ORBCOMM Inc.
Q1 2017 Earnings Call Transcript

Published: 7 May 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to ORBCOMM's First Quarter 2017 Financial 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] A replay of this conference call will be available from approximately 1

[Michelle Ferris:]

Good morning, and thank you for joining us. My name is Michelle Ferris, and with me today is Marc Eisenberg, ORBCOMM's Chief Executive Officer; and Robert Costantini, ORBCOMM's Chief Financial Officer. 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. I want to remind you that ORBCOMM assumes no duty to update forward-looking statements. In addition, the financial information we will discuss includes non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures is included in our press release. At this point, I'll turn the call over to Marc Eisenberg.

[Marc J. Eisenberg:]

Thanks, Michelle. Well we’re off to a fast start in 2017 with a record quarter, even though first quarters of the year tend to be soft. We’ve got a lot of topics to cover on this call including an update on market conditions, the progress we've made on some of our largest deployments to date including J.B. Hunt and our partnership with AT&T, supporting the U.S. Postal Service, some exciting new customers and projects in key areas of the business as well the debt financing that we closed just a couple of weeks ago. At that point, I'll turn the call to Robert to walk you through the Q1 financials and wrap up with Q&A. So let's get started. Earlier this morning, we issued a press release announcing financial results for the first quarter ended March 31, 2017. In Q1 we reached a record $51.9 million in total revenues, increasing over 19% or $8.4 million compared to the same period last year. Growth came from both service and hardware as we generated service revenues of $29.5 million, a 10% year-over-year increase and product sales of $22.4 million or 35% increase, both record achievements. The increased revenue performance resulted in significantly improved adjusted EBITDA year-over-year of $12.4 million, an increase of nearly 16% or $1.7 million, demonstrating the leverage in our model. Our subscriber count, our subs grew in the quarter by over 42,000 net subs, taking our base to 1.77 million at the end of March 2017, a 10% increase year-over-year. We shipped a new high of about 55,000 devices across our various product lines, some of which came from Q4 2016 backlog. While the first quarter was aided by deployments we had anticipated in 2016, we are experiencing increasing demands helped by the seasonally strong second quarter. We are expecting 2017 to be a defining year, backed by a strong sales pipeline and healthy backlog. Two small points in the quarter. First, hardware margins were lowered by start-up costs associated with the onset of deployments for our new large customers to hit the time requirements for these projects. Second, even though service revenues were greatly improved over last year, professional fees were down approximately $350,000, which offset larger increases in recurring services. Looking at market conditions impacting the business, heavy equipment is running at conservative, but improving levels and OEMs are guiding to improved sales in the second half of the year. We continue to be excited about our new heavy equipment OEM who ordered over $1 million in products in Q1, which I will talk about in more detail in a few moments. Rail companies are struggling based on the cost of fuel. However, we continue to see a migration toward IoT technology as part of their core strategy is to reduce cost and add efficiencies. In Refrigerated Trucking, fleet owners need to be compliant with the FDA's Food Safety Modernization Act, or FSMA regulatory requirements, which is opening up multiple opportunities for our solutions. We deployed our cold chain solution in one of the largest supermarket chains in the country, Wakefern Food Corporation, which operates supermarkets under the ShopRite, Fresh Grocer, Price Rite and Dearborn Market brands. We're seeing significant improvements in foreign geographies that have been struggling recently. Our customers in South America have again started taking hardware shipments in reasonable quantities. Overall, this is the first time in quite a while that nearly every facet of our business is showing strength all at the same time. We still have some concern as we continue to scale production. We are building on new factory lines at unprecedented volumes. But we believe we’ve got a good handle on it. As long as macro conditions remain stable, we believe we will continue to perform and execute on a really productive 2017. To be clear, hardware sales can be lumpy and I make a point to say that in up quarters and down quarters as well. But over the course of 2017, we're expecting strong hardware sales as well. Before I move on to the business highlights, I'd like you to -- I'd like to discuss the thinking around our recent financing. We secured $250 million in the high-yield markets to replace our term loan and add additional growth Capital. First, it enabled us to lock in $250 million at a fixed rate for the next 7 years. Our $150 million term loan was at a lower rate, but an adjustable rate in a rising interest rate environment. Even though we had some more time in our existing loan, we'd have likely started renegotiating over the next year at a higher rate and we are not interested in raising equity or convertible debt to today’s share price levels. Second, we needed to choose a platform that enables the Company to scale with the business and not subject ourselves to large fees as we refinance our debt. The high-yield platform allows us to add incremental capital, while keeping the current debt in place. Lastly, it allows us to take advantage of a number of market opportunities including potential accretive acquisitions that will enable us to distribute more products to our customer base, while adding incremental vertical markets and capabilities. Going into the high-yield markets makes us more agile, and we believe it will generate significant cost advantages over time while giving us more certainty. We are currently analyzing a number of M&A opportunities, and while each one is unique, you will probably not see an acquisition overly large, in which deals have become increasingly competitive or excessively small, which is difficult to move the needle while creating as much integration effort as in larger companies. We are focusing on midsized targets that will add incremental vertical markets that are subscale and would benefit from significant ORBCOMM's synergies. It's been a really productive quarter for our transportation group with a number of hardware shipments led by two of the largest deployments in the Company's history, J.B. Hunt and AT&T in support of the U.S. Postal Service. To recap, J.B. Hunt and ORBCOMM are ramping up for a deployment on nearly their entire fleet of more than 90,000 assets over the next year or so. The solution features our new LTE product on our GT 1100 with cargo center that can be installed outside of the asset in under 15 minutes that allows for installation on a loaded trailer or container. Let's begin with the hardware shipments. We shipped J.B. Hunt nearly 8,000 systems through Q1 and received a blanket purchase order for an additional 80,000 units, which we intend to ship the vast majority this year. Transitioning to installations with one of the largest support teams in the IoT industry at ORBCOMM, including customer service, deal technicians and installation training specialists, we believe that we will be able to assist them in completing their deployment in record time. This is an aggressive installation plan, and once we outfit a good portion of J.B. Hunt's fleet, installations may slow a bit as it becomes more challenging to catch large pools of containers available for installation, which is typical for deployments of this size. In other words, based on the speed of installations, service revenues will likely trail hardware shipments and subscriber adds by a quarter or two. While the goal is to complete the fleet-wide deployment by the end of 2017, we wouldn’t be surprised if installations extended into next year. J.B. Hunt is a technology leader