in line with guidance. While, this is a $400,000 increase over the prior year, the normalized performance seems far greater, as last year included significant favorable non-recurring accounting entries.Looking at cash flow, the company generated over $9 million in operating cash flow in Q4, a strong number considering the quarter included one of two $10 million interest payments we make over the course of the year. This is our sixth consecutive quarter of positive operating cash flow.In 2017, we took the strategic initiative to acquire Blue Tree and inthinc our most recent acquisitions, in order to enter into the fleet management business and complete our transportation offering. These two acquisitions marked a total of 13 between 2011 and 2017.Over those six years, we embarked on many facets of integrating these companies. However, there was still much work to complete. We found ourselves with redundant hardware, overlapping web platforms and multiple accounting systems, all of which contributed to significant inefficiencies across the business in areas such as accounting, engineering and customer service. This led to high levels of inventory, rising SG&A, diminishing margins and a slowdown in innovation. Since then, we set out to finalize our integration efforts by reducing hardware SKUs, moving to one ERP system and consolidating over 20 web platforms down to two.So where are we now? Our product assortment now totals 50 SKUs from a high of 160, and is projected to get as low as 40. Hardware margins at our lowest point were about 13% and are now hovering around 30%. Inventory is down 20% off the highs. Today 98% of our revenues flow through the new ERP system, with 100% expected by midyear.The first of our two platforms our Application Enablement Platform or AEP, became available over the last six months and is now fully deployed and combines our RFID, heavy equipment device management and Carrier’s private label cold chain management platform. Roughly 30% of our solutions revenue runs through this platform.The second of our two platforms the ORBCOMM platform, combines our 15 legacy transportation portals, and is currently running with six pilot customers. Cargo customers will have access to the new platform within weeks, with refrigerated in-cab fleet and sea container customers to follow, and the operational across all assets by the end of 2020.With these new integrated web platforms, customers will experience a complete view across all their assets, faster response time, greater capacity allowing for additional deployments, as well as more real time visibility, especially as the world moves toward 5G.While the ORBCOMM platform is not 100% complete, we are in the homestretch. This project is taking longer than originally anticipated, as it was delayed by incremental scope in terms of features, as well as competing priorities on legacy platforms as we onboarded new customers.That being said, these two new robust scalable platforms are built for the future and are ready to address the industry’s evolving requirements for greater processing power and data bandwidth. In a short period of time, our customers will have the ability to monitor and control more asset types create far tighter reporting intervals, gain real time visibility with our new camera cargo sensor and access advanced analytics to extract deeper insights about their business. We believe these enhanced features along with a dynamic user interface are unparalleled in the industry.Let’s move on to our container programs. In late 2015, we bought the WAM business and inherited an AT&T contract supporting Maersk. This contract represented the overwhelming majority of the WAM revenues and contained two components.First, a license fee associated with firmware, WAM developed that was being amortized over a 60-month term, that at its peak represented about $3 million annually. These license fees had dwindled down and have now been fully recognized with the last 1 million accelerated over Q3 and Q4 2019.The second, which was the support components, also represented about $3 million of revenue annually, supporting the program’s operations from an engineering perspective and also ended in Q4 2019. In 2015, the strategy behind this acquisition was not to get into the engineering support business, but to add this vertical markets where transportation portfolio and market directly to our OEMs and customer base.The business model is acquired was not complimentary to our strategies. Since then we’ve created a hardware portfolio for this line of business. We’re in the process of integrating the existing web application into the ORBCOMM platform and have customized the number of features across a diverse base of customers. That changing strategy is now starting to pay dividends as we anticipate doubling our revenues in this market in 2020, despite the reduction at AT&T.To be clear, the anticipated outcome of these events in 2020 is a headwind to service revenues, offset by a significant tailwind to hardware revenues, leading to similar levels of adjusted EBITDA contribution from this group. Beyond 2020, we intend to surpass the service revenues generated in the past, as hardware continues to get installed.Speaking in more detail, we ship nearly 16,000 devices in Q4 in support of our initial project with Carrier. As a reminder, ORBCOMM is partnering with Carrier to provide a customer specific refrigerated container monitoring and control system to help increase asset utilization and short temperature compliance and lower operating costs to one of the premier shipping line companies.In 2019, we shipped more than 29,000 devices for this project and anticipate shipping the remainder over the next six quarters as we offset their entire fleet of 150,000 containers. In addition, we recently received a product order for the next opportunity with Carrier.Last quarter we mentioned a container opportunity with a large producer and distributor of produce, anticipating a first quarter deployments. Unfortunately, their timeline is shifted and we’re hoping to kick this project off toward the back half of this year. Looking more broadly at this market, we continue to engage with a number of customers yet to launch IoT solutions across their supply chains that are expected to deploy in the near future.We entered 2019 on a high note and transportation, growing at a strong rate, having just completed the deployments that JB Hunt in the U.S. Postal Service. However, we faced headwinds that increase throughout the year from a challenging U.S. transportation macro environment that was impacted by fewer new orders of reefers, dry vans and trucks contracting to 10 year lows. This led to hardware sales and our North American transportation group in 2019 being down year-over-year by about $9 million, as opposed to growing about $8 million as we were anticipating.Looking back the 2018 tax incentives, which resulted in record OEM orders of reefers, dry van and truck assets, coupled with a reduction in demand, led to a significant contraction and delivery rates that dramatically affected transportation companies.Through the first three quarters of 2019, 800 carriers went out of business, which was double the number in 2018. While analysts were projecting a recovery starting in Q2 this year, the economic uncertainty as a result of the health issues in China will likely push this back further.Continuing with our transportation group, our double play and triple play offerings continue to be a key differentiator for ORBCOMM. By enabling customers to gain a comprehensive view of multiple asset types through one integrated platform, they can increase efficiency across their business operations and make more informed decisions about their fleets. A great example of a double play that we mentioned last quarter is our recent wins with one of America’s largest grocery retailers who we can now say is Kroger. Kroger operates nearly 3000 stores under a variety of brands and selected ORBCOMM to track their 10,000 assets, including dry and refrigerated trailers.A new opportunity for ORBCOMM is in the bus market. Autobus Oberbayern, a large bus and coach operator in Germany recently selected ORBCOMM’s in-cab telematics solution, gaining visibility, monitoring and management of their drivers and passenger buses.By leveraging our detailed data analytics and reporting, they’re improving their operational efficiency, driver performance, fleet safety and regulatory compliance. We also signed a number of new transportation customers in Q4, including Howels Motor Freight Watkins Trucking, Hilco Transport, Boost Transport, Feld Entertainment and Rail Delivery Services.Coming up revenues in Q4 grew 5% despite some challenging headwinds. Service and product margins were strong leading to adjusted EBITDA of $16.9 million and significant operating cash flow of $9 million.We’re in the final stages of our skew rationalization initiative, global ERP implementation and customer beta testing on our new ORBCOMM platform, all of which are key to increasing our efficiency and profitability across the company.Overall, as a result of these initiatives, ORBCOMM will emerge as a fully integrated, better scaled, more productive company. Our focus can then turn to advancing our technology and better serving our customers, leading to faster growth and further cash generation.With that, I’ll turn the call over to Dean to take you through the financials.

