ORBCOMM Inc.
Q4 2017 Earnings Call Transcript

Published: 1 Mar 2018

[Operator:]

Good morning, ladies and gentlemen and welcome to the ORBCOMM’s Fourth Quarter and Full-Year 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 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. 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 Eisenberg:]

Thanks, Michelle. We finished 2017 with record revenues and subscriber additions and growth across nearly every aspect of our business. We're excited about our progress and growing market share and shipping more than 107,000 devices in Q4 which is more double last year's fourth quarter. This takes our total for the year to an unprecedented 336,000 shipped devices. At present, we do not see this momentum slowing down. As a matter of fact we're chasing more opportunities now than at any point in the company's history. Adjusted EBITDA in the quarter was lower than Q4 last year partially due to investments in large deployments that we discussed on prior calls and partially due to a few accounting adjustments in costs that we are going to explain shortly. I'll kick things off with a review of the financial highlights for the fourth quarter and the full year 2017, provide an outlook for 2018, as well as an overview of key areas of the business including a new product line targeted for the consumer market. I'll then update you on the status of our large deployments, new customers, product innovation and the integration of inthinc and Blue Tree. At that point I'll transition the call to Robert to walk you through the 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 fourth quarter ended December 31, 2017. ORBCOMM’s total revenues grew to a record $76 million, a 62% increase over last year and higher than we had anticipated. For the full-year total revenues reached $254.2 million generating robust topline growth of 36% over the $187 million 2016 with service revenues growing $22 million and product sales growing $45 million. Both service revenues and product sales closed the year strong achieving quarterly highs of $39.3 million and 36.7 million respectively. Revenue was aided by acquisition, but was predominantly driven by organic growth. Q4 service revenues grew 34% year-over-year 11% percent organically Q4 product sales were up a 111% over last year, 73% organically. We continue to see the conversion to the generation of high margin recurring service revenues as hardware gets installed. Service revenues grew nearly $2 million organically just over the prior quarter. Our subscriber count to subs experienced unprecedented growth in the quarter over 127,000 net subs including over 90,000 organic subs and 37,000 from the acquisition of Blue Tree driving the base to 2.3 million at year end. In 2017 we added over 300,000 net subs an 18% increase over 2016 representing more subscriber additions than the company had in its first 10 years of business, demonstrating our continued growth and market leadership. Adjusted EBITDA for the fourth quarter of 2017 was $9.3 million which was lower than anticipated reflecting nearly $4 million of additional cost between large scale of deployments that we believe will taper off in Q1, a number of accounting adjustments including our reserve for aging inventory, additional costs for network overages at inthinc that we believe will not repeat and higher relative operating costs for the Blue Tree acquisition as we begin to execute on delivering the expected synergies. As we've said on prior calls, we expected a partial margin recovery on hardware in Q1 with a return to more normalized levels in Q2. For 2017 adjusted EBITDA totaled $44.9 million down $2.4 million compared to the prior year. Let me try and put this in perspectives, strategically ORBCOMM has always had two objectives pulling us in different directions. First is to drive growth. We are focused on adding subscribers the result in recurring revenue for multiple years which will continue to grow service revenues and shareholder value. We've done this by expanding into new vertical markets developing cost reduced solutions and adding product lines and geographies. As we've invested millions of dollars in growth, we put ourselves in a great position from a business development perspective. Just this year, that's 2018 will provide – we'll release over 20 products that we believe will significantly add to growth. That doesn't take into consideration the tens of feature additions including software enhancements sensors, new installation options and customer integrations with internal systems. Second is to manage the company for profitability in the short run. How much do we reinvest in the business as opposed to focusing on improved adjusted EBITDA in the short run, it's always been our practice to walk a fine line between these initiatives. In 2018 we entered the year with significantly more opportunities than in any prior year and a terrific position and a strong economy especially in the industries that we serve. We see an opportunity to ramp our subscriber growth, subs that will contribute to revenue for many years to come. What we're seeing is that some markets are becoming more competitive and we're hitting price points with some of our products but at low margins, which has affected our profitability in the short run. As a result, we've started making significant additional investments to take costs out of our product portfolio to make us more competitive and improve our long-term profitability. With all these factors in mind, we are guiding revenues and subscribers higher for e the full-year 2018, but adjusted EBITDA margins lower in the first half of the year. We're now thinking revenues will be between $290 million and $310 million and subscribers at 350,000 to 400,000 subscribers. We are projecting adjusted EBITDA at $55 million to $60 million. While we feel this number could go higher, we are balancing the timing of new customer deployments, expanding into new markets, as well as the availability of the cost reduced products that will result in more subscribers, more hardware sales and a more competitive product portfolio. Let's be clear. We're investing in a significant cost reduction plan for our products and we're now projecting higher revenues with more subscribers and rising hardware margins with an expectation to end the year at a substantially higher adjusted EBITDA run rate. We believe Q1 will generate $65 million to $70 million in sales despite Q1 typically being our weakest quarter and adjusted EBITDA is expected to be $9 million and $10 million as we cycle out our large low margin deployments and have a typically higher first quarter costs. We see a recovery to hardware margin percentages in the low 20s in the second quarter with most of our cost reduced products hitting the markets in Q3. By the third quarter we expect hardware margins to be in the mid-20s and by the fourth quarter margins are expected to be in the high 20s as we get a full quarter of deploying these products. Let's move on to business highlight starting with transportation. We're near completion of large deployments with both J. B. Hunt and U.S. Postal Service. At the end of Q4 we had shipped over 73,000 systems to J. B. Hunt with over 62,000 