with one of the largest fleets in North America and we’re really excited about this partnership. We look forward to J.B. Hunt seeing the vast benefits and efficiency, and end-to-end visibility in our logistics chain with our asset monitoring solution. On our last call, we announced that our partner AT&T won a large contract with U.S. Postal Service concurrent with the J.B. Hunt announcement. But I wanted to go into more detail as it's one of our largest deals to date. The U.S. Postal Service has access to tens of thousands of trailer assets across a vast number of different suppliers, and we are helping to monitor them on a unified platform for logistical efficiencies as well as visibility and security of their fleet. In Q1, we shipped 3,600 units to the Postal Service for their own fleet as well as an additional 2,200 to one of their major leasing suppliers. We expect to ship over 5,000 units in Q2 to additional leasing company suppliers and we will continue to shift to their highway route contractors over time. Given the size and widespread distribution of the Postal Service's trailer fleets, our solution and partnership with AT&T is a great fit for meeting their complex requirements and seamlessly connecting their device network of assets -- I'm sorry, diverse network of assets, another great win for the ORBCOMM AT&T partnership. In Q1, many of our long-standing transportation customers continued to place renewal orders, such as Walmart, Hub, Celadon, KLLM, Werner, John Christner Trucking, Light Speed, Swift, CR England, Meyer, Summitt Trucking and SNL Distribution Industries. Carrier also placed additional orders as they continue to prepare for the official launch of their Telematics Program in North America. We've closed several new opportunities this quarter, including Wakefern, which I mentioned earlier. Wakefern's selection of our cold chain solution was largely driven by our high quality products and the need to be compliant with FSMA legislation. In addition, our European subsidiary is supporting a new container opportunity with the German shipping line, Deutsche Afrika-Linien, or DAL. The DAL opportunity is a great example of how our various business units cross-sell our IoT portfolio. Euroscan is providing DAL with our ReeferConnect solution, including hardware and web platform from our containers and port solutions, or CAPS business to monitor their container shipments from Europe to Africa and back, which will begin shipping in Q2. We're also seeing cross-selling success with our latest acquisition, ORBCOMM Africa, who was selected by South Africa's Department of Fisheries and Forestry to provide a custom solution that utilizes IDP products along with our proprietary fleet management platform for their fishing vessel monitoring solution. We believe there is no better evidence that our strategy is working when seeing various components and skill sets we obtained through our 11 acquisitions or products we build internally, come together to deliver one cohesive solution for our customer. Within our government business, our partner Kevadiya recently renewed their multi-year contract with the Department of Veterans Affairs' VetRide program. This project is another great example of how we're leveraging a number of technologies across different platforms. This solution utilizes ORBCOMM's dual-mode IDP and cellular device with a tablet installed on VA passenger shuttle buses and vans in combination with a sophisticated web platform developed by Kevadiya. VetRide is used by transportation coordinators at VA Medical Centers to schedule, dispatch and optimize transportation services for patient appointments. We’ve also teamed with Kevadiya on a new product with the Federal Bureau of Prisons to monitor their buses. ORBCOMM is providing satellite communication services and hardware in support of Kevadiya's fleet mobility solution. This solution will enable the Federal Bureau of Prisons to gain full visibility of their fleet, optimizing routing, and take immediate action in case of emergency. Our application enablement platform, or iApp group, also had some key wins during Q1. We’ve added Glencore, one of the world's largest mining companies to our customer portfolio. Glencore will use the iApp based asset watch solution in conjunction with RFID technology for monitoring high-value, underground heavy equipment vehicles, initially at two mines in Canada. This real-time solution is planned to be expanded to include mine workers and additional vehicle types in the future, and is expected to be deployed at other locations throughout Canada. We also grew our enterprise software opportunity with Iron Mountain, enabling them to expand their deployments to well over 100 warehouse sites around the world. ORBCOMM's solution helps Iron Mountain's customers gain access to unsurpassed levels of stored, records, visibility, auditing and validation capabilities. We are excited about the momentum in this business and hope to be able to report on additional wins in the future. In heavy equipment, we shipped our most significant order of our new heavy equipment monitoring device totaling nearly $1 million to our new OEM. As a reminder, we’re providing this OEM with an end-to-end telematic solution for their global customers, which has options for OG2 satellite service, cellular connectivity or a combination of both, along with our FleetEdge web reporting platform. They have already started deployments throughout North America and we expect Europe to follow shortly. As I mentioned on our last call, we expect to be able to announce this relationship more formally sometime in Q2 and are excited about the opportunity to support the build out of their telematics program. Turning to AIS, Q1 was a record quarter with $2.2 million in revenue. And we are seeing solid momentum in the business. On our last call, we announced two major multiyear contracts with the government of Canada through our Canadian partner Maerospace, as well as the Australian Maritime Safety Authority, or AMSA. Through our partner Kordia, we've already started providing our AIS data to both organizations. In March, we introduced an exciting new product called Hali that combines terrestrial and satellite AIS data capability, along with ORBCOMM's two-way satellite end-to-end technology to deliver reliable vessel location data and ensure safety, security and compliance for small Class B vessels such as pleasure craft and fishing vessels. Currently, Hali is the only solution in the market that provides multimode connectivity adding two-way capability, which is available only through ORBCOMM. Let's transition to an update on our satellite network. We recently crossed the one-year mark of offering commercial service in the final mission of OG2 satellites. We are in the process of performing propulsion maneuvers to position the OG2 satellites to their final operational orbits. Three of the four satellite planes have reached their targeted position or are in the process of being thrust into their final altitude. The last plane is scheduled to reach its final orbit in early Q4 of 2017. As the planes continue to separate, the network's messaging performance will gradually continue to improve. Currently, the OG2 satellites process about 80% of the network's total message traffic. Summing up, it's difficult to express how many projects we take on and how talented and hard working the team is at ORBCOMM. They’ve been able to keep up an incredible pace quarter-after-quarter, launching satellites as well as their evolving services, refinancing the Company, supporting large deployments, developing new products, collaborating with new partners, integrating acquired companies, expand the capabilities, servicing current customers, adding new features, reducing costs. We constantly strive to make ourselves better. I don't thank our roughly 600 employees enough. Thanks to them, we’re prepared for growth and we continue to take on more opportunities. We remain focused on execution and believe our most significant asset and differentiator continues to be our ability to provide the broadest set of capabilities, technologies, products and services. I don’t believe anyone else in our markets can compare. At this point, I'll turn the call over to Robert to take you through the financials.