[Dean Milcos:]

Thank you, Marc, and good morning, everyone. We finished the year on strong note. Many of our financial measures improved over the prior year to continue to make progress on several key initiatives across the business. In addition, we’re pleased that our cost reduction program begins to deliver the savings we anticipated. Let’s start with the company’s fourth quarter financial results.Total revenue for Q4 was $69.7 million, up 5% compared to the same period last year and up slightly from Q3. This result was in line with the midpoint of our revenue outlook. The year-over-year growth in revenues came from both service and product sales, as we were able to overcome the negative impact associated with us transportation market correction that affects our sales for most of 2019.Q4 service revenues were $41.3 million, up 6.9% compared to the prior year period. Recurring service revenues in the quarter grew 7.3% over the prior year and were up sequentially from Q3. This improvement is primarily driven by subscriber additions and acceleration of deferred service revenues relates to the AT&T contract expired on December 31, 2019.Let me take a moment to talk about our billable subscriber account as we have couple of end of year adjustments. Prior to make any adjustments, we added over 73,000 net subscribers in the quarter, which would have made our billable subscriber account 2.66 million at the end of December 2019. This is roughly a 12% increase over the number of subscribers we ended with in 2018.As we have communicated with the last few quarters, our agreement with AT&T expired on December 31st, removing approximately 425,000 subscribers from the base. In addition, we deactivated approximately 85,000 devices, not generating revenues as part of our cost reduction initiative that we’ll talk about in a few moments. And that effect will result in increase an ARPU about $1, production cost and a starting account of 2.14 million subscribers to begin in 2020.Product sales in the fourth quarter were $28.4 million, up 2.5% from the prior year period, primarily driven by new orders from existing transportation customers and soft shipments of our satellite IDP products.Q4 product sales also benefited from shipping nearly 16,000 devices in support of our initial project with Carrier. So on a year-over-year comparison basis, this revenue nearly offset the revenue in Q4 ‘18 from shipping nearly 14,000 devices to Savi for the Defense Logistics Agency or DLA.Turning to gross profit margin, the company realized a margin of 52.3% in the fourth quarter, a 140-basis-point improvement over last year, driven by growth in both products and service gross margins.Profit margin in Q4 grew 170 basis points to 29.2% compared to the prior year period. The driving factor for the year-over-year margin improvement continues to be the higher mix of sales of our new portfolio of cost-reduced products compared to the prior year.During the quarter, we did see an uptick in orders for transportation products, which carry lower average margins. As a result of this shift in product mix in Q4, margins fell just below our 30% goal. Q4 service margin was 68.2%, a 50-basis-point improvement from the prior period, driven primarily by incremental service revenues.In 2019, as we start to achieve synergies anticipated integration efforts, $2 million of operating expenses were taken out of the business. Starting in 2020, as we execute on further efficiencies we anticipated realizing another $4 million of savings spread across costs of service, costs of product and operating expenses. For example, the 85,000 deactivations I just mentioned, were composed of fielded units have not yet been activated, unassociated subscribers picked up an acquisition or demonstration units.Overall, the 85,000 subscribers are generating no revenues or are costing us about $500,000 annually. In addition, we have negotiated lower pricing on new product bills from our contract manufacturer. Eliminated redundant positions and renegotiated or terminated multiple vendor and contract relationships.Operating expenses in Q4 were $32.9 million roughly flat at the same period last year. Adjusted EBITDA in Q4 was $16.9 million, up $400,000, with margin at 24.2% in line with the outlook. Both operating expenses and adjusted EBITDA benefited from a favorable $1.5 million in Q4 of 2018, from non-recurring account entries associated with inthinc, Blue Tree acquisitions. Without this benefit, operating expenses were lower and improved $1.7 million and adjusted EBITDA grew $1.9 million over the prior year period.Turning to the balance sheet and cash flows, the company ended Q4 of 2019 with approximately $54 million of cash and cash equivalents, an increase of about $2 million from the end of Q3 of 2019. I’d like to point out that the increasing in our Q4 cash balance was accomplished in a quarter that include a $10 million interest payment and $1.6 million deployed in stock buyback activities.In August, the company announced a $25 million share repurchase program, through the end of 2019 the company has been purchased over 1.9 million shares for a total cost of the $9.4 million. We continue to be opportunistic buying back shares and believe these actions represent a good investment for shareholders.Cash flow from operations was $9.3 million in Q4, marking our sixth consecutive quarter of positive operating cash flow. CapEx for the quarter was $4.8 