installed. We shipped the remaining 13,000 systems in January and expect to complete installation for the retrofitted fleet by the end of March. This is one of the largest deployments in the history of our industry and it's finishing on time making J. B. Hunt a happy customer. In the next phase of our relationship with J. B. Hunt we'll focus on analytics, new software features and factory installations. We're also making great strides in our program with the U.S. Postal Service. As of Q4 we shipped nearly 33,000 systems with more than 60% of which are already installed. We expect to complete the U.S. Postal Service program by the end of Q2. In Q4 many of our long-standing transportation customers continue to place renewal orders such as Walmart, Prime, Hirschbach, C.R. England, Covenant, Carolina Tank, Tyson Foods, Riverside Transport, Cryo-Trans, EPES Transportation, Atkinson [ph] Logistics, FedEx Custom Critical, NTB [ph], Napa Transportation, and NFI [ph]. We've also closed a large number of exciting new customer opportunities including Armstrong Transportation, Cooper Freight, Little Truck Sales, Marvin Keller Trucking, Ole Tyme Produce, Kim Transport, FGSI [ph] and Jordano's Foodservice. Inthinc had a productive fourth quarter shipping 5,400 devices and growing their fielded units by over 10% in just one quarter, much of which is due to the rebounds in the oil and gas industry. We're also seeing inthinc growing in new markets including natural gas and alternative energies with the addition of several new customers such as Keane Energy and NW Natural. The new ELD mandate for electronic data logging of hours of service is also a major factor in driving demand for inthinc's products which are focus on improving drivers' safety and compliance. We're making progress on the integration of Blue Tree Systems and are quickly seeing the benefits of our ability to offer the most complete integrated transportation solution offering, from in-cab fleet vehicles to refrigerated assets to dry vans, all visible on a single platform. We've already starting piling Blue Tree's in-cab solution with many of ORBCOMM’s customers and expect to see the business grow as we cross-sell the full portfolio into our complementary markets. The Blue Tree team in North America closed some key wins including Cooling Concepts, EverFresh Produce and Weis Markets. The European team received several renewal orders from DHL, Kerry Coaches, Certas Energy and Karim Foods. As in inthinc we're seeing ELD mandate is a big driver for Blue Tree's business given that their solution is regarded as one of the most driver friendly ELDs in the market and expect to have some exciting new wins to announce over the next few quarters. Turning to AIS, Q4 marked another record high of $2.5 million in revenue with a total of $9.5 million for the full-year also a record. We're excited to announce that the Government of Canada has exercised the option for another year under their contract through our Canadian partner Maerospace. This program monitors Canadian and global marine traffic to help keep their borders secure. This is a multiyear contract with options through 2020. On another note, we've been talking for some time about our plans to enter new markets that support our long-term growth further diversify our business. We're pleased to announce that we've launched a new IoT business that is focused on the consumer market under our [indiscernible] brand. Leveraging where it counts industry-leading IoT technology and expertise, the [indiscernible] product line of asset tracking and communication solutions is unique extension of our core IoT business targeted for personal use and small business applications. The first of [indiscernible] products to be released in the market is the [indiscernible] Venture smart GPS tracker from tracking personal vehicles, family members, or valuable items to small business applications such as monitoring the location of drivers, workers out in the field or vehicle fleets. The [indiscernible] venture reports its location. [indiscernible] venture is available on Amazon starting today and the mobile app can be downloaded on Google Play or the Apple Store. We will continue to take the lead on developing best in class IoT solutions that help people and businesses stay connected to everything, everywhere, so look for additional [indiscernible] products to be launched in the future. It's been a busy quarter from a product perspective. In Q4 we began to ship [indiscernible] IsatDataPro or IDP terminals that use our new radio frequency integrated circuit or RFIC in greater volumes. We've got RFIC baby units deployed on fishing buoys for several months with positive results and we're seeing the transition ramping to other IDP customers around the world. As a reminder, the RFIC is a custom chip that reduces part count by 600 components thereby significantly reducing cost and improving reliability. We're just beginning to see the benefit of the cost savings and efficiencies. We've also completed the validation of our dual-mode RFIC which leverages both the Inmarsat L-Band and OG2 networks and are developing modems and terminals using this chip which we expect to release in the second half of 2018. As I mentioned earlier, we plan to release more than 20 new products and solutions ranging from feature enhancements to sensors and peripherals to product configurations to user interface designs. These projects span every aspect of our business as well as several new product categories in vertical markets and will significantly contribute to the business going forward through greatly improved price points, features and performance gains. We will also be enhancing our IoT solutions operating with a major initiative to expand our data analytics capabilities which we use to identify patterns to predict valuable operational information from the data collected by various SaaS platforms. We're already working with multiple customers to extend further efficiencies of their business through these platforms. Summing up, the business performed well in 2017 from a growth perspective marked by record service and hardware sales, device shipments and subscriber additions. We are also making good progress on hardware initiatives that we expect to have significant impact on margins and demand keeping us in a great position to continue to grow the company. In 2018 we also expect to see the benefits of the investments that we've made on our large deployments and product developments. From a market perspective, we elevated our position in the industrial IoT as the solution provider of choice for many of the world largest players in transportation, heavy equipment, marine, and other key vertical markets. With the addition of inthinc and Blue Tree we now have a clear path to providing the transportation industry's only complete integrated platform for nearly all asset classes and we've been already seeing these businesses gaining momentum. Our continued focus on innovation, execution, and scale has led to many new customers, products, and markets that have built the solid foundation for 2018 and beyond. Clearly there's a lot to be excited about. At this point, I'll turn the call over to Robert to take you through the financials.