[Robert G. Costantini:]

Thank you, Marc. Good morning, everyone. First, I will provide some insights regarding our financial performance in the first quarter, and then follow-up high-level discussion on the recent debt raise that closed in early April. For the first quarter of 2017, total revenues reached $51.9 million, with both service revenues and product sales achieving record levels. Subscriber net additions were over 42,000 in the quarter. These measures translated to a robust first quarter, sustained by a strong backlog heading into the second quarter. Service revenues of $29.5 million grew about 10% year-over-year, with service revenues contribution margin expanding about 170 basis points to approximately 68%, signaling consistent solid performance from incremental revenues over the last year -- over last year. Product sales of $22.4 million grew by approximately 35% compared to last year, supported by the Q4 backlog that’s shifting Q1 this year. Contribution margins totaled of -- for total revenues of 47.6% were impacted by the mix of service revenues and product sales in the quarter, as well as higher volume of large size orders of product shipment. In terms of profitability, we generated $12.4 million of adjusted EBITDA, up nearly 16% from the year earlier period at a margin of 23.9% of total revenue. Service revenues came in at $29.5 million, up nearly 10% from the prior-year period. The growth in service revenues was led by the transportation AIS and Marine groups and was largely driven by growth in the recurring service revenue subscriber base as compared to last year that included a higher amount of professional service revenue. AIS revenues were particularly strong in Q1, and are now at $2.2 million per quarter, trending at nearly $9 million on an annual run rate. Record first quarter product sales of $22.4 million were up by about 35% over Q1 last year with strength in both domestic and international markets. We shipped a record 55,000 devices in the first quarter. This quarter benefited from a backlog push from Q4, and we are entering Q2 with an even greater backlog. Net subscribers added in Q1 were over 42,000. Our total subscriber -- billable subscriber base grew to 1.77 million at March 31, a 9.8% increase over the 1.61 million at the end of March last year. Looking at direct contribution margins, service revenues net of direct cost of service for Q1 were 67.6% of total service revenues improving sequentially and 170 basis points higher than the prior-year quarter. Product sales, net of direct cost of products in Q1 were at 21.2% of total product sales, reflecting higher production and delivery costs on the large size deals. We opted for aggressive delivery of products to speed up service revenues over higher hardware margins, leading to some manufacturing inefficiencies, further compressing already lower margin sales. We expect to smooth out these higher costs in the next quarter or two by leveraging the higher volumes and eliminating non-essential component cost in the manufacturing process. In the first quarter of 2017, the company had a net loss of $3.3 million compared to net loss of $2.1 million for the same period last year. Advancing the loss this year were $2.1 million in higher cost for depreciation and amortization and higher interest expense of $0.7 million and higher SG&A of $0.5 million. SG&A expense grew by 4.1% year-over-year, below the 5% to 6% range in growth we guided to for 2017. A benefit to the bottom line this quarter was lower product development cost by $0.4 million. Depreciation and amortization increased by $2.1 million in the first quarter to $11 million. Depreciation increased $2.4 million over Q1 last year, reflecting an incremental 2 months of expense related to Mission 2 satellites that were offset by slightly lower amortization expense by $0.4 million. For the second quarter of 2017, we expect depreciation and amortization expense at the same level, then growing by about $100,000 in both Q3 and Q4 of 2017. Interest expense for Q1 2017 was $2.4 million versus $1.7 million in the prior year, including the amortization of debt fees. Acquisition related and integration costs were $0.2 million in the first quarter of this year compared to $0.4 million in the same period last year, that reflected the Skygistics acquisition. With the net proceeds from the debt raise earmarked for growth, we expect acquisition related and integration activity to pick up for the remainder of 2017. Looking at the balance sheet. Cash totaled $20 million at March 31, 2017 compared to $25 million at December 31, 2016, a decrease of nearly $5.1 million. The decrease reflects $5.6 million for capital expenditures, partially offset by cash provided from operations in the quarter. Breaking down the capital expenditures further, $1.5 million related to sustaining CapEx for existing infrastructure and approximately $4.2 million related to investment CapEx for new products and services. Our total debt outstanding at March 31st is $148.9 million, net of debt issuance costs with an available $10 million undrawn revolving credit facility. A few comments on the recent senior notes issuance with -- and what our expectations are for the debt raise before I move into Q2 guidance. On April 10, 2017, ORBCOMM issued $250 million of 8% senior secured notes due in 2024 in a private offering pursuant to an indenture agreement that was filed with the SEC on Form 8-K. The indenture agreement spells out the terms and conditions, which the notes and the company will be subject to for the next 7 years. The purpose of the raise was to repay our existing notes that were due in 2019 as well as provide growth capital. On an estimated pro forma basis at March 31, 2017, our cash balance was $113 million, post-transaction and after the existing debt repayment. The estimated leverage ratio post-transaction for debt-to-adjusted-EBITDA as reported for the trailing 12 months ended March 31, 2017, was approximately 5 times on a pro-step basis and 2.7 times on an net debt basis. We intend to put that cash to work to grow the Company and to grow adjusted EBITDA to naturally deleverage the balance sheet. Strategically, we thought it made sense to fix the rate of interest over the next 7 years in what has been a rising interest rate environment. Over that term, we believe we will be financially beneficial. Structurally, it's a better vehicle to balance the capital structure as we continue to grow and to provide the maximum flexibility to support the growth plan. Now moving into Q2 guidance, we expect service revenues of about $30 million. We are building products to support $25 million in orders, and while we believe we will ship all $25 million in Q2, about $4 million is scheduled to ship in late June, a portion of which could slip into Q3. We expect product contribution margins to stabilize in the 23% range for the year. As a remainder -- as a reminder, rather, for the full-year of 2017, we guided the service revenues between $118 million and $122 million, with product sales ranging from a low of $80 million to a high of a $110 million. We are confident that we should exceed the low-end of the range for both service revenues and product sales, and will likely end up in the mid to the high-end of the range for the year. Adjusted EBITDA margin for 2017 is expected to be in the 24% range, as hardware ramp ups at an increasing pace. Wrapping up, we ended the first quarter of 2017 with strong momentum from an unprecedented backlog for product sales, winning some of the largest opportunities in the marketplace that ultimately sustains longer-term service revenue growth. We are entering Q2 riding the same wave of momentum with the continued urgency to execute. We are obviously delighted with the great start for 2017 in Q1 and we look forward to an even better year. This now concludes our remarks for this call, and we are happy to take your question.