million.Turning to our full year results, total revenues was $272 million in 2019, compared to $276 million in 2018. The slight decline stemmed from lower product sales as a company faced several headwinds in 2019, including a downturn in the U.S. transportation market, global trade tensions and company has several large deployments in 2018, such as J.B. Hunt, U.S. Postal Service and our partnership with Savi for DLA.Considering these headwinds and having our newest large anchor customers trying to deploy late in the year, we’re pleased that we successfully navigated through this environment we’re able to hold total revenues nearly flat.Service revenues improved in 2019 to $160 million and we grew recurring service revenues by approximately 5% compared to 2018. This increase was primarily driven by addition of over 281,000 net subscribers, not including adjustments I mentioned earlier. Also contributing to the improvement was steady growth from our AIS business achieving record high of $12 million in 2019 and increase over 8% compared to the prior year.As a result of improvements to service and product margins full year 2019 adjusted EBITDA reached a record $63 million, a 23% margin and marched the second year in a row we achieved significant incremental growth from both the dollar and a margin perspective.I’d like to remind everyone that 2018 and Q1 of 2019 included non-recurring favorable net benefits mostly associated with inthinc and Blue Tree acquisitions. If we exclude the net -- the favorable net benefits of $6 million recognized in 2018, as well as the corresponding $2 million, realized in 2019 than our normalized base adjusted EBITDA increased $10 million over the prior year, with margin improving 400 basis points. This achievement demonstrates are focused on improving operating efficiencies.Better operating results through improve margins that operating cash flow $3 million in 2019. This is remarkable $19 million improvement over 2018. Given in a year and we have seen a substantial investments to further expand our business inclusive, of course, that or content can generate significant operating cash flows.As I mentioned last quarter, we made some changes internally or to improve communication, visibility and forecast accuracy across the business. We hired new talent into the financial planning team with professionals have extensive experience with several large public companies. Our planning teams working with deeper industry data to better understand trends and provide insight and greater visibility into the market shifts.With that being said, let’s move on for first quarter outlook. We expect total revenues to be in same ballpark as last year, which was $66 million. This is just a bit lower sequentially from Q4 2019. As the first quarter it seasonally our lowest revenue quarter of the year. Exchange experienced softness in the U.S. transportation market and in addition have more than the loss of revenues from the expired AT&T contract.We anticipate adjusted EBITDA to be between $13 million and $15 million, this would be up 6.5% were normalized for last year’s positive accounting adjustments assuming in the middle of the range.For the full year 2020, we expect total revenues to grow between 5% and 8% over 2019 as we continue to deploy a Carrier, start replacing devices with expiring network technology, add new customers and launch new products. We expect this will offset several the macro headwinds we previously mentioned.We expect recurring service revenues to grow between 2% and 4% compared to 2019, influenced by the loss of revenue from the AT&T contract, just about a 250-basis-point impact. Product sales in 2020 are expected to increase 7% to 15% over 2019.We expect subscription sales to be approximately 5% for products shipped. For 2020 we expect service margins to be between 67% and 68% and product margins to between 29% and 31%. We expect full year adjusted EBITDA margin to be between 23.5% and 24%.Walking you through our thinking on 2020 adjusted EBITDA, we start with last year’s run rate of $63 million, reduce that by $2 million for accounting adjustments and additional $4 million from the expired AT&T contracts, which gets us to $57 million to start the year. We then add $4 million to anticipate cost savings, plus the contribution from incremental revenues and the higher margin run rate, which gets us to a range.For 2020, we expect operating cash flow to be approximately $40 million, led by revenue growth and improving margins, with capital expenditures anticipated to be approximately $27 million this year. The CapEx estimate is based on roughly flat expenditures to last year’s $22 million, plus potential investments in subscription service models.In closing, we made progress across many financial measures in both Q4 and full-year 2019. Total revenue growth turned positive in Q4. Both service and product margins had fixed improvements over the prior-year. Full-year adjusted EBITDA reached a record $63 million and operating cash flow grew $19 million over 2018, with Q4 marking our sixth consecutive quarter of positive cash flow generation.With the solid pipeline of opportunities, new product launches anticipated in the year, entering the final stages of our integration efforts and further cost reductions and operational efficiency is expected, I look forward to a promising 2020.This concludes our remarks for the call and we’ll now take your questions.