[Robert Costantini:]

Thank you, Marc. Good morning everyone. The essential highlights of Q4 and the full year 2017 are record growth in revenues, adding the Blue Tree acquisition in Q4 or a total of two acquisitions in 2017, and delivering record amounts of hardware and services to customers. We massed over 300, 000 net additions in 2017 propelling our subscriber communicator base to over 2 million by the end of last year. Net additions were 127, 000 in Q4 with over 90,000 being generated organically. Net subscriber additions were the catalyst of delivering record Q4 total revenues which were $76 million up 62% over the last year. This performance included $39 million in service revenues growing 34% or $9.9 million year-over-year with 11% organic growth. Effective growth of 12% over Q3 was strong adding $4.3 million of service revenues in Q4. We're starting to see the pay off from our delivering installation of 2017 large orders. Also Q4 AIS revenues of $2.5 million were up 34% reflecting the steady growth in AIS over the last several years. The fourth quarter also included higher installation revenues and costs which did impact margins due to costs being higher than the associated revenues to provide those services to certain customers. Service contribution margins of 57.5% in Q4 this year were lower than Q3 margins of 61.1% due to the installations from directional carrier opportunities plus mixing in the two new acquisition that operate lower margin platforms due to their current scale. We had more installations in Q4 than Q3 and higher installations costs as we worked hard to get these products delivered higher margin service revenues. Automated controls are now in place to link future overage charges and new subscribers will increase the scale and margin of the service platforms recently acquired. Excluding the effect of these items, service revenue contribution margins were almost 68% for the rest of the business which supports our expectation that service margins will scale back to higher levels as the deployments wind down. On the hardware side record product sales of $37 million was a remarkable 111% adding almost $20 million in Q4 this year over the last year. A good portion of these products will be installed in early 2018. The growth was mostly organic like Q3 serving our key markets of transportation, marine and heavy equipment. Unprecedented volumes of products shipped was nearly 107,000 units in the quarter compared to 105,000 units shipped in Q3, 13% product contribution margins in Q4 practically unchanged from Q3 margins of 13.5% reflecting a greater percentage of product sales at high volume pricing. We expect these activities to taper off in Q1 this year as margins start to improve. Revenues from acquisitions are an important complement to our growth and in the fourth quarter the acquisitions increased our momentum when combined with the fourth quarter's double-digit organic growth in service revenues and product sales of 11% and 73% respectively. Revenues from acquisitions will contribute for full-year in 2018 versus six months for inthinc and three months for Blue Tree in 2017 supporting lift to service revenues in 2018. For the full year 2017 total revenues exceeded $254 million increasing 36% year-over-year with $135 million in service revenues growing 20% and 62% growth in product sales to $119 million. Full year 2017 service contribution margin was 63% and product contribution margins were 16%. Operating expenses were up over the last year by $7 million in Q4, 28% and for the full year up $16 million or 16% when excluding asset impairments. These costs which have been higher mostly to operate the two new acquisitions, particularly adding new employees from the acquisitions and organic growth. The two acquisitions also drove acquisition related and integration costs higher by $0.6 million in Q4 this year over the last year, bringing acquisition related and integration costs of $3.3 million for the full year 2017 versus $1.6 million in the prior year. Adjusted EBITDA was lower than last year's fourth quarter and down sequentially from the third quarter. Overall in Q4 adjusted EBITDA of $9.3 million was $3.2 million lower than last year. Adjusted EBITDA margin of 12.2% was compressed due to the higher installation and service delivery costs for investments and the high-volume opportunities and higher relative operating costs when we added Blue Tree. Excluding the impact on the margins from these items just mentioned, adjusted EBITDA would have been approximately $13.2 million in Q4. For 2017, adjusted EBITDA totaled $44.9 million down $2.3 million or 5.1% compared to last year. Interest expense for Q4 2017 was $5.2 million versus $2.5 million in the prior year. Including the amortization of debt fees, reflecting the new bond offering in Q2 of 2017, interest expense for the full year 2017 was $17.7 million compared to $9.1 million last year. Interest expense will be approximately $2.8 million for the full year of 2018. In the fourth quarter of 2017 the company had a net loss of $7.5 million compared to a net loss of $3.2 million for the same period last year. The expanded loss this year in Q4 was due to higher operating expenses from the acquisitions and higher interest expense. The full year net loss of $61.3 million increased due to higher operating expenses and interest expense. As mentioned, along with the satellite impairment charges that increased $20.5 million over 2016. Looking at the balance sheet and cash flows, cash flow of approximately $34.8 million at December 31, 2017 compared to $25 million at December 31, 2016 increasing $9.8 million. This reflects mostly the net proceeds from the bond offering plus net cash used in operations of $5 million that was used to increase working capital components of receivables from increased product sales and increased inventories to meet product demand. In Q4 the net cash used in operations improved in the quarter by $2.2 million. The 2017 capital expenditures of $27.4 million included $3.9 million for the final OG2 milestone payment, $7.8 million of sustaining CapEx and approximately $15.7 million of investment CapEx for new products and services. We also reported inthinc to $34.2 million and Blue Tree to $34.5 million. Our total debt outstanding at December 31, is $246.5 million net of debt issuance costs. Looking out to 2018 guidance, as Marc previously stated, for 2018 we expect total revenues to be between $290 million and $310 million. We were struggling at the time of the new deployments and how they correspond to margin improvements, so even though it could be higher, our current view is of adjusted EBITDA in the $55 million to $60 million range. We expect to see service and hardware margins rise throughout the year exiting 2018 at a substantially higher adjusted EBITDA annual run rate. We're also guiding for capital expenditures to be between $20 million and $25 million in 2018 with about 75% to 80% of that for investment CapEx. We believe the new Tax Act will benefit our customers particularly the provisions to write of equipment purchases in the first year, which makes this an ideal opportunity for our customers to invest in our technology that improves their productivity, especially in the current environment marked by driver shortage, where truckers are pressed to operate more efficiently with limited availability to incremental drivers. So wrapping up for the quarter and all of 2017 showed unprecedented growth in revenues and products shipped as we continue to expand our offerings and grow revenues, whether by investing in new products, large deployments or new technologies to maintained market leadership and drive long-term profitability. And this is highlighted by our recent acquisitions into the fleet management arena which are expected to contribute significantly in 2018 and beyond. This now concludes our remarks for this call and we're happy to take your questions.

[Operator:]

Thank you. [Operator Instructions] And we'll take our first question from Ric Prentiss.

[Marc Eisenberg:]

Hey Ric.

[Ric Prentiss:]

Hey can you hear me okay?

[Marc Eisenberg:]

Yes, yes.

[Ric Prentiss:]

Hello? Okay.

[Marc Eisenberg:]

Yes we can hear you.

[Ric Prentiss:]

Yes, hey, couple of questions. Great. A couple of questions, first back on the fourth quarter, I think you mentioned $4 million kind of impact within the quarter because of a handful of items, and one was including an accounting adjustment for inventory reserve. Can you breakout for us kind of what the different components of the $4 million were?

[Robert Costantini:]

Sure, you know, I would say volume pricing for products was you know for $4 million let's call it like $1.2 million, installations not yet properly netted out, a negative $1.4 million, you know some of the inventory reserve, the inventory reserve adjustment is kind of $0.5 million, then [indiscernible] charges were about $0.5 million, you know acquisition focused costs were yet about another $0.5 million.

[Marc Eisenberg:]

When he says you know the large volume pricing, he is talking about finishing off the two, you know the couple of large deployments that we've been talking about for a few quarters.

[Robert Costantini:]

Yes.

[Marc Eisenberg:]

He is not saying about anything incremental.

[Robert Costantini:]

Yes.

[Ric Prentiss:]

Right, right. Now that makes sense. Okay and as we think about how much within the fourth quarter Blue Tree came in obviously right at the very beginning of the quarter, can you help us understand how much revenue that added, I think it had 37,000 subs and which have a pretty high ARPU, so just trying to think through how much Blue Tree meant in revenues incrementally in the quarter?

[Marc Eisenberg:]

The service was $2 million.

[Robert Costantini:]

Yes and private was just the same.

[Marc Eisenberg:]

Yes, about 2 and 2. So if you pan it back out of the service you know we are up about $4 million, so you add about $2 million organic and $2 million Blue Tree.

[Ric Prentiss:]

Yes, okay. And then remind me, do you guys book the installs into service? I think you do and you mentioned that was a pretty big quarter, how should we think about the impact of installs as we look at what happens to the service revenue on the way into 2018?

[Robert Costantini:]

Yes, that's what we're describing for you right now, we're going to – we have to taper off that program, so obviously products will ship in Q4 that's going to be in all in Q1 and throughout Q1.

[Marc Eisenberg:]

Right.

[Robert Costantini:]

So it will taper off.

[Marc Eisenberg:]

So there's good news and bad news there right? The good news is the costs which are far higher than the revenues are going to taper off by the end of this quarter and you know the downside is, you know the little bits of revenue that we get will also taper off you know the service revenues. So from an EBITDA perspective as you jump from Q1 to Q2 it's probably which maybe $1 million pick up from Q2 to Q1 Robert?