[Operator:]

Thank you. [Operator Instructions] And our first question will come from Ric Prentiss with Raymond James.

[Ric Prentiss:]

Good morning, guys.

[Marc J. Eisenberg:]

Hey, Ric.

[Ric Prentiss:]

Hey, appreciate all that extra color. First question is on the potential M&A. Marc, you mentioned that you’re analyzing a number of deals, don’t look for anything too big or too small. Can you kind of help us understand what vertical markets might be interesting and is there any other areas like geographies or capabilities that might be included in that. And then just kind of timing one, having raised the debt, how soon should we expect to see some of it put to work given that you’re going to have to carry the interest costs?

[Marc J. Eisenberg:]

So Ric, historically, once we raise our capital, we put it to work over the next quarter or two. So a portion of which -- obviously, we are not going to put 101 spot based on my comments, but something relatively quickly in terms of the targets we’re looking at, we’re zoned in right now on the United States where we’re seeing strength and where the power of the ORBCOMM distribution is really doing an awful lot of magic. And in the near-term, we are going to stay -- we are currently looking at opportunities, it's vertical markets in transportation, because if you just look at that powerful start with reefer and add dry vans and then automatically have the distribution set up. And then once we did that, we were successful getting into the container business and the reefer container business. And our hit rate and our success in on boarding those incremental American vertical markets has been -- just been a great return for our shareholders. So I think that’s what we are looking at for our first opportunity, something like that.

[Ric Prentiss:]

Okay. And then, some of the contracts you mentioned, can you help us kind of size them? Obviously, J.B. Hunt is really large, the Post Office is sizable as well, but the new ones that were included in the press release and talked a little bit about today, any of them stand out particularly strong as potential number of units that could help '17?

[Marc J. Eisenberg:]

You know they are all in that 500 to 2,000 unit mark, and those are the cool deals that kind of sustain us in between these big super large deals. But a lot of these are solution subs that we’ve been doing an awful lot of work. So some of these might look like a 1,000 subs, but they may have the economics of 8,000 subs. So they are really large, even though they don’t look really large. But gee Ric, I’ve never quite seen anything just like this. I mean we are clicking along and kind of knocking these out one after the other. And some of these opportunities, like Glencore and Iron Mountain, they are not sub-based and there is very little hardware involved there. So these are software solutions. So they work their way into service revenues, but there is no denominator there, and that creates some of that volatility quarter-to-quarter in service revenues. But gee, -- to close the deal, that’s roughly $1 million in pure service is pretty good for ORBCOMM over the course of the year.

[Ric Prentiss:]

Okay. Good margin, definitely. Okay. Thanks, guys.

[Marc J. Eisenberg:]

Okay, Ric.

[Operator:]

And next we will hear from Mike Walkley with Canaccord Genuity.

[Marc J. Eisenberg:]

Mike.

[Mike Walkley:]

Thanks, guys. Nice start to the year on the strong hardware sales and outlook. Just going through the hardware gross margin, I just want to clarify that you guided to kind of 23 versus the 25, is that just due to the expedited ramp of these new customers? And then if that’s the case, how should we think about the attachment to solution sales and maybe driving higher recurring revenue as they come online?

[Robert G. Costantini:]

Yes. So, that’s precisely at making those conscious trade-offs between needing a faster delivery schedule precisely to get at those faster revenue stream. So this is unprecedented in so many ways in terms of size and speed that -- they are doing everything they can to get them installed as quickly as possible. We are doing everything we can to make sure that the product is there for them to do that. So again, as for service revenues, it's going to take a quarter or two to get that scale going. We expect those to come online as quickly as they can get installed.

[Marc J. Eisenberg:]

So they have days that they were able to install almost a 1,000 units. So, I mean, it's going quickly and the hardware is actually slowing us down right now, but that’s going to stop pretty soon. Just two points on your margin question. Number one, the hardware margins in Q1 were lower, but we kind of ended up where we thought we would be in the -- from an EBITDA perspective, because we made it up on higher volumes. And when we guided to 23 for the rest of the quarter, it's partially because we’re carrying the 21 in the first quarter.

[Robert G. Costantini:]

Yes.

[Marc J. Eisenberg:]

So you’ve got that start to the year and to -- if you are kind of rolling in 24 to 25 for the rest of the year, that will get to 23. But we -- so we think it should rise as we get these one-offs complete. And the second point that I would make is when we gave our guidance of $80 million to $100 million, we said, gee, if we are at the low end of that in the $80 million, the margins could be higher than 25. And if we get to the higher end or over the $100 million mark, we said the margins could be lower than that. So basically, we are kind of supporting, what we said. On the one hand, we are saying, gee, now this hardware is looking like the higher end, the mid to high-end, which is what we guided to today, but the other half of that is the margins may be a point or two smaller. So, I think that’s exactly what you are seeing, but in the end, from my perspective, if margin is 23 or 24, gee, let's get a couple hundred thousand subscribers on the switch this year or even more, a bigger number that the Company has never seen before. And let's get that recurring revenue on the switch and get the service moving and that’s really the Company's goal.

[Mike Walkley:]

Thanks. That’s helpful, Marc. And then just building on that, with the -- on the services revenue, little slower sequential growth and sounds like that was mainly all due to the professional services. Does the professional services recover with some of these big installation or is that kind of headwind to your solutions business on a year-over-year comparison basis?

[Robert G. Costantini:]

No, no. We are guiding to $30 million, there is probably going to be some in there. It's a timing thing. So, sometimes just depending on when those things hit when you either hit a milestone or something of that nature, and of course we’re not talking about AIS. So it's not sort of game over just because it's a little bit lower in Q1. It could rebound in later quarters. So, not a particular concern, it's just the explanation to what happened.

[Mike Walkley:]

Okay, great. And last question for me and I will pass it on. Just update overall on the Carrier business. It sounds like it's finally getting ready to go commercial. Can you maybe talk about how that deal is going and kind of your business you see both in Europe and U.S. with Carrier and the different drivers there?

