ORBCOMM Inc.
Q2 2018 Earnings Call Transcript

Published: 2 Aug 2018

[Operator:]

Good morning ladies and gentlemen, and welcome to ORBCOMM's Second Quarter 2018 Financial Results Conference. [Operator Instructions] A replay of this conference call will be available from approximately 9

[Aly Bonilla:]

Good morning, and thank you for joining us. Today I'm here with Marc Eisenberg, ORBCOMM's Chief Executive Officer and Dean Milcos, ORBCOMM's interim Chief Financial Officer. On today's call, Marc will provide some highlights on the quarter and give an update on the business. Dean will then review the company's quarterly financial results. Finally, Marc will address our outlook for the remainder of the year. Following our prepared remarks, we will open the line for your questions. Before we begin, let me remind you that today's conference call includes forward-looking statements and that actual results may differ from the expectations reflected in these statements. We encourage you to review our press release and SEC filings for a full discussion of the risks and uncertainties that pertain to these statements. ORBCOMM assumes no duty to update forward-looking statements. Furthermore, the financial information we will discuss includes non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures to GAAP measures is included in our press release. In addition, ORBCOMM routinely posts important information about the company to its website at www.orbcomm.com. Effective November 1, 2018, the company may use its website as a channel for distribution of material nonpublic information about the company and for complying with its disclosure obligations under Regulation FD, promulgated by the United States Securities and Exchange Commission. These disclosures will be included in the Investor section of the company's website at investors.orbcomm.com. Accordingly, investors should monitor this portion of the company's website in conjunction with the company's press releases, SEC filings, and public conference calls and webcasts. Also, investors may automatically receive email alerts and other information about the company by enrolling their email addresses, using the email alerts link within the Investors section of the website. At this point, I'll turn the call over to Marc Eisenberg

[Marc Eisenberg:]