[Robert Costantini:]

Yes, I mean…

[Marc Eisenberg:]

It's a big deal.

[Ric Prentiss:]

Right and so as you think about that margin pressure or you mentioned some markets are getting more competitive, lower margins looking at cost cutting, which particular sectors is that and what kind of programs are you putting in place so we can see that progression through the year I guess on the EBITDA that you kind of laid out?

[Marc Eisenberg:]

Yes, you're not going to believe this, but it's almost everywhere and some of these things we've been working on for years. So let's just start with the IDP products which you know ship between 25,000 and 30,000 devices. We talked about this RFIC and what we talked about on this call was, you know what we talked about on this call was, limiting that or we're just not trucking out 600 down the one chip. And we've had successful deployments in the field, but those are mostly pilots. So of the 30,000 that we ship a quarter only 700 of them have had this benefit to the cost. The other – 20 some odd thousand haven’t or almost 30,000 that we do in a quarter haven’t benefited from this yet. But that's like the long range plan. You know the stuff that we started that we're working on this year is the GT 1100 which is the anchor in our transportation group you know a new version comes out in Q3. There is also – you know we have a premium product, so sometimes what happens to a product is, you get some of our customers that say listen we love your premium product but I don’t want to pay for it. You know, I'm going to go to your competitor. You've given me a Cadillac, I want a Chevrolet. Now, I'll take the Cadillac for the Chevrolet price, but you know, gee I really want to pay for the Chevrolet. So we have another low cost non-solar product that's coming out to meet those needs as well, so as opposed to discounting this thing pretty close to cost, we'll have a lower price unit there. The Blue Tree stuff there's so much opportunity at Blue Tree because we haven't moved our production yet and these guys are so subscale that there's like 30% improvements when we moved their product to San Mena. So when we say that we haven't achieved the synergies yet at Blue Tree the easiest thing is just moving the, two easiest things are moving the terrestrial fees over to accounts where we get slimmer rates and then the second thing is moving the manufacturing over to our manufacturing using our components and when you look like, we use the same processor as we do on our GT 1100 they're buying a couple 100 a quarter we're buying tens of thousands a quarter, just that one piece alone is 10s of dollars. So we're working on that as well. We're converging the platforms. So right now you could be on a StarTrak platform or a Lam platform or an LMS platform, everything gets consolidated from a data perspective in the next year or two through the Blue Tree platform because that is by far the most sophisticated. We've got new fuel sensors coming out. The transition from - in the reaper business, from the RT6000 to the PT6000 barely any of the units shipped is on the new platform which is severely cost reduced. Carrier is on it but the rest of the business is not. To give you a hard number at it, almost 80% to 90% of our products are going to be touched by this plan, but here's what we're battling in the in the short run. When we tell you that margins are expected to be 25 points almost none of our margins are 25 points. The margins could be 40 and the margins could be 5 depending on what product it is. So and we're hoping then it's going to be 25 points, we're sitting there looking at our sales plan looking forward and saying alright X percent is transportation, Y percent is Skywave. Europe’s doing this and we're trying to roll these things up and trying to get to that, get to those mid 20s, so that's why we're confident that margins are going to go up a bit in Q1 and then they're going to go up a whole lot more in Q2 because some of these big transportation deals kind of fall off. And they we're saying, you know what, I don't feel like we're in control of that, so how do we kick the bottom end of that plan, the 5 to 40, how do we take the bottom from 5 to 20 and then how do we play between 20 and 40 as opposed to playing between 5 and 40 and that's the plan that we're talking about here, but wow, this is more complex than you think it is. It's not just building products and shipping products. You're dealing with long lead times, you're dealing with inventory that you're holding based on all products, you're dealing with long lead items and components that now you're writing off and you take this inventory write off because you don't want to build them because you've got these costs reduced products coming and that's why we're anticipating margins in the lower half of the year. But once we clean all this up and get to that second half of the year Q3, Q4 we think we're going to do better than you expected, you just have to give us a couple of quarters to get there.

[Ric Prentiss:]

Okay and how about the services that should be a little bit easier I would think, it's not as lumpy and chunky, but that's where I guess the price competition is coming in, so just trying to think on the service margin improvement.

[Marc Eisenberg:]

Yes, that's not a problem at all. You're going to back up the installations and service is going to jump right back.

[Ric Prentiss:]

Okay, because I mean historically you've been more in the kind of mid 60s I guess versus mid high 50s?

[Robert Costantini:]

Yes, mid to high 60s, yes. That's - those are the levels we're talking about down into.

[Ric Prentiss:]

Okay, so getting back to that.

[Marc Eisenberg:]

So the install is really what's really depressing that. The install is depressing it 90% of the issue, the other 10% of the issue is the terrestrial overages in the short run or half and that we’ve got figured. We had some runaway units there that we needed to fix and then lastly, Blue Tree and inthinc that we brought on run just slightly lower than we do, so they've lowered the average. But if we fix the installs and the network overages we're going to be right back in the mid 60s.

[Ric Prentiss:]

Great, thanks for that color.

[Operator:]

And we’ll take our next question from Mike Walkley, Canaccord Genuity.

[Marc Eisenberg:]

Hey Mike.

[Mike Walkley:]

Sir, can you hear me? Okay sorry I'm over here at Mobile World Congress in Barcelona, so sorry for that. It's not loud enough so I'll speak up here. But as we look through the cadence of the year, can you walk us through maybe what adjusted EBTIDA could look like exiting the year should your margins start to recover back to some of the levels you talked about on the call?

[Robert Costantini:]

Sure, again that run rate, that exited run rate should look like, what we - before we started getting into this large installation deployment arena, so those were sort of in the mid 20s and that makes a lot of sense to us to see us sitting at that level.

[Marc Eisenberg:]

I'm sorry Mike what I was going to say, on the greater subs with the greater revenues, and keep in mind getting to 25 points is significantly better than it was because, you have a much higher percent of hardware sales now.

[Robert Costantini:]

Covered a lot of ground.

[Mike Walkley:]

Okay, that’s helpful and then just with inthinc and Blue Tree have ARPU even that guidance of your subs I think it was 2 million 90,000 plus, how should we think about ARPU trends, because I know you have a lots of different products, where do you expect ARPU to end up over the course of the year?

[Robert Costantini:]

inthinc has really done well, so inthinc puts on the internet subs that are in the $30 to $40 range. So when you look at inthinc doing, 5,400 subs in a quarter, it kind of looks like, from a revenue perspective, it looks like 40,000 subs in a quarter. So they certainly helped ARPUs a lot with those 5,400 subs. And if you look quarter-over-quarter organically the company grew $2 million in service revenue that's a year's worth of growth in one quarter when you look at like 2016 or 2015 numbers. So I think we were able to help ARPU in the quarter, Blue Tree helps as well. Transportation brings it down. Some of the other stuff brings it up, but I think there's more help than hurt there.