[Marc J. Eisenberg:]

You know in the U.S., Carrier is fielding units on real customers now, which is really, really exciting. Gee, I am going to just restrain myself from telling you the customers are, but -- because that’s their job to announce, not mine, but I think it's going well. They move a little slower than ORBCOMM does, but that being said, everyone moves slower than ORBCOMM does. And they are a Dow component, they are going to be ready when they are ready, but it feels like they are really, really close to pulling the trigger. United States is ahead of Europe in that. There is two completely different hardware products that go on the European units versus the American units. So that one is lagging just a little bit behind, if you think -- the United States, even though we have the FSMA requirements, there is an awful lot of logistics concerns and then the European is a whole lot more focused on compliance day one, but just a quarter or two behind. I think at one point, Carrier is going to put units in the factory on every unit. I think it's heading in that direction. But I think the whole world is heading in that direction, that's IoT, that's what we're seeing out there and at that point, Carrier should be our largest customer or pretty close to it.

[Operator:]

Okay. We will move on to our next caller -- our question will come from Mike Malouf with Craig-Hallum Capital Group.

[Mike Malouf:]

Great. Thanks for taking my questions.

[Marc J. Eisenberg:]

Hi, Mike.

[Mike Malouf:]

Hi. I have a question on CapEx. If you could just -- you did a little over $5.5 million for …

[Marc J. Eisenberg:]

Yes.

[Mike Malouf:]

… the March quarter. I’m wondering now with some of the acquisitions that you’ve could speed up, is that growth CapEx changed at all for you or do you have a pretty good sense of projects for that or [multiple speakers]?

[Robert G. Costantini:]

Yes. No, no, this is sort of in line, I would say. The timing of when you spend it, especially on the growth side is -- it's variable quarter-to-quarter. It's not like a straight line. The sustaining component is right on target. So I would say the M&A doesn’t really change that. I mean, when we go in and evaluate what those companies need, a lot of times we can leverage something we already have, don’t have any visibility into that at the moment. So I'd say we are sort of on track here.

[Mike Malouf:]

Okay. And then with regards to AIS, I know that, that’s popped up a little bit faster, obviously [indiscernible] recently announced deal. Do you still feel that $10 million to $15 million is kind of the target for that eventually, or is that maybe kind of move on a little bit better?

[Robert G. Costantini:]

I mean we are tracking awfully well to what we’ve guided to and this has been a pretty consistent message from us for three years. So I would say, right now, we are in that $10 million to $15 million total range, but we are hoping we are wrong there, we will see where it goes.

[Marc J. Eisenberg:]

And any new products that we are building like this Hali device, that isn't in the $10 million to $15 million. That is a different product that could be additive to it. So, I guess, what we are saying is $10 million to $15 million is pure distribution of data. You turn the [indiscernible] on and you start sending people raw data, but any products that we can kind of evolve around that would be additive.

[Mike Malouf:]

Great, great. And then just a final question. CIMC, is there any kind of update with regards to the China opportunity [indiscernible] say?

[Marc J. Eisenberg:]

You know I was kind of hoping to hold this, but we got an e-mail just after we would already worked through our script and everything and they are about to begin a 10,000 unit pilot with a customer and they are working through the contracts and maximizing their efficiency on their hardware, so working through the technical aspects. But, gee, I love pilots at the 10,000 range, don’t you?

[Mike Malouf:]

[Indiscernible].

[Marc J. Eisenberg:]

There has been some movement in China, but when you get near that Chinese New Year, work really stops. But we continue to be excited by that opportunity.

[Mike Malouf:]

Okay. Thanks a lot.

[Marc J. Eisenberg:]

Okay.

[Operator:]

We will now hear from David Gearhart with First Analysis.

[David Gearhart:]

Good morning. Thanks for taking my question. My first question is, in the past, you’ve given the pipeline number at a million units and just wondering if you could give us an update on the quantity of units that are in your pipeline and maybe just a high-level sense of what the mix is versus trailer, intermodal, heavy equipment, just how we should be thinking about pipeline?

[Marc J. Eisenberg:]

Yes, the opportunities that we are looking at, they are getting vastly bigger and, gee, it's -- the million that we were talking about, we probably took down a huge chunk of it. If you kind of look at Hunt, you look at what we are looking at, I think in those days when I drew up that number, we were looking at the Carrier units out there and we were looking at some of the business stuff, and this pipeline is generating 55,000 units last quarter in hardware just on a quarter. But it feels like for every -- for every time we kind of whack that mole and knock one, another three pop up. So it's probably -- I didn't do the math before this call, but I’m sure it's a lot bigger than a million units right now. There is more distribution at ORBCOMM, we are in more geographies. And I think the economy, at least for now, is humming along a little warmer than it was then. Someone else asked a question, I meant to say this, and it kind of bodes to what you are asking, I think we did something like mid to low 40,000 units that we built in Q4 and shipped, and then we did 55,000 in Q1, which we think is a cool number because Q1 is a slow quarter. I mean, go back year after year after year, and you kind of want to -- you want to forget about Q1s. But Q2, we’re kind of watching that quarter for the hardware deployment and there is couple thousand units that are just kind of on the verge at the end of the quarter that we think we’re going to get in, which would make this quarter's hardware $25 million, but we are building right now over 70,000 units. And look at the progression here, right from mid to low -- low to mid 40s up to 55, and now we are kind of zoom up to 50. So we are like really confident that we are going to do closer to a 50 number between Q2 and Q3. We are just hoping that the Q2 business falls in Q2, because there is so much focus on our hardware, there is more focus out of the building than in the building, but the backlog looks strong and it looks like we are doing a pretty good job knocking it up.

[David Gearhart:]

Okay. And just another question on pipeline. With the Hanjin bankruptcy, has it affected your intermodal business in terms of more opportunity coming into the funnel just because of a lack of visibility on the containers that they have outstanding has materially helped ORBCOMM up to this point, or it could be a tailwind for the near future just because of the puts and takes after that bankruptcy happened?

[Marc J. Eisenberg:]

Yes, I think we had spoken to Hanjin and we never ended up closing a deal there and we couldn't figure out why these guys weren't at least working on their gensets and there is all the regulation around that and the California emissions and we weren't able to close it and we couldn't figure out, now we know why. There were capital constraints. but I haven't seen weakness through their competitors. Clearly, I know more right now than I’m saying in terms of pilots and other opportunities on the reefer container and container businesses. There's a number of pilots out there that we're working on that could generate again, some more really large deals. So we are seeing it heating up. We are certainly being helped by regulation. On the intermodal side, where we are talking about rail now right, we are moving to rail, which I’m not sure if you are asking about sea containers or intermodal ...

[David Gearhart:]

No, it was just a broad question for [multiple speakers].