Thanks, Aly, and good afternoon, everyone. Earlier today, we issued a press release announcing our financial results for the quarter ending June 30, 2018. The second quarter was highlighted by improved service and product margins that led to strong adjusted EBITDA performance. Total revenues were $70.8 million, an increase of over 24% compared to the prior year, demonstrating the success we're experiencing in expanding our base business, as well as momentum in our initiatives to market to many small and medium size customers. As a result, we added about 93,000 net subscribers in the quarter, bringing our total subscriber base to 2.22 million at the end of June 2018. Service revenues increased to $38.5 million, up 24% over the prior year and up sequentially from the first quarter. Our service gross margin also increased to almost 68% for the quarter, a significant improvement sequentially. Product sales in the quarter of 2018 were $32.3 million, up 25% over the same period last year as we continue to see strong sales demand from new and existing customers. Product gross margin also improved again this quarter to over 22%. Higher service and product gross margins led to improved adjusted EBITDA of $13 million, an increase both sequentially and versus prior year. Second quarter 2018 adjusted EBITDA margin was 18.4%, showing continued improvement from the lows of late last year. Our margin improvement plan, as discussed in previous quarters, is underway and on track. Looking at the business, I'm pleased with our position, both strategically and financially. The breadth and depth of our IoT solutions portfolio has never been stronger. It's a reflection not only of the great work our team has done to build best-in-class, organically developed product and applications, but also the addition of the strategic assets we've acquired over the past 7 years that have expanded the offerings we can deliver to our global customers. With superior products that serve multiple asset classes, the largest support team in the industry, and the release of new products at highly competitive price points, ORBCOMM is the true leader in providing industrial IoT solutions. Just recently, [indiscernible] ranked ORBCOMM as the largest provider of tracking solutions for cargo assets, including trailers and containers. Our unique advantage and leadership in this market has opened up doors to some exciting new opportunities where we're able to cross-sell our entire transportation portfolio. A great example is Chief Express, a truckload carrier based in Seagrove, North Carolina, who is utilizing both our in-cab solution for their trucks as well as our trailer solution for their drive and fleet. We're seeing a number of these types of customers where we start working on a single product class and then expand the opportunity to meet their incremental transportation asset needs with one integrated platform. We're seeing increased focus on supply chain visibility and transport security within our containers and ports group, which is driving the adoption of cargo tracking technology among the key players in the marine transportation space. Regulatory compliance is another driver, requiring high levels of condition monitoring and traceability to meet food and pharmaceutical standards. Just recently, we started deploying a reefer container solution to Pasha [ph], a leading shipping supplier between U.S. main lands and Hawaii, helping them to increase asset utilization, reduce operating costs, and improve cargo security to better serve their customers. Pasha will be using our monitoring solution on 2,000 of their reefer containers, as well as our VesselConnect system, which provides a private GSM network with a satellite backhaul on board their vessels, enabling their containers to communicate on shore or at sea. The world's largest shipping lines are transforming themselves into technology leaders by incorporating IoT solutions that digitize their supply chains to make their business run more efficiently and effectively. ORBCOMM's reliable transfer of real-time container data from ship to shore and on to enterprise systems is a crucial part of how this evolution is taking place. These shippers are now able to gain visibility of their containers and cargo throughout the entire chain of custody, and many such as Pasha are returning to ORBCOMM for our expertise in providing cost effective, high-end container and shipping monitoring solutions. We're currently engaged in pilots with several of the top marine shipping carriers around the world, presenting a large and growing opportunity. We're seeing momentum for our satellite products and are working on a number of exciting opportunities, including recent wins such as Codan. Codan is one of the largest radio manufacturers in the world and selected us for integration with their push-to-talk radios for backup communications and tracking. We're providing dual mode hardware, satellite, and cellular connectivity, as well as device management in conjunction with Codan's high frequency radio technology to support their multi-mode telematics platform for global asset management. Partnering with ORBCOMM allows Codan to support their high profile government and military customers that require full asset visibility and control to maintain mission-critical applications. Our OG2 constellation continues to perform as expected, processing well over 1 million messages a day. Our AIS business grew $100,000 in the quarter, reaching a record of $2.8 million in revenue for the second quarter of 2018, up 20% year-over-year. We've added several new multi-year licenses and government and commercial customers to our AIS business this quarter. As I mentioned on previous calls, we've been working on a major initiative to develop and deploy more than 20 new products and solutions, which include feature enhancements, sensors and peripherals, new product configurations, and improved user interface designs. Together, these improvements will enhance our existing capabilities while significantly improving product margins and gaining efficiencies. A great example is our dual-mode radio frequency integrated circuit, or RFIC, which is a custom chip that reduces the part count for our IDP or SkyWave-enabled products by 600 components. We shipped our new, lower-cost products that leverage the RFIC in only about 10% of our IDP deployments in Q2. We've also shipped our new cost-reduced refrigerated container products, but only to a few of our customers. We're on schedule to introduce our newer, lower-cost products for the heavy equipment fleet management and asset management markets and expect to start shipping in the end of the third quarter and ramping through the end of the year. You see, we're just beginning to see a fraction of the savings from the investments we've made to take costs out of the majority of our products and anticipate product margins will gradually increase, approaching 30% as we exit 2018. We've made a significant amount of progress this year making the company more agile with the ability to win opportunities of all sizes, using a mix of world-class products at competitive price points. We've strengthened the foundation of our business and expanded our market reach, which helped broaden our customer base. We've got a robust pipeline of opportunities and expect to add some sizeable customers in the coming months. I'm pleased with where the business is trending and the outlook that lies ahead in the second half of the year. Before we move on to the finance update, I'd like to take a moment to introduce Dean Milcos to everyone on the call. Dean was appointed interim chief financial officer in May. He's been with ORBCOMM for 5 years as our chief accounting officer and has played a major role in getting us to this point and is a great asset to the company. So at this point, I'll turn the call over to Dean to take you through the financials.