[Mike Walkley:]

Great. Thanks and then just as you look to expanding margins second half of the year, with some of the deals you're chasing out there, are there any concerns potentially where you'll get another large deal like the one J. B. Hunt or something like that that can impact the margin recovery, that just seems to be a question I get a lot from investors were that you might have trained customers for these lower margin deals on the installation side.

[Marc Eisenberg:]

Yes, I think if we were to close the exact Hunt deal in the second half of this year when the new margins come out on their specific product, we wouldn't be talking about it at all. And just to just explain what I'm talking about there, the issues with the margin on J. B. Hunt is, you know with the J. B. Hunt product if you look at the pictures of it online, there's a lot of separate components that make up that unit and by Q3 all of the components, the cargo sensors, the brackets, the GT 1100 are going to be compressed into one unit which is going to drastically take costs out of there. So, you know as opposed to being the highest value upper price points on products. We're going to be the low cost leader in terms of, in terms of the product that we're able to provide, but with the most features and functionality. I think it's the perfect storm for us. I don't think you are going to see that issue at all.

[Mike Walkley:]

Okay, great. Thanks for taking my questions. I’ll pass the line.

[Operator:]

All right, thank you. We'll now take Mike Malouf from Craig-Hallum Capital Group.

[Mike Malouf:]

Great, thanks for taking my questions.

[Marc Eisenberg:]

Hey Mike.

[Mike Malouf:]

I'm wondering if you could talk a little bit about how the satellite health, satellite constellation health is, how you see it going forward it's been several months now since we had an issue or two, so I'm just wondering where we are at there and as you look into rest of this year and into 2019, if you think you're going to have to augment your constellation around. Thanks.

[Marc Eisenberg:]

Yes, it's funny we wrote it, we started off writing a paragraph and the scripts for the satellite and then there's like no news. And in the satellite space no news is good news. So these satellites are healthy. We've made our augmentations. We feel we've got it licked. We're not seeing any further issues. We have been pricing out various satellites just in case, but that is definitely tapered off as we're offering pretty good service with the spacecraft that we have. So lot of focus on this dual-mode RFIC which is really close which backs this up to the Inmarsat network. In terms of the subscribers that are on the switch, they're getting really good service right. no further losses to any satellites in the network, so there's not a whole lot to report here.

[Mike Malouf:]

And I know that you thought that there was a chance you could wake one of those satellites back up, my guess is no, no luck with that so far?

[Marc Eisenberg:]

No, luck with that. You know there's one of them that responds to commands which we're more hopeful than the other two. I think probably it's certainly less than a 50-50 shot.

[Mike Malouf:]

Okay, great and then as you look into, you made two nice acquisitions last year, as you look into 2018, can you talk a bit about the opportunities for their acquisitions and whether your balance sheet is sort of set to handle anything that comes your way?

[Marc Eisenberg:]

I think I’m - where we are with Blue Tree and inthinc is an athlete's space. There were holes in our portfolio and that made us nervous. And what made us nervous is, we had this massive cargo business and we weren't in the trucks and the fleet and we did think that people wanted integrated solution with their trucks and their trailers and their containers and everything. We felt that that made us vulnerable, so we made those acquisitions. We think that they're going to do really well and it certainly gives us a huge advantage over the rest of the market. So we felt it was something we had to have. And kind of looking forward, I don't think there's anything out there that we're saying we have to have. Now I think we can be opportunistic and being opportunistic we can look at some financial opportunities to add scale or stuff that we think will help us with our price points or distribution. It's nothing that we can't build ourselves or do internally, but at that point it would be a pure financial decision is it makes sense and is it accretive it's a shareholder value. So could there be some deals this year? There could. Would you be shocked if there were, was very little this year don't be. This is a complex plan and we are putting tens of millions of dollars into really cool products and cost reduced products and we're getting into the marine business with Inmarsat. We launched a retail product today. This company doesn't have a growth issue, that's not where we're struggling.

[Mike Malouf:]

Great, thanks a lot, I appreciate it.

[Operator:]

All right. And David Gearhart from First Analysis.

[David Gearhart:]

Hi, good morning. Thank you for taking my questions. My first question kind of piggybacks on the M&A question and doing more acquisitions. I know you’ve talked about integrating and having a unified view of in-cabin and the trailer. ORBCOMM is really strong and cold chain with reefer, just wondering if you've considered or looking at possibly going into fixed location cold chain to kind of create a unified view from - for temperature sensitive goods from production to distribution of final sell through?

[Marc Eisenberg:]

I think that would be a natural progression and potentially a pretty good next step and kind of the way we look at those things we build by a partner. So we have a modeled that out and kind of looked at all the various opportunities and I don’t know that we settled in on one yet. So the answer is probably there will be an answer this year and it will be a long one of those three areas and I couldn't tell you which yet.

[David Gearhart:]

Okay and then I didn't hear any comments on JLG and Oshkosh in the prepared script, just wondering if you can give us an update on the units done with JLG for the quarter in the year and how ORBCOMM is progressing at penetrating some of the opportunities in the Oshkosh umbrella?

[Marc Eisenberg:]

All right, so there's another one that was in the script that we pulled out because we talked about three quarters in a row. We shipped between 10,000 and 20,000 devices last year and I think it was somewhere in the middle part of that range, I just don't recall at the top of my head. And I think we're doing really well on the Aerial Work Platforms. And then if you remember last quarter, we added there Fire and Rescue Group and that added more and then this quarter I'm kind of pre-announcing it, so you're hearing it first here. We're starting to work with their snow group, the plows and the other stuff that they build and we'll get that deployed as well. We're starting to move internationally with JLG and Oshkosh. I know they are starting to build the same at their factory in India, but that's not even the cool thing about JLG. The cool thing about JLG and Oshkosh is from an OEM perspective building in the factory we're doing well, but they've got tens of thousands or hundreds of thousands of units out there that are in the field that we have an opportunity to retrofit. And the opportunity to retrofit them is really with these rental companies because in Aerial Work Platform is not like a piece of heavy equipment where you've got to build it and own it, it's owned by the rental houses. It's owned by the United Rentals and the Herx [ph] and those guys. And I think we've got some good news for you there, give us a quarter, but I think we've got some really good news for you there.

[David Gearhart:]

Okay and then two more from me, I just wonder if you could give us an update on the - since you're talking consumer products and whatnot, I'm wondering if you can give us an update on the Halle [ph] AIS product and what kind of adoption you're seeing there? And then lastly, just if you can comment high level on overall churn just given the elevated competition you're seeing in new markets?