[Marc J. Eisenberg:]

Yes. So on the intermodal side, I mean, Hunt and Hub are behemoths in that market, right. They own a huge portion of the assets out there on the commercial side and then throw in Swift too, that we do as well and our market share in there has to be 90 plus in those areas, and now we are getting all these follow-ons and we are like, can you show us what you are doing for J.B. Hunt, some of the other guys out there. And then the big opportunity is the rail companies themselves own a number of intermodal containers and these guys are just a little slower moving than the rest of the industry. So certainly chasing those down as well, but we love the container business -- love the container business.

[David Gearhart:]

Okay. And last question for me, one of your competitors is in process of launching their next satellite constellation, somewhat of a different focus from ORBCOMM, focused on connectivity and ORBCOMM's more connectivity and solution. But do you anticipate any impact on your pure connectivity business from competitor launches, any headwinds to that effect or not really at this point?

[Marc J. Eisenberg:]

You know I don't see it, because if -- these guys, they are building these voice networks, right. And from an end-to-end perspective, I don’t know what it gives you, right. You know what M2M hated? M2M hated when 1x went to 3G, because they are saying to themselves well we are only using bits of data, so we don’t need gigabytes of data, so why do I want to have the extra power and pay the extra hardware fees, and then 3G went to LTE and were like, ooh even scarier or even more power hungry and I kind of look at these constellations that are launching and it's really more of the same. So I don't know what the data rates go up to. They go up to, I don't know, 2.4 to maybe 28.8. These are still relatively old technologies. I'm not sure what else they're doing, but you know what we learned, and I got to tell you, this goes back all the way to J.B. Hunt, the first time I met them in 2003, and you are sitting there with their dispatcher and their dispatcher is saying, look at all the cool things I can do, and I would love to know this and how do I deliver this and how can I reduce my fleet size and how can I make my drivers more efficient, I’m pulling my hair out of my head, this driver sitting here is, container is not ready, we sent the guy to fill up a full container, I’m really struggling here, how are you going to help me? And that dispatcher did not know if it was cellular or satellite, didn't care, didn't care, right. It's really all about how you can help them run their business. And whether your network takes a minute to send that message or whether it takes eight seconds, they are going to get the message and they are going to be able to be more productive. And you look at J.B. Hunt, originally they are waiting for a phone call. And now within a minute, they know that the thing is empty and they can go and pick it up, and that’s the power of what we are being able to deliver. I wish all these guys luck. There is a lot of capacity coming on the market in the non-M2M areas. It's going to be a struggle in some of those industries, but I know these guys a long time and I certainly wish them luck.

[David Gearhart:]

Okay. Thanks for that color. That’s it for me.

[Marc J. Eisenberg:]

Sure.

[Operator:]

And now we will hear from Jim McIlree with Chardan Capital.

[Marc J. Eisenberg:]

Hi, Jim.

[Robert G. Costantini:]

Hi, Jim.

[James Mcilree:]

Hey, good morning. Yes, thanks a lot. I just want to make sure I understand the hardware margins commentary that you made. Are you saying that the margins were lower and expected to be lower because you are accelerating deliveries, or is it because the delivery sizes are larger and because they are larger -- the prices are necessarily lower, or is it a little bit of both?

[Marc J. Eisenberg:]

I will let Robert speak to it, but I think he was saying both. I think he said in Q1, what was happening is these guys needed to get their products, we were running behind and we were moving products from factory to factory to generate enough product to get them deployed and moving all those products around created a one-time -- some one-time pain in Q1. But what we are saying long-term is, do you remember in the last call, we said something like, listen, we don’t know if all the installs or all the shipments are going to happen this year, or they are going to happen next year and these guys are running at margins that are lower than the average. So if a lot of it falls into next year, we will be at the lower end of the hardware, but if it ships this year, we will be in the high-end of the hardware. But the lower than average incremental sales will affect the average, right. And now we are thinking that we are going to ship nearly all 90,000 of these units this year. And if you do it at a lower than average unit, then it's going to affect the mean [ph]. Yes, so …

[James Mcilree:]

Okay. Yes, all right. That makes sense. And so the reason, and so if you are shipping -- if you are at the higher end of the unit shipments this year, the reason that you are not expecting -- the reason that you are not raising the service guidance is, one, you just want to be conservative, and two, there is a lag between shipments and [indiscernible] there is a lag?

[Marc J. Eisenberg:]

But we think we are raising service guidance, right. We are thinking, we are moving the range up, because we are saying we are not going to come in at the low end. Now I understand it's a very thin range between 118 and 122, but we think it's going to be toward the higher end of that.

[James Mcilree:]

Right. Right. No, I did -- I did hear that. That’s great. Thank you. And just a couple of other things. So, the pace of how things are going this year, Marc, I was a little bit confused as to -- your commentary made it sound like maybe Q2 and Q3 are really strong, but Q4 isn't, because of the shipments to Hunt and AT&T, is that right or are you just a little bit [multiple speakers]?

[Marc J. Eisenberg:]

No, no, no. I was referring to the pace in which we are building hardware. So I’m not building hardware for Q4, I’m building hardware for Q2 and Q3. And I think the comment was more around there is an awful lot of hardware we are shipping towards the end of Q2, but most of the hardware for Q3 is going to be shipped early. So in terms of the lumpiness of the hardware by Q3, I think we are all caught up and we ship, I hope better than 50 million over the two quarters, but I was kind of hedging, which quarter this stuff should send.

[Robert G. Costantini:]

[Indiscernible] of schedule.

[James Mcilree:]

Okay, all right. That makes sense. Thanks. And my last one is, Robert, is there any change on the service margin outlook? Has any of what you guys have been talking about in terms of deployments impacted the service margins? And by that, I mean as a percent of revenues, not the dollar amount.

[Robert G. Costantini:]

Yes, I -- we expect them to rise. I mean, that’s part of the equation. The faster you get these service revenues on stream and the way the business is performing from a cost perspective on those platforms, it was strong in Q1. We were happy about that and we expect that to continue to improve. That’s in front of us on the -- the hardware's margin is a little more variable. Obviously, we can see what’s in front of us, so we know what to do. And those are shorter term decisions, but certainly the longer term outlook on service revenue, margin is good. It was good for the quarter and we expect it to continue to improve throughout the year. I mean slightly -- we don’t ever talk about this thing jumping five points a year, but it should continue to be strong and show that 1% or so growth year-over-year.

[James Mcilree:]

All right. I just wanted to make sure that there was nothing about the nature of the customers that would require -- make things up now, higher network costs or higher service costs?

[Robert G. Costantini:]

No, no. It's not like the product side of the equation.