[Operator:]

[Operator Instructions] Our first question will come from Rick Prentiss with Raymond James. Please go ahead.

[Rick Prentiss:]

Thanks. Good morning, guys.

[Marc Eisenberg:]

Good morning.

[Dean Milcos:]

Good morning.

[Rick Prentiss:]

Hey. Couple of questions. First, let’s start on guidance a little bit, on the recurring service revenue guidance of 2% to 4% for the year. Help us understand -- obviously, there’s been a lot of moving pieces accounting things contribute that, how should we think about that playing out throughout the year 2020 and what the exit rate into 2021 would look like?

[Marc Eisenberg:]

Sure. Yeah. We’re adjusting for that AT&T contract that you mentioned in the past couple quarters. So it does look like we will be probably in that 2% to 4% range quarter-over-quarter for most quarters this year. And then exiting the year when we be back out that comping with the AT&T contracts we will be closer to a 6% growth rate.

[Dean Milcos:]

So the AT&T contract is 2.5%.

[Marc Eisenberg:]

Yeah.

[Rick Prentiss:]

Okay. And as we think long-term in this business with 5G on the cost, you talked about a little bit and Internet of Things out there. What should we think the ability for ORBCOMM to grow this recurring aspect of service revenues could be as we look out over a longer term period?

[Marc Eisenberg:]

Yeah. I think historically the company grew closer to the 8% to 10% range in service revenues and certainly higher end products and these macro issues over the last year in transportation certainly affected that. So, I think, we should be able to get right back to that area as we kind of build-out of that kind of keep moving on.

[Rick Prentiss:]

Okay. And on the product side, Dean, you called out how transportation has a lower margin in it, as we think about the 2020 guidance and then looking longer term maybe for some recovery in the transportation segment. Where should we think about product margins, the effect on product margins in 2020, but then also longer term with the product margins might look like given mix?

[Dean Milcos:]

Yeah. We still think 30% is the range of product margin for 2020. We sell a few products that we’re going to be rolling out this year, within in-cab product we have a new version coming out later in the year. So we think product margins could have incrementally better beyond 2020.

[Rick Prentiss:]

Okay. And then let’s touch on the larger broader issue. You touched a little bit Marc, the China and the Coronavirus. What are you seeing right now from customers, any change in activity slipping out of orders and what might impact through the rest of this enter into spring timeframe?

[Marc Eisenberg:]