[Marc Eisenberg:]

Yes, the Halle [ph] was a really good test, so we built this Halle and we kind of built it with discrete parts and cobbled some stuff together you know to see what the market was for this combined AIS or kind of offering. And then you take a swag at a number right and that number is, how many we're going to build and you’ve got to risk that you don't sell them and it's an untested market. So we went in - our first build was something like 750 units and then within a month we sold 750 units and then you like right now we've got no components and nothing in this cycle we better start building it. And then we got a little more encouraged and we're starting to build a more and designed a more integrated product around Halle. I think it's a real product. I think it's going to do well and I think it's again higher service revenues. And I think with a couple of different systems out there doing AIS, I think you're absolutely right that - I know what you're thinking that we can really separate ourselves and distinguish ourselves on the product side because it's what we do so well and we're going to - I think we're going to do just that. What was the second question you had?

[David Gearhart:]

Just a high level overview of churn and how it's trending just given your comments on elevated competition and pricing in the market?

[Robert Costantini:]

Yes, that's a great question because it's the pricing we were seeing on the way and that not once, we bring a customer on board. So the churn has been very stable. We've always operated with 6% to 7% range. The trending actually has improved. So as it was moving a little bit higher than 7 now it's sort of to step back as we're reversing more, I want to say reverting for that, that mean number of around 7, so again remarkably stable not a big issue for us.

[David Gearhart:]

Okay, that's it from me. Thanks for taking my questions.

[Operator:]

Okay and Jim Mcilree, Chardan Capital.

[Marc Eisenberg:]

Hi, Jim.

[Jim Mcilree:]

Sorry about that, thanks, good morning. Can you guys give a rough split of the roughly 300 million in revenue that you think is going to be hardware versus service?

[Robert Costantini:]

Yes, at the middle of the range it would be 55% service and 45% hardware. Top of the range it’s going to be close to 50 and if it’s a bottom of the range it's going to be closure to 60-40, but the middle of the range is 55-45.

[Jim Mcilree:]

Okay and that 350,000 to 400,000 net adds that are you talking about is that kind of roughly even throughout the year or is that something that accelerates in the second half as well?

[Marc Eisenberg:]

I'm just thinking of Q1. I think Q1 we're not going to go down from that 90,000. So I think it's going to be, I think we're going to start on that run rate already and then have an opportunity to improve on it.

[Jim Mcilree:]

Okay, I'm with you. And then I think you answered this one Ric was asking his questions, but there was some crosstalk and I just want to make sure I understand it correctly. When you're talking about the price pressure, you were talking - you were referring to hardware price pressure not to service price pressure. And so the margins that are being impacted are the hardware margins, not the service margins from that pricing pressure, is that correct?

[Marc Eisenberg:]

Not only is that correct, but the pricing pressure on hardware is really specific to four or five skews. It's really in the transportation segments. If you look at the other parts of our business which is roughly 60% or 70% of our shipments it's - we're not seeing it nearly as bad as we are on transportation group.

[Jim Mcilree:]

Okay, that's helpful. And then finally, again I think you've addressed this, but I just want to make sure so when we're talking about service margins we're going to have the installs impact the service margins in Q1 and then it kind of we get a bounce back in Q2 or there's a little bit of that installed issue in Q2 as well.

[Robert Costantini:]

Yes, there could be. So there will be a bounce back, I think it will seriously look like a bounce back and then get into the normalized range for sure by Q3. So that's how we're seeing it. So if you split the difference between 1 and 3 and that would be a good midpoint for Q2 that will.

[Marc Eisenberg:]

From a customer perspective, J. B. Hunt is expected to be done sometime in the second half of March. So I don't know if it's two weeks or three weeks or four weeks, but that one is around in being finished, there's still a bunch of installs that happen that at inthinc, but the inthinc installs run thousands of devices and not tens of thousands of devices, so it's going to improve.

[Jim Mcilree:]

Okay and then the last question is, Marc you talked about customers wanting the Cadillac at the Chevy prices, I guess that's kind of everywhere, but let’s say something about the market just to say that the market really doesn't want these premium products or doesn't value the premium products or does it say something about the growth or is there any implication from that kind of dynamic or that's just the normal thing that every customer in the world wants?

[Marc Eisenberg:]

It feels like we're winning most of the deals we've been on, so I don't know if it's the commoditization of the market as much as I don't know maybe our customers are really good at negotiating and putting these ARPU together and saying, hey we really want here the 10% premium not a 30% premium. So, I think there's definitely some of that, but the GP1100 has been fielded all the way back in 2014 and I think it needs to be redesigned. I think there's opportunities to take significant - maybe 20% or 25% cost out of those configurations with the integrations, with the sensors and everything else and I think that's probably, I think that's probably the right market price too.

[Jim Mcilree:]

Okay, great. Thanks a lot guys. Good luck with everything.

[Operator:]

And we'll take Michael Latimore from Northland Capital Markets.

[Unidentified Analyst:]

Hi, thanks for taking my call. This is [indiscernible] for Mike Latimore.

[Marc Eisenberg:]

Yes.

[Unidentified Analyst:]

I have a couple of questions, so what did inthinc contribute in 4Q?

[Marc Eisenberg:]

Contribute in terms of revenues or subs or…?

[Unidentified Analyst:]

Revenues and subs, subs and yes revenues.

[Marc Eisenberg:]

The subs are 100 and what was, no, no 37,000 was the [indiscernible] 400 subs in the quarter, what did inthinc contributes in revenues?

[Robert Costantini:]

Probably $9 million.

[Marc Eisenberg:]

Yes, it's the same $9 million bucks.

[Unidentified Analyst:]

How much of that is product and service?

[Robert Costantini:]

Most of it is, well I don’t want to say its half, it's a little more service, so 60-40. You have to recognize the part of product off the front? I mean the product revenue at the front and the services is high though, that’s the higher ARPU, it benefited the mid 30, so ARPUs that Marc was describing.

[Marc Eisenberg:]

That makes sense because if you sold 5,400 units let's say and I don't know if they were sold in the quarter or the quarter before, were installed in the quarter, but at their ARPUs on hardware that’s $3 million to $4 million and then they did $9 million, so the resting service it sounds right.

[Unidentified Analyst:]

Yes.

[Marc Eisenberg:]

We don't segment report this, so we're kind of running [indiscernible] hypothetic.

[Unidentified Analyst:]

All right. And what EBITDA, like inthinc and like Blue Tree is expected to contribute into FY '18?

[Robert Costantini:]

What EBITDA the new units or the entire base?

[Unidentified Analyst:]

From the acquisition both the inthinc and Blue Tree.