[James Mcilree:]

Right.

[Marc J. Eisenberg:]

I think margins are still incrementally greater than 90% across all our different types of subscribers, Jim. I think these container ones, big volumes, but just smaller ARPUs, little bit smaller ARPUs. So that may be -- sometimes it may look like a margin, I don’t know.

[James Mcilree:]

And if I said that was my last one, I lied, just one more. Robert, what’s the projected interest, quarterly interest past going forward, is it just the 8%, what, the [indiscernible]?

[Robert G. Costantini:]

Yes, 5 million [indiscernible].

[James Mcilree:]

Okay. Fantastic. Thanks a lot. I appreciate it. Good luck, guys.

[Robert G. Costantini:]

Yes.

[Operator:]

We will now hear from Mike Latimore with Northland Capital Markets.

[Marc J. Eisenberg:]

Hi, Mike.

[Mike Latimore:]

Yes, nice quarter. So just on service gross margin, so that should even tick up again in the second quarter, is that what you are thinking?

[Robert G. Costantini:]

Yes, so whether it actually rises quarter-to-quarter, don’t expect a lot. I mean, it grew sequentially from Q4 to Q1 by 20, 25 basis points. But again, you just have to, I'd say, look at it over on a yearly basis, we expect it to rise. I can't give you quarter-on-quarter outlook, but I'd say that we’ve been consistently able to do that.

[Marc J. Eisenberg:]

Let me just kind of rephrase this question a little bit, because maybe it will add more insight. The recurring revenues are -- if it's a $30 million a quarter, the recurring revenues are anywhere between -- they are typically around $29 million of it or so.

[Robert G. Costantini:]

Yes.

[Marc J. Eisenberg:]

And then on top of that $29 million, you’ve got roughly between $500,000 and $2 million of either it's professional fees or it's fees -- InSync licenses to guys like Glencore and sometimes those tend to be lumpy and they confuse the -- they confuse how we report sometimes, so -- sometimes people think it's a margin going up and down or not when it's just those sales kind of jumping in quarter-to-quarter.

[Mike Latimore:]

Great, guys. That’s helpful. And then the -- just on the new unannounced OEM, I think you said $1 million in the quarter, does that flow through both hardware and service, and also is that kind of a decent run rate on a quarterly basis?

[Marc J. Eisenberg:]

So that is -- I’m going to explain it, because the script is confusing because at one point it says over $1 million and one point it says up to $1 million. So when we are talking about selling them our own product, because we sell them two products, which is their higher end product for their bigger machines, it was just under $1 million of hardware. And then in terms of what we ship them, total hardware, it was closer to $1.5 million, which is why we said over a $1 million, and that is a lower end device that we source and sell them someone else's product, and that is almost 100% hardware. These units are first going to be installed and it's generating almost no service at all. It's a startup number. It's hard to explain without telling you who the customer is, because their model -- they are not your normal heavy equipment guy, they don't build excavators and backhoes and tractors and stuff like that, they build something else that’s heavy equipment. So model is a little different and they don’t have a dealer network, so they sell directly to end-users and fleets. So there is a little bit of fleet by fleet stuff going on there, which is different from the other businesses, but I think $4 million to $6 million run rate is probably right.

[Mike Latimore:]

Okay, great. And then, just -- you obviously raised your hardware guidance for the year a little bit there, but in terms of the range that’s sort of left, what are the kind of key factors that would get you to the upper versus the lower end of the range?

[Marc J. Eisenberg:]

We think across our $15 million a quarter that we do, which is just our maintenance business and Hunt and AT&T, it gets us already to the middle of the range and then deals that we -- the middle of what the range was. And then certainly our huge sales force isn't taking vacation for the rest of the year in May. So we think that we can go over and above based on what they are able to close between now and the end of the year, which typically is a lot, right. So …

[Mike Latimore:]

Okay.

[Marc J. Eisenberg:]

… I think we can hit the century mark and hopefully we can climb above that.

[Mike Latimore:]

And just last, on the -- just the manufacturing, factory line, what's left? It sounds like there is still some tweaking going on there, what’s left to sort of finish that process?

[Marc J. Eisenberg:]

There is not a lot left. There is -- they are manufacturing on that line pretty well. Specific to J. B. Hunt, the 80,000 unit blanket order came just a couple of weeks ago. And there is 16-week lead times and we are rushing components, and there is hundreds of components that go into the product and now we are running around China, sourcing batteries and stuff like that. And it's more that than the actual manufacturing. This line in, this factory in Sanmina is huge. I mean, we can just keep opening lines and we can get you millions of units in that factory. So -- but it's the first time that, that line had been used and they are building great products there. We're getting really high percentage of productive units out of there as we continue to test. So not so much a concern, but we fell behind in order to meet these customer deployments. I will do it on Twitter later. I want to show you what a J.B. Hunt stack looks like so you can get a feel for it. When they are sitting there, how anxious you are to get these things before they get moved. While they're sitting there in the stack and if you want to check it also, you could see what a monthly Walmart deployment looks like, I put that on there as well. But you will get a feel for it there, but -- they are herding [ph], they had the units stacked, they had people ready to do deployments and we spent the extra dollars to get them their product sooner.

[Mike Latimore:]

Yes. Okay, great. Thank you.

[Operator:]

And next we will hear from Arun Seshadri with Crédit Suisse.

[Arun Seshadri:]

Hi, guys. Thanks for taking my questions and welcome to the high yield market. Just a couple of things from me. First, in terms of OpEx, just wanted to understand how we should see product developments and SG&A, saw that down, product development down a little and SG&A up a little. If you can give us any commentary on cadence and ramp up as you add volume?

[Robert G. Costantini:]

Yes. So those line items will generally be unaffected for 2017. The guidance that we gave was about 5% to 6% SG&A. We were happy to see that be a little bit lower in Q1, because that’s typically a heavy quarter. So I’d say that we’re not ready to bake that fully in for the year, but there was a good start to the year there. So that’s going to probably be well within the guidance range that we gave. SG&A, rather product development was lower than we had guided. We were looking more like $1.7 million a quarter, it came in $1.6 million. I like that range. So I think that, that’s probably going to continue for the rest of the year. But with respect to the ramp up, those two line items will not be materially impacted by what we are talking about on the product side.

[Arun Seshadri:]

Okay, great. Thanks for that. And as far as cash flow for the quarter, working capital, I saw a little bit of working capital this quarter versus last year, obviously, I’m sure related to the ramp up, but just wanted to understand that a little bit better and how you see working capital spend for the rest of the year?