Yeah. So let’s start with the supply side, Rick, and then we’ll talk about the demand side. So from a supply side, the overwhelming majority of our product is produced in Mexico with Germany being a pretty far distance second.That being said, some of the device components are sourced from China, especially cables. And some of these components are in pretty good shape, because we’ve got inventory on hands, where we’ve been able to secure a secondary source.So from a supply side, we’re pretty confident these efforts in our Q1 and for the most part our Q2 supply. So unless it goes longer than that, I think, we’re probably in better shape than most companies that you listen to from a supply side.From a demand side, what happens when less goods from China or other places flow into United States and does that mean less trucks on the road and lower trucking rates. The answer is kind of maybe, that’s likely breaking stuff, which is why we changed the lower end of the guidance that we’re talking about.I mean, if we seen reductions in demand yet, not really, the shame of it all was in Q4 transportation was actually up, company returned to growth, we grew 5% and transportation that in the tough parts of the year were down $4 million in a quarter actually kind of pops positive to a positive $1 million or $2 million in Q4. So we’re kind of moving toward a little bit better market there.And if you look at the guidance that we gave this year because of the uncertainty, we kind of kept the top end where it was and we reduced the bottom end a little bit, obviously, that moves the middle of the range down a little bit.But if you kind of look at those hardware numbers, what you really have is year-over-year mediocre hardware numbers are less than mediocre from last year, plus the carrier deal and a couple of 3G trade outs, almost gets you to the middle of the range.So we’ve taken a pretty conservative approach, that there is no rebound in transportation to even get to the middle of the range. So you can kind of see what we’re thinking and if the flu season ends and this thing starts to come back, hopefully, we’ll be closer to the upside there.So to answer your question, precisely, I mean we’ll see what happens to trucking rates and everything else. Right now we’re kind of living through the close down in China from holiday anyway, but we’ll certainly see. But I think the guidance reflected.

[Rick Prentiss:]

Okay. Thanks.

[Marc Eisenberg:]

Sure.

[Operator:]

Our next question will come from Mike Walkley with Canaccord Genuity. Please go ahead.

[Mike Walkley:]

Great. Thanks. Marc just to clarify on your last answer there for the transportation market, are you assuming flattish with a disappointing 2019 in your updated guidance or even down again just given the uncertainty in that market because it appears the container deal alone can get to at least to the bottom end of your guidance if I’m doing my math correctly?

[Marc Eisenberg:]

Yeah. At the bottom of the range, you’re saying businesses flat to down and at the top of the range it’s seeing some type of recovery but nowhere near to the levels of 2018. So -- and I know on the hardware side, it’s a pretty wide range.So it’s just -- our timing in terms of reporting is a little unfortunate that, this virus news has really changed in the last 72 hours and we’ve actually changed our guidance number since our Board meeting last week, had we reported last week, it would have been different.

[Mike Walkley:]

Okay. Great. That is helpful. On the large container side with Carrier, there’s no signs of that of that slowing down and you can talk about the overall pipeline for additional deals in that area?

[Marc Eisenberg:]

We’ve got some commitments through at least the first half of the year and we’ve already shipped them a good part of Q1. So we’re pretty comfortable there. But once these guys say go, once these guys say go, they don’t really get the return they are looking for until it’s fully deployed.So the most painful thing that happens in these businesses is a 50% deployments and think of what we’re deploying on. We’re deploying on refrigerated containers, what’s in refrigerated containers? Medication, vegetables, fruits, blood, those are the things that are in reefers. And regardless of what the macro environment is, those are some pretty damn important things or maybe even more important.

[Mike Walkley:]

Yeah. Absolutely. Makes a lot of sense. Indeed, just a question on the model force here, reset the sub-numbers here. You talked about ARPU up maybe $1what’s the reduced to sub-count? How should we think about kind of ARPU trends going forward as my understanding some of the large container deals on sea containers for the Carrier those would be kind of below ARPU over time. So, maybe another way to ask it to is. What’s kind of a good way to think about net ads you implied in your guidance to the 2% to 4% growth for services?

[Dean Milcos:]

You’re right. The container deals are typically lower ARPU including this Carrier deal we’re working on. So that will given the larger proportion of shipments this year being in the caps business that will lower the ARPU this year slightly. But we -- but looking out in subsequent years as the other markets come back and ARPU should bounce back to the range we are right now.

[Mike Walkley:]

Okay. Great. Thanks. A last question from me and I’ll pass it on. In terms of cleaning up the sub, are there any other kind of one time things that you guys see heading into this year of big contract coming to an end or some of these non-revenue generating subs still on your network. Just trying to idea of what might still be out there in terms of net sub growth longer term?

[Marc Eisenberg:]

Yeah. I don’t think we see anything like that. These 85,000 subs that we shut off, I mean, that’s pretty good news, right? You shut off these 85,000 subs, you get rid of $500,000 worth of cost of service and it’s just change your revenue one bit and it really falls into three pools.I mean, first of all, the first thing that we’re looking at is a $63 million adjusted EBITDA a year, which is starting off at a run rate of 57 because of the accounting adjustments in AT&T deal and then you building it back up to the middle of the range, which is in I think 68 to 69. So, as you kind of build that up, you start scouring for these opportunities to begin to build that up and one of them was this subscriber interchange that we made, but it’s really three pools.The first is, when we did some of these acquisitions, you had someone like inthinc that had 12,000 more subs that you were paying for then you were billing for, but you couldn’t shut them off because their ability with the systems that they had to reconcile, which ones you need to shut off wasn’t there and then you could severely affect a customer if you shut off the wrong subscribers and then you start moving subs from these acquisitions through the new work on platform with all the tools that we have and then while I -- you see the access to the subscribers.The second tool that we had was, we kind of changed the thinking in terms of when you ship subscribers, you ship them active because they need to work and you’ve got a very quick turn and getting them installed and getting them out there. And you also need them turned on when you build them into factory for testing.So, a good part of our resellers literally then when you ship them within just a week or two. They’re registered on the platform and we start billing. But sometimes they hold them in inventory or there’s some sort of push and they don’t get registered immediately.And on a day-to-day basis, it’s a couple of subs, but as you kind of reset how you count subs, all of a sudden it’s a much bigger number. So, this unit probably will be subs, as they go and get installed. It’s just a timing thing. But boy it’s hard to resist a $0.5 million.