[Marc Eisenberg:]

Right, okay well let me answer both. So inthinc is in the $30 range for ARPUs and it depends drastically on the whether you get satellite units or cellular units they're vastly different and the dual mode units have much greater ARPUs then this cellular ones and the reason is because inthinc is reporting like every couple of seconds. So this is an awful lot of usage it's a very data intensive plan. And then Blue Tree is in the low teens and the reason Blue Tree’s in the low teens is Blue Tree is a bunch of in-cab but Blue Tree also has Reaper and Blue Tree also has DriveCam. So Blue Tree was like a little microcosm of all comes transportation group itself, so it averages in the low teens so as it comes there and that $5 o $6 range in terms of ARPUs they're both positive contributors to ARPU.

[Unidentified Analyst:]

That’s all from me. Thank you.

[Marc Eisenberg:]

Sure.

[Operator:]

[Operator Instructions] And we’ll have Chris Quilty from Quilty Analytics.

[Chris Quilty:]

A question for you Marc, just may be to step back a little, okay? Good morning. You've got in the last couple of year years software intensive acquisitions in inthinc and inSync and Blue Tree and do you have some kind of a master plan or in terms of moving towards a singular platform or you have an issues or is there an investment out there that needs to be made to do sort of consolidate all that down or is it looking pretty seamless to the customers today?

[Marc Eisenberg:]

It's a little bit of both. So up until the acquisition of Blue Tree, the old StarTrak plan is still out there for the customers that are fully deployed out and are used to it but we haven't been developing on it, so it's out there. You still want to use it, we keep it up, we keep it maintained, but if you add new subscribers then you're on cargo watch and not on reefer track and so over time it's been slowly transitioning to one platform and then you go and you buy Blue Tree and boom everything changes. And what Blue Tree has is by far the most sophisticated web platform of those and let's keep inSync different because they do something completely different. That's inSync not inthinc, so what Blue Tree is it's an in-cap solution but because they also sold Reaper and they also sold drive and everything is on one platform, so when you go and sell them across all of these products, you could see every asset they have on one platform. So within the next year everything we have on all of these transportation platforms gets moved to fleet manager which was the Blue Tree acquisition. So you can kind of see how important it is. And just to give you a feel of why you select that one is, the Marvel in cargo tracking believe it or not is not so much the web interface, it's more about the hardware, you know where you're trying to figure out how to make an asset report for ten years on a pack of batteries when you can't make your iPhone last one day. And then you put it on the web interface and it's really cool that you get location and you get all your geo fencing and you get your open/close, you get your full MT, cool features, but nothing compared to the in-cab where it's almost nothing on the hardware and it's full on software platform, where you've got your ELB mandates and your fuel tax and your driver performance and we rate drivers. So when it comes to the web platform, the cargo is more of a tail lag in the dark. So we go in, we move to fleet manager on that platform. And then the non-transportation platforms tend to work coming inSync platforms, so yes the idea to get from six down to two over time.

[Chris Quilty:]

Got you. You had talked before about driver shortages, but if from the stuff I read we won’t need drivers in the next several years because this is all going to be autonomous. Can you talk about what role - do you see ORBCOMM playing in that market and are there incremental investments or new products or capabilities that you need to target in order to be prepared for that future if you believe in it?

[Marc Eisenberg:]

So imagine you are a company that is kind of built to support drivers and with this driver shortage you get a 100% turnover and there's literally guys on the road that have never driven professionally you put them through some training and not only there is responsible for driving. They're responsible for the cargo, they're responsible for the reefer, they're responsible for temperature, they’re responsible I mean that's what's going on out there, so what are these guys do, they put technology on their assets and I think ORBCOMM from a cargo perspective, and I'll talk about the in-cab in a minute. But from a cargo perspective I think the only thing better for ORBCOMM then helping these customers take this responsibility out of the drivers' hands, the only thing better than us helping them there is no drivers at all. Oh my god make I really need this right, [indiscernible] how do you going to control your reefer, how are you going to know what the temperature is, how are you going to know the diagnostics, there is no one on there, you're better like these things up and get data back. And I think from an in-cap perspective, you know I think you're battling some of the same things. The ELG mandates around driver performance and behavior changed somewhat because what's with the, how do you have an eight hour restriction for a truck that has no driver not such a big deal, but in terms of the other stuff knowing what the truck is doing and paying fuel tax and figuring out all of that complex stuff. I think from a software perspective, I think we're going to be a big help and we're in pretty good shape.

[Chris Quilty:]

Good, just did you had mentioned with the sequential service revenue growth even if I’m back out the contribution from Blue Tree I mean it looks like, I mean that was a pretty big number and in fact for a number of years I've never seen that big of a sequential jump was there something else in there or is that indicative of what we should expect going forward?

[Robert Costantini:]

No, it’s so cool, you know it's so cool Chris, what it is 90,000 subs. So 90,000 subs you know at let's say 6 bucks gets you pretty close to the $2 million of organic growth and then you throw in like a massive quarter of Inthinc where the ARPUs are so high at Inthinc that you get a little more help. Now don't get me wrong, I've $2 million that’s a part of it. That's a huge part of it. That’s fully $1.5 million but you're also getting a lot of professional fees mostly led by installation which that you're to lose. But I don't know that it helps you Q3 over Q4 because we did a lot of installations in Q3 and Q4. So I think if you heard what I said on the call and with $2 million in service revenues or maybe it was in the Q&A like yes that’s a huge worth of growth in the quarter but 90,000 subs I think years worth of 2015 growth and a quarter also, so it should be that.

[Chris Quilty:]

Yes. So one final question, International markets, I mean you've got a lot on your plate now and you’ve made some targeted acquisitions internationally as you look out into 2018 or maybe it's 2019, is there a bigger picture long term plan for international expansion?

[Marc Eisenberg:]

Well, what we're kind of biting off right now is Blue Tree does half its business in Europe and our South African asset obviously does its business in Africa. So we do see those guys picking up momentum and I don't know if the markets there are quite as frothy as North America but they're pretty damn good, so proud of the folks in South Africa. They recently closed a 8000 unit deal for trucks a 1,800 of which in Q2. I mean that's like 20% of their base in one deal and they're selling ORBCOMM products into South Africa everything that we dream that they would do. So really executing well there, you heard all the renewals at Blue Tree, I guess if you're asking about new markets China areas like Asia, Australia there is some news Australia done an acquisition but in terms of partnerships. We do see a plan in Australia. China, we may have some really good news in terms of licensing with CIMC over the next quarter or two where we can have landing rights there which will help us there as well. So there's an awful lot coming together and on these earnings calls it's just a matter of picking or choosing your best, best knewd as news.

[Chris Quilty:]

All right. Thanks and congrats.

[Marc Eisenberg:]

Thanks.

[Operator:]

Next we have [indiscernible] from Roth Capital.