[Robert G. Costantini:]

Yes. So, you can see inventory was flat, the receivables were up. We were again a little bit off pace on cash flow from operations in Q1, I would say, primarily because of the ramp up. So it's all related to that. We expect to do better on the inventory side. And as historically, you look at ORBCOMM, cash flow from operations improves throughout the year as we continue to grow. So this will have a little bit of a growth element to it this year than we’ve seen in the past. So working capital probably be up a little bit higher. I think last year was in terms of the increase was about $8 million. That looks like a reasonably good number for me this year, especially in what we are doing. We are going to do a lot to keep inventory continue to be increase our turns, get that as tuned up as we can. Good customers here. So I don’t expect a lot invested really in receivables. It will just be a timing thing. So again, I think that’s how it's going to play out throughout the year. It will continue to grow quarter-over-quarter.

[Arun Seshadri:]

Okay, great. Last thing from me. CapEx, you obviously came in a little bit higher than your $16 million to $20 million for full-year guidance in sustaining CapEx and growth CapEx. How should we -- possible you end up higher than the $20 million or is there some lumpiness?

[Robert G. Costantini:]

No, there is no lumpiness there. I mean, there is a labor component to it and a spending component, and the spending component is kind of variable, just depending on what those guys are up to, it's not at all a straight-line type of event. So I’m still holding the line right now and I will get back to you guys in Q2 and see if that changes. But I think we are probably at that $20 million number for the year.

[Arun Seshadri:]

Thanks very much.

[Marc J. Eisenberg:]

Yes.

[Operator:]

And now we will hear from Chris Quilty with Quilty Analytics.

[Chris Quilty:]

Hey, Marc just one follow-up question on Europe. I know you bought the Euroscan acquisition as a sort of an entry point into the European market, and that came with a recorder product. Can you give us an update on how successful you’ve been in migrating other product and capabilities into the European market in the last couple of years?

[Marc J. Eisenberg:]

Just recently, they’ve picked it up pretty significantly. Well first of all, in their recorder product, they are doing roughly 3 times the service revenues that they were doing when we purchased the company. So that transition has done well. The second thing that they did is they support the European product not as much the guys here in the United States. So, they enabled us to land the Carrier deal. And then lastly, they’ve picked up the rest of our products like this shipping deal that we talked about between Europe and Africa, that is also Euroscan deal that they’ve picked up. So, I’d give them extremely high grades on that acquisition.

[Chris Quilty:]

Great. That was my only question.

[Operator:]

[Operator Instructions] We will now hear from Scott Searle with Benchmark.

[Scott Searle:]

Hey, good morning.

[Marc J. Eisenberg:]

Hi, Scott.

[Scott Searle:]

Can you guys just [indiscernible] clean up on a couple of questions here. Did you mention any 10% customers? And just given the strength in AIS and the new relationships in Canada on trail, what do you expect the exit rate to be for 2017?

[Marc J. Eisenberg:]

I’m sorry, we don’t have any 10% customers unless J.B. Hunt rolls up, there just on their hardware sales and then disappears again.

[Robert G. Costantini:]

Yes, yes. That will be the case, right.

[Marc J. Eisenberg:]

So our largest customer, I think, was at 6% or 7% of sales. And as the company grows, we tend to grow outward, not vertically through. I mean the customers are certainly growing, but not at the rate that we are adding customers.

[Robert G. Costantini:]

Concentration is improving. It's diluted, not concentrating rather.

[Marc J. Eisenberg:]

And what was the second question?

[Scott Searle:]

AIS, just the exit rate for this year?

[Robert G. Costantini:]

Yes, it's growing, $10 million, kind of grows every quarter to the point [indiscernible].

[Scott Searle:]

Okay. And just a clarification on the hardware front, more units than subs coming on, how much -- is that just getting ahead of subscribers being installed on vehicles in line or is there an upgrade cycle that’s going on and I guess, kind of embedded in that?

[Marc J. Eisenberg:]

So there is a bunch of things here.

[Scott Searle:]

Yes.

[Marc J. Eisenberg:]

Are you ready for this? You got your pen out? So the 55,000 subs, a small portion of them are non-wireless subs, and that’s the recorder business that Chris was talking about. And that business gets smaller as the wireless business gets higher. But that’s thousands, that’s not tens of thousands. Secondly, there is a portion of the SkyWave business that is pretty stable service, but it's actually recurring hardware and that’s the buoy business. So the buoy business is roughly 30,000 or 40,000 buoys a quarter -- I’m sorry, a year, where the sub numbers stay the same, but you are swapping out the hardware, and that adds to it. And then the last thing that’s in that number is the hardware is gross and the sub number we give you is net. So the sub number includes 6% or 7% annual churn. So 6% to 7% on that 1.8 [ph] million is -- it's a low percentage, but it's still a large number of subscribers. So you’ve to back that out as well.

[Scott Searle:]

And Marc, given the new products, is there a large installed base that might be due for an upgrade cycle here in the next year or two?

[Marc J. Eisenberg:]

For every year.

[Scott Searle:]

Every year.

[Marc J. Eisenberg:]

Every year. I mean, If you look at our trucking companies, they don’t buy them all in one year. So as a deployment gets more mature, you deploy on the new truck and maybe the old truck goes out of service and then the account grows as their fleet grows.

[Scott Searle:]

Hey, Marc, and last question from me. Just to smooth out a little bit of the volatility in the hardware front, what’s the latest thought in terms of leasing hardware and the appetite on the customer base to look at that, digest it, deploy it? Thanks.

[Marc J. Eisenberg:]

So we do that a little bit today. We have specific customers and we have built out a program to do some leasing. We don’t do it on our own balance sheet, because until now the capital that we had was spoken for. So we use a third-party bank typically to finance those, but there is a leasing platform out there now. When we closed our J.B. Hunt deal, we priced it in a leasing model and we priced it also where they buy the units upfront and I’m guessing their cost of capital is lower than ours. So that’s the way they chose to go.

[Scott Searle:]

Great. Thank you.

[Marc J. Eisenberg:]

Sure.

[Operator:]

And at this time, we’ve no further questions in the queue. I’d like to turn the floor back to Mr. Eisenberg for any additional or closing remarks.

[Marc J. Eisenberg:]

Thank you for your questions and for participating on our call. We look forward to speaking to you again when we report our Q2 2017 results in August. Bye, bye.