[Dean Milcos:]

Thank you, Marc, and good afternoon everyone. I'm happy to be here today to discuss with you our company's second quarter financial results. Second quarter 2018 results were highlighted by improvements across multiple financial metrics. Total revenues were $70.8 million, up $14 million or 24%, compared to the same period last year. This improvement was largely due to strong sales demand and from the benefit of a growing customer base, which now stands at 2.22 million billable subscribers. Service revenues in the second quarter of 2018 were $38.5 million, an increase of $7 million or 24% over the prior year period. This service revenue consists predominantly of recurring service revenues of $37.1 million, which continued to show quarterly sequential improvement, generate to additional net subscribers in the quarter. The company has historically always grown recurring service revenues as we continue to win new customers and add subscriber units. Other service revenues were $1.4 million in the quarter, consisting largely of higher-margin professional services as opposed to lower-margin installation services that dominated the last few quarters. Product sales in the second quarter of 2018 $32.3 million, an increase of $6 million or 25% compared to the prior period. There was no single customer in the quarter that accounted for more than 10% of the product sales. These results include increased demand across multiple lines of our business, as we've shipped product to a diverse group of over 850 customers. Gross profit margin improved sequentially for the second consecutive quarter to 46.9% versus the 42.5% realized in the first quarter of this year. Service gross margin in the second quarter of 2018 reached 67.8%, a sequential improvement from the 59.1% recognized in the first quarter. And keep in mind, our first quarter gross margin included over $1 million of low-margin installation services. Although service gross margins reached record levels this quarter, we do anticipate margins to be approximately 66% to 67% in the second half of 2018 due to variability in the other service revenues. Product gross margin for the second quarter of 2018 was 22.1%, an increase of 50 basis points both sequentially from Q1 2018 and over the prior-year period. This improvement was realized in parallel with the reduction in our inventory levels by approximately $4 million, as we wrote through inventory and SKUs that are transitioning to new, lower-cost products. Operating expenses in second quarter of 2018 were $34.4 million, up $6 million compared to the same period last year. This increase was primarily driven by higher selling, general, and administrative expenses taken on from the two acquisitions in 2017. In the second quarter of 2018, the company had a net loss of $7.2 million, or $0.09 per share, compared to a net loss of $10.7 million, or $0.15 per share in the prior-year period. This year-over-year improvement of almost $4 million was primarily attributable to improved gross profit in the quarter and the loss on debt extinguishment that was recorded in the second quarter of 2017, partially offset by higher operating expenses and an increase in foreign income taxes. Improvements in both of our service and product gross margins led to a strong second quarter adjusted EBITDA performance of $13 million. This is an increase of $1 million versus the prior period, and an increase of $3 million sequentially from the first quarter of this year. In addition, adjusted EBITDA margins continued their upward trend to 18.4% in the second quarter, a 350 basis point sequential improvement from Q1. With a greater number of lower-cost products anticipated rollout towards the end of the year and operational efficiencies taking place in many areas of our business, we believe adjusted EBITDA margins will continue to improve this year. Looking at the balance sheet and cash flow, the company ended the second quarter of 2018 with cash and cash equivalents of approximately $39 million. Total debt at the end of the quarter was $246.9 million, net of debt issuance costs. Cash flow used in operations totaled $12.5 million for the six months ended June 30, 2018, primarily for working capital needs and investments in the business. We believe we hit our low point in cash in the second quarter, and with company initiatives to deliver significant-I'm sorry. And with company initiatives to improve management of working capital and improving margins, we expect to deliver significant positive cash flows in the second half of the year. Capital expenditures in the quarter totaled $6.2 million, consistent with approximately $1.6 million of sustaining CapEx and $4.6 million of investment CapEx for new products and services. Overall, we're pleased with the quarterly results and the direction our financial metrics are headed in. With that, I'll turn the call back over to Marc for some closing comments.