[Unidentified Analyst:]

Hey, good morning. Thanks for taking my call. I know lot has been covered, so I’ll just hit it quickly. I don't know if I missed the specific EBITDA number in terms your guidance for the first quarter, but given the other commentary in terms of gross margins it sounds like you have pretty good visibility of the things we're covering both on the services front and hardware front that are within your control within the second half, so it looks like you kind of entered the year at $8 million to $9 million in adjusted EBITDA but we're exiting the year at almost $20 million per quarter is that correct?

[Marc Eisenberg:]

I think we said 9 to 10 in Q1. I think a lot of the analysts were in the low 60s for next year and here we are guiding 55 to 60 and we think we're there, where the analysts were, but we know that we're going to have this slow start in Q1 because of gee these large deployments we just, we still haven't passed that kiddies stone, but where instead of hurting these installations get done and they start helping and when you take like a $60 million number and pull out the slow start at the 10 you’re at fifty you divided by the quarters, and you are like, oh those are really big quarters. So, I don't think the, I think exiting the years, you guys are going to be super excited about the business. The margins are picking up. this transition over the next quarter to and we haven't spoken in a while, so some of these low cost plans and initiatives they've been out for a long time, but we haven't spoken in 4.5 months, so unfortunately you're hearing them for the first time even though we've been executing them for quite some time but here we have an opportunity to invest a few million dollars and some cost reduced product they're going to had $20 million to hardware revenue, $20 million in hardware revenues adds another 70,000 subs. Another 70,000 subs in the year adds another 350 grand a month or another $4 million a year going forward. And you're saying to yourself, oh my God, so getting your investment back to one year, how can you not do that? and then and I got to get your investment back in one year and you not do that, how do you not do that and then it's just our ability to explain to you, what we're up to and I don't know if Q1 is 9 to 10 who cares. We're building a company that we think is going to be billions of dollars in a couple of years and we're going to build the right products and we're going to hit price points and we're not going to play Russian roulette every quarter not knowing of we could install more 5% or more 40%. We're going to design a way into the right products, build the right produce sell more of are going to sell more 5% or more 40% we're going to design or way into the right product build the right products and margins are going to show in the second half of the year.

[Unidentified Analyst:]

Got you. And just to follow up, Marc now that you've had a couple quarters under your belt with inthinc, Blue Tree still new but what is your ultimate cross-selling and penetration opportunity within the existing base, do you think now that you've been able to see how things are operating go back and discuss it with the existing installed base?

[Marc Eisenberg:]

Inthinc is a little different, Inthinc is selling into oil and gas markets that ORBCOMM is never traditionally been and in those small fleets. So from a distribution perspective Inthinc is still running a little bit on their own and in terms of – are selling more of their product and integrating it, Inthinc has, you have to say more business than they know what to do with but they have more business there's much business that they can execute on right now so, I think if we were to close another 10,000 units. They grew 20% this quarter something some crazy number right? So basically we're leaving them alone, from a distribution perspective where we're taking costs out of their products. We're working on next generation designs and that has been the work it at Inthinc, Blue Tree is completely different. Blue Tree sell to truckers, they sell to private fleets, ORBCOMM sell to truckers to private fleets and that team is 100% integrated within our sales team and they go and visit customers together and that is the upside down ORBCOMM deal where always the first thing to get integrated is the operations and the engineering and that one the distribution gets integrated day one and this is what I love about Blue Tree. I love the ARPUs, I love by far the best product in the industry, but where there's a three to six month lead time for trailers and for reefers. There's more like a six months to one year lead time for Blue Tree, so we're not like announcing any we've closed 8,000 units of this person yet we're to this team but we're piloting there. We love the results that we're getting it's just think of into a truck or right when you swap out the in-cap system it’s like the work that we did at J.B. Edwards swapping at our ERP system that took us a couple of years and that’s what we kind of go through with Blue Tree, but I think it’s everything we expected it to be.

[Unidentified Analyst:]

Okay. Hey Marc just one last one, the consumer product that you’re launching today with Amazon just other channels maybe some of the price points that you’re talking about and does that factor into your guidance at all this year? Thanks.

[Marc Eisenberg:]

Yes, really, really, really small. I mean almost negligible $1 million, $2 million and by the way the link is up for that [indiscernible] and I’m assuming you’re going to get on and buy one specially since you can expense it, but that's the price point.

[Unidentified Analyst:]

I’m sorry.

[Marc Eisenberg:]

You bought it already? In terms of some of the other products you’ve got stuff that is coming in that's super high, the big end products with Inmarsat that’s like Q2, Q3 one that is super high, it’s closer to 1000 bucks in hardware with significantly higher ARPUs. The retail one kind of looks on par in service and looks way low in hardware. I think you’re seeing a cross-section, you may end up right where you started.

[Unidentified Analyst:]

Great, thank you.

[Operator:]

[Operator Instructions] And we have a followup from Ric Prentiss from Raymond James.

[Ric Prentiss:]

Yes, hey guys thanks. A quick follow up. On the inventory reserve what line did that get booked to, was that against cost of product or was it down below?

[Marc Eisenberg:]

No it’s cost of product.

[Ric Prentiss:]

I’m sorry, say it again.

[Marc Eisenberg:]

Cost of product. So it’s in the market.

[Ric Prentiss:]

Okay, good. And then Robert, you talked in the past about wanted to scale up the acquisitions, they were sub-scale as you think about the SG&A that we saw in the quarter and the product development we saw in the quarter, how should we think about scaling the acquisitions up and is that kind of good run rates for SG&A and product development now you have the two acquisitions in the company?

[Robert Costantini:]

Yes, you know it would be SG&A is a good run rate it will be slightly higher going into the year but the very consistent what’s call it around $17 million per quarter, little higher in Q1 perhaps because we have this Q1 expenses that are very typical in Q1 that payroll taxes, little scope increase on the auto whatever. Product development will run higher. That's going to lead the effort on this development activities that Marc is describing and probably started the year around 3.5, $3.5 million per quarter earlier on and then wind-down under $3 million in the latter half, $3 million for quarter. So that’s probably how that is going to roll out.

[Ric Prentiss:]

Okay. And some of that’s from SG&A and product development from the acquisitions, so at some point when do you think they become accretive to EBITDA and can you get those up to your traditional kind of margins?

[Robert Costantini:]

Yes. So these things as Marc talked about are going to be developing this consolidated view of products and the bell starts tapering off in the latter half of the year, but as far as those, I expect both of those acquisitions to be accretive in 2018.

[Ric Prentiss:]

Great, thanks for the extra questions.

[Operator:]

We have no further questions. At this time, I would like to turn the conference back over to management for any additional or closing remarks.

[Marc Eisenberg:]

Thank you for your questions and for participating on our call. We look forward to speaking to you again when we report our Q1 2018 results in May.

[Operator:]

This concludes today’s call. Thank you for your participation. You may now disconnect.