[Mike Walkley:]

That makes sense. Thanks for taking my question.

[Marc Eisenberg:]

Sure.

[Operator:]

Our next question will come from David Gearhart with First Analysis. Please go ahead.

[David Gearhart:]

Hi. Good morning. Thank you for taking my questions. Marc, I just wanted to ask if you could give us an update on the bundled program if you can talk to take rates and how that’s trending because you talked about it a bit last quarter?

[Marc Eisenberg:]

So the guys are translating with the bundle program is forming. So you mean our subscription program. So we guided that the subscription program would be something like $9 million this year.And there’s a couple of components to that, one is this produce customer that’s kind of moved back in the year and you’ve got some transportation groups and I think it’s probably still going to track close to that $9 million number, if we miss it will be missing on the low side, not on the high side.As you know, we’ve got a pretty strict range in terms of how much of our cash we wanted to deploy from this perspective, so, at this point, let’s say it’s on par, but let’s say it’s in the $7 million to $9 million range as opposed to just a $9 million range.

[David Gearhart:]

Okay. And then, lastly, with all the initiatives that you’ve been working on in terms of consolidating platforms skews and cleaning up the sub count and everything. Can you give us a sense of when you think ORBCOMM will be roughly at a normal operating state quarter-to-quarter? Is that more in back half of ‘20, early 2021 just your high level thoughts there?

[Marc Eisenberg:]

Well, I think, we’re weeks away. So -- the hardware is basically done. The ERP system really only has South Africa left, which is 1% or 2% of our revenues. The application enablement platform, which is 30% of our solutions revenue, not 100% is in full swing and going. And then if you look at the ORBCOMM platform, which is the transportation one, it’s -- there’s degrees of readiness of what you’re referring to.Number one, all of those 15 transportation platforms are running through it now. So that particular platform is seeing 6 million messages a day today. And already with it all flowing through one platform, we’re going to start the transformation for counting to be able to build on one system and everything else and we’ll get the planning and all the advantages of getting that done, is relatively soon as this thing’s really just ready.New customers, they aren’t running on the old platforms are at least for the cargo business, which is the largest business that we have are going to be put on this platform this quarter. This quarter is only got another month left. So, that feels pretty good. We’ll have reefer, in-cab completely for new customers converted by the end of the second quarter.But in terms of leaving the old platforms around, just to have the data filter in both platforms, as we kind of move features. There is no real timeline on that. We’re not doing any more development on those platforms, but we’ll let them run in parallel.So if there’s specific features that we’re looking for they’ll continue to be able to run. But in terms of getting all our horsepower behind one engine, we’re just a quarter away from the overwhelming majority on it.

[David Gearhart:]

And if I could sneak in one more, can you give us the AIS revenue for the quarter?

[Marc Eisenberg:]

What was the AIS revenue?

[Dean Milcos:]

For quarter.

[Marc Eisenberg:]

3 point.

[Dean Milcos:]

It’s total on annually now it’s probably…

[Marc Eisenberg:]

3.1.

[Dean Milcos:]

3.1, yeah.

[David Gearhart:]

Okay. That’s it from me. Thank you so much.

[Marc Eisenberg:]

Sure.

[Operator:]

Our next question will come from Mike Latimore with Northland Capital Markets. Please go ahead.

[Mike Latimore:]

Hi. Great. Thanks a lot. Just -- I don’t know if you’ve giving us or not, but the CapEx outlook for the year. Can you give that in any sort of sub segments of that?

[Dean Milcos:]

So, capital expenditures, I think, we’re thinking close to $30 million. We said $27 million on the call, right, $27 million, it depends on the range of subscription model uptake with the customers, that we’ve spent in CapEx with subscription model would be roughly flat around $22 million. And subscription model could be as Marc was saying anywhere from $7 million to $9 million maybe on the lower end $5 million.

[Marc Eisenberg:]

Yeah.

[Mike Latimore:]

Okay. Got it. And then, I’m just curious in some of your bigger deals, do you have like a win rate number and where that’s been tracking over the last couple years?