[Marc Eisenberg:]

Turning to our outlook, we are reiterating our guidance for total revenues in 2018 of between $290 million and $310 million. We're also maintaining our full-year guidance for adjusted EBITDA of $55 million to $60 million, as well as adding 350,000 to 400,000 net subscribers. These ranges are dependent on the timing of customer wins and subscriber deployments, with many opportunities expected to close toward the back half of the year. In closing, I am pleased with the progress we've made so far this year across multiple fronts, underscoring our focus on strategic priorities. Our revenues continue to grow, while margins are on an upward trend. With a strong pipeline of opportunities across a wide variety of markets and cost-reduced products rolling out over the next couple of quarters, supported by the most talented team in the industry, we expect to keep this momentum going in the second half of 2018. This concludes our remarks for this call, and we'll be happy to take your questions.

[Operator:]

[Operator Instructions] First we'll go to Mike Walkley at Cannacord Genuity.

[Mike Walkley:]

Congratulations on the strong margin recovery. Marc, can you just walk us through kind of your sequential improvement, maybe in hardware? Sounds like a lot of the cost-optimized stuff still ships more later in the year. Is it more Q4 a big step up in hardware margins? And given the timing of some of your larger deals, do you expect more of a Q4-weighted hardware sales than Q3?

[Marc Eisenberg:]

Yes, a lot of questions there, so let me try and remember them and take them one at a time. You know, first, the hardware margins are pretty much where we expected them to be. I know we said low to mid, and we came in at 22, but you know, there was a real effort here to get the inventory reduced while we were selling at a much higher rate. So, you know, if you go back a year, you're kind of making a guess on these last builds, and you're picking up inventory in these products, and you're guessing when you're going to run out of that product and when the new product's ready. So, you know, we're pleased that we're able to move a good deal of that inventory as we get closer to the new releases. Once you kind of back that out, you know, in that reduction inventory and some of the older SKUs, you know, boom, you're right there in the mid-20s, you know, 25 or 26, just where we want it. So that was a pretty good balance, the getting that $4 million cash back into the business while still holding up a pretty good margin. So, you know, we're thrilled with that. I think you've hit something really interesting there, you know, that Q3 versus the Q4 in terms of where the hardware hits. And listen, Q4 is going to be bigger than Q3, from everything that I see. I don't know if it's going to be as drastic as last year. I mean, last year Q4 was like, whoa. You know, it was many, many millions bigger than Q3. But, you know, I wouldn't be shocked if Q4 was $5 million or $6 million higher in hardware than Q3 is. And, Mike, I hope so. I hope so, because there's more margin in these products that are coming out in the second half of the year, and I don't want to build more of, you know, the higher-cost products to make it through Q3. I'd rather push a couple million dollars in Q4 and sell at better margins. And to be quite frank, you know, our EBITDA plan kind of relies on that. So, you know, that is the plan. Did I get it all, or was there another one?

[Mike Walkley:]

No, I think that covers the hardware area for me. Just on a bigger picture, you talked, Marc, about some of your customers now cross-selling between both the front of the cab, with your two acquisitions, and cargo in the back. You know, as we look out, 3G is going to be turned off sooner than later; there's going to be fleets that are going to need to upgrade their hardware. Can you talk about maybe that potential opportunity, as you have such a large cargo base, how you might upsell some higher ARPU in-cab solutions through your inthinc and Blue Tree acquisitions? Maybe just talk about that opportunity and how that pipeline is shaping up.

[Marc Eisenberg:]

Yes, I mean, you've hit on a great point. I mean, it's the-you know, there's this hard stop on most of the networks on 3G, and the overwhelming majority of all trucks in this country, and in Europe as well, are sitting on 3G and not LTE networks. So, you know, it's great; it's like we all have to go back to the poker table and re-divvy out all the chips. And, you know, the stuff that we're bringing back in is very, very small, and the stuff our competitors are bringing in is really, really large. And, you know, great. I mean, it's the impetus that people need to make these changes. And, I don't know, when you struggle with these in-cab things, you know, when you're building a brand new business, where you struggle is having the credibility that you've done these large deployments before and getting a good reputation with the customer. And what does ORBCOMM have? Great reputations with all of these customers, not necessarily on the in-cab side yet, but they're all using-or many of them are using our trailer products and our reefer products, and they're giving us an audience. And, you know, as we continue to get closer to that timeframe, some 2019, some 2020, I think we're going to get more than our share, I'll tell you that, so I think that's exciting.