[Dean Milcos:]

Oh, boy, it depends on which business you’re talking about. It’s -- in the refer business it’s north of 50%, in the container business it’s north of 50%, in the in-cab business it’s south of 50% and the fleet business is south of 50%, in the satellite business it’s super way high, because there’s only one or two competitors out there. It really ranges but what we’ve learned is, like, in the transportation business when you’re bidding on like a dry van, maybe you win 35% of the time, but if it’s dry van and reefer like in the Kroger deal together in one opportunity, because that’s very unusual for someone else to provide multiple assets, then it grows north of 75% and then if it’s a triple play, that includes all three, then it goes significantly higher even than 75%.So, I think, close counts, if we’re talking about historically, maybe over the last year or two while we finished these integrations they were a little lower than we’d like it to be. But as we get this complete and kind of return to innovation and get all our skews out there and polish and piloting and working perfectly, I think, we’re going to exceed the historic close count numbers.

[Mike Latimore:]

Great. And then on the sub-count for the year, as we think about sub-adds being kind of similar to a little bit better and last year?

[Dean Milcos:]

Yeah. I think, subs will probably be somewhere around that 300,000 number, even though hardware, continues to grow and because some of the 3G trade out stuff we’re doing isn’t going to result in a sub, it’s going to be a plus one minus one. So, you can grow 5% or 7% at the low end, still keeping your sub-counts low. If we get closer to the 15% of the high end range of where those subs are then ARPUs it’s going to be -- a little bit higher than that, right?

[Mike Latimore:]

Great. Thanks a lot.

[Dean Milcos:]

Sure.

[Operator:]

Our next question will come from Chris Quilty with Quilty Analytics. Please go ahead.

[Chris Quilty:]

Thanks, Marc. I think you indicated North America was obviously down big -- North American transportation was down big in ‘19 and you’re expecting no recovery. But how do we think about the international market in the context of the Coronavirus? Are you in your forecast expecting international transportation to be down or flat or what’s baked into the guidance?

[Dean Milcos:]

So what’s basically baked into guidance is, the Carrier opportunity is in the heart from a hardware perspective. It’s over a $10 million increase and we think these 3G trade outs, which moves back and forth, depending on what T-Mobile’s doing with Sprint and how they’re allocating spectrum and all that stuff. But that is a few million dollars more. So if you look at those two things and let’s say that’s $13 million or $14 million, that’s 9% growth right there and we’re guiding from what was it 5% to 7%...

[Marc Eisenberg:]

7% to 15%.

[Dean Milcos:]

7% to 15%. So you get to the middle of the guidance just from that. So, at the low end of the range you’re actually guiding it all down.

[Chris Quilty:]

Got you. And how large is, I mean, excluding carrier and 3G trade out, which presumably wouldn’t be impacted by virus effects. How big is the balance of the international transportation relative to the U.S. market?

[Dean Milcos:]

Maybe 15%.

[Chris Quilty:]

15% the size of the U.S. market?

[Dean Milcos:]

Yes.

[Chris Quilty:]

Got it. And [inaudible]

[Dean Milcos:]

For -- I mean for ORBCOMM, Chris, right.

[Chris Quilty:]

Oh! Yeah.

[Dean Milcos:]

Does that you are asking? Okay.

[Chris Quilty:]

Obviously.

[Dean Milcos:]

Of course, it’s bigger

[Chris Quilty:]

Understand. Can you give us a sense of how, how much the IDP business grew in 2019? And what are the prospects there, either for domestic or international or if there are specific applications where you’re pushing that solution?

[Marc Eisenberg:]

Yeah. So there is definitely a convergence where if you look at the ORBCOMM network, the ORBCOMM network is predominantly OEM business and has been for a very long time. And then almost all of the reseller business, the VAR business has been shipped over to the IDP network over time. And as you know, the IDP network is smaller antenna and an awful lot quicker, quicker than anyone’s network, just about eight second response time.So when you look at some of these markets, that either are very, very stringent on battery or security related, that is a -- the attributes of that network are pretty strong. We bought the IDP network in 2015. We had about 225,000 subscribers on that network as I remember in 2015 and it’s about 450,000 today. So you can get a good feel for the CAGR based on that.

[Dean Milcos:]

And Chris it grew about 7% last year both product and service.

[Chris Quilty:]

And were there particular markets or applications where you’re seeing the highest growth?

[Marc Eisenberg:]

So the number of the international markets actually did extremely well last year, especially in places like Brazil. And the company really never had a footprint in the Middle East and last year, I think, we announced a call with that division of Saudi Telecom in the middle of the year. And ended up shipping, thousands of units into their off a base of zero. So, we’re not as U.S. centric as we are in the transportation business…

[Dean Milcos:]

Yeah.

[Marc Eisenberg A:]

… where the overwhelming majority of our business in the IDP group is international.

[Chris Quilty:]

Great. And final question on the AIS business, any update on the timing of your two cubesats launches. And are you still expecting this sort of modest growth we’ve seen in that business, topline revenue that has occurred in the last couple years?

[Marc Eisenberg:]

Yeah. I think there’s a couple things growing that. We’ve always told you 10 to 15 Chris, probably since the day we met you and we’re sitting there at 12 as it continues to grow. So, I don’t know, before I answer that question December. You see the first launch in Vandenberg on a SpaceX rocket in December. Second one, roughly six months later.But back to your original -- my original thought, in order to grow that business and keep it going, there’s other things that we need to do to continue to make it grow. Number one is launch those things and get into that Class B, where all of a sudden you have new customers, because you’re monitoring a new class of ship with a new class of customer. So you’re actually raising the market size and that’s exciting to us.The second thing is kind of ORBCOMM one-on-one where you productize the AIS business kind of like we do in our solutions, markets. The AIS business all along is collect the data, turn on the faucet and let the data run to your resellers. And now we’re building this, portable Hali product for these Class B ships that don’t have these big AIS communications on it. So we think there’s a pretty big market for that and if you look at some of these bids out there that we’re kind of looking at some of them could be in the tens of thousands.

[Chris Quilty:]

Great. Thanks, guys.

[Operator:]

Our next question will come from Scott Searle with ROTH Capital. Please go ahead.

[Scott Searle:]

Hey. Good morning. Thanks for taking my questions. Hey, Marc, not to spend too much time on the Coronavirus, but just to go back to your earlier comments about some push out that you were expecting start-up in the second quarter. Could you frame that for us a little bit in terms of the size and magnitude of that? Maybe what you guys were thinking about from a growth perspective last week to help us understand frame and then as well on the ARPU front, certainly some near-term blended issues from a container standpoint being lower ARPUs. But could you help us understand what the pipeline is looking like the visibility of the pipeline, because a lot of the applications weren’t talking about Blue Tree and inthinc or higher ARPUs, and how we should expect that to be trending over time and your visibility to what that pipeline looks like? Thanks.

[Marc Eisenberg:]

Yeah. So to begin with on Q2, I don’t know that I said, pushed out, what I said was, I don’t know. I think we’re first beginning to understand and it’s evolving. So the one thing I do know is it’s not good news and it’s not helping business.So I’m not 100% sure in Q2 what the impact is, Q2 already has some good sizable orders and Q2 is historically, gee, and every year I can think of better than Q1 because of the seasonality of the ORBCOMM business. So we’ll wait and see in terms of Q2. But to your point, we did take a more conservative look at guidance, especially even over the last 72 hours as we watch the data continue to come in.The ARPUs in the container business, it depends on what we’re doing in the container business. So, for Carrier, we’re not in the telco business, we’re in the hardware and software business. That is what we’re doing with that particular first opportunity for that customer.So as you sell the hardware and recognize the licenses on the firmware over a period, it leads to lower ARPUs. The rest of the container business so far that we see, including what’s most likely our next deal with Carrier is different in that, you’re still not necessarily doing the telco and the communications, which also is a cost. But you are offering your web platforms and everything else. So the ARPUs are closer to the mid-range of the ARPUs for those deployments. But, Dean is right as you average that out with the big Carrier deal it’s a slight negative effect.

[Dean Milcos:]

Yeah.

[Marc Eisenberg:]

So, moving forward an inthinc ARPU is multiples of a cargo ARPU and reefer, it’s almost like reefer is like 3X dry van and then in-cab might be 3X reefer. And we’re always focused on our mix to see where we end up and -- where we end up.But if we do 300,000 subscribers this year and 80,000 of them are tied to this one particular opportunity Carrier, then it probably will have an effect, but it’s not going to -- it’s going to come nowhere near beating down the $1 that’s just going to pick up.

[Dean Milcos:]

Right.

[Scott Searle:]

So Marc though, but looking at that pipeline, if we’re looking at the 2021, is there a bias then to the upside in terms of the blended ARPU mix? And if I could just throw in as well on, what’s the number in terms of the 3G trade-off -- trade up this year that you’re kind of factoring into that 7% to 15%? Thanks.

[Marc Eisenberg:]

Gee, the 3G, if we were to trade out everyone, which we won’t would be something like $20 million. What we’ve modeled in as opposed to that is more in the $3 million to $5 million range for product.

[Dean Milcos:]

Right. Yeah.

[Marc Eisenberg:]

So relatively small, but I don’t think we’re going to get it all done this year, which is why it’s relatively small. But what I know is that these companies can’t wait, some of them have deployed in the 10,000 units out there and to get these things swapped out might take a year. So they can’t wait till the end or they can’t wait till next year. So, we -- one of our largest customers we expect the first 2,600 units between now and the end of Q2. But I think we have sized it pretty well for you right there.

[Scott Searle:]

Thank you.

[Marc Eisenberg:]

Sure.

[Operator:]

At this time, there are no further questions and the company thanks you for participating on the call and look forward to speaking you again when they report first quarter results. Have a great day.