[Mike Walkley:]

Great, and last question for me and I'll pass it off. Just building on the Blue Tree acquisition, along with inthinc, as you continue to scale those platforms out, how should we think about this service's gross margin longer term? Obviously, you had a really nice step up this quarter, but where could they go longer term, as those two platforms scale up to the higher levels?

[Marc Eisenberg:]

Yes, you know, it's a great question. This is a cool year, right, because I don't know, sometimes it feels like we're driving this aircraft carrier, and we're trying to land these F-16s on our aircraft carrier, and those F-16s are trying to raise margins substantially, trying to increase sales, trying to do a better job managing our working capital, trying to gain efficiencies in the company by moving to a much slimmer amount of SKUs that you're going to see, and then lastly, trying to move off our six web platforms or seven web platforms, you know, onto two. And this is all happening at the same time, and when you look at the financial impact on these things, it's everywhere, right? So you're looking at higher revenues. You know, part of it leads you to higher margins. You're drastically reducing costs and you're gaining scale when you limit the web portals and amount of SKUs that you can deliver. You can keep a lower amount of inventory because there's a little less guess in terms of the new sales that you're going to close because you have a limited SKU count. There's more efficiencies among a bunch of the outsourced services that are supporting us on the website that we're starting to move away from and shrink, which is going to reduce costs, all at the same time. So, you know, that's kind of the hornet's nest that we're managing right now, but it's so exciting.

[Mike Walkley:]

Great. Thanks for taking my questions and look forward to seeing our conference next week.

[Marc Eisenberg:]

Oh, yes, we'll be there.

[Operator:]

Next we'll hear from Raymond James, Rick Prentiss.

[Rick Prentiss:]

First, thanks for doing the afternoon call; lets' us digest things a little better, and it looks like a nice, clean quarter. Good to have one of those as well.

[Marc Eisenberg:]

Yes, you know, I wanted to lead off with welcome to the afternoon version of the conference call, but the lawyers cut it out.

[Rick Prentiss:]

You mentioned managed working capital. I think, Dean, you mentioned it as well, that 2Q would be the low point on the cash balance. Help us understand what you're doing there. Obviously, EBITDA growth helps, but how should we think about that working capital and how you're making your way through that?

[Dean Milcos:]

Yes, we put a lot of money into working capital in the first half of the year, I think in the range of $24 million to $25 million. We're going to see a significantly lower number in the second half of the year. We've seen inventory come down in the second quarter. I think that will continue to come down in the second half of the year. And then, that in combination with the improved margins that you mentioned and improved profitability should lead us to some positive cash flow in the second half of the year.

[Marc Eisenberg:]

You put about, I don't know, $15 million [indiscernible] so the cash starts coming back. There's a lot of factors there.

[Dean Milcos:]

Yes, the SaaS model where we lay out the capital up front and get that back over three years, that's right

[Rick Prentiss:]

Okay, and then Marc, you mentioned ARPUs. Help us think through what these sales are doing what kind of ARPUs. Help us think through what these sales are doing, what kind of ARPU trends might be. You've probably got ARPUs all over the map maybe. But just as we think through the recurring service revenue and what the unit sales translating to ARPU and revenue might look like.

[Marc Eisenberg:]

Yes, you know, the ARPUs are holding steady. You know, as I look at the service revenues this quarter, I think the recurring part was a few hundred thousand dollars, which is lower than average in the-I don't know, but last quarter was higher than average. And you know, I think if you were to just draw a straight line through recurring service revenue growth, you know, it would be like a 750 gain per quarter. So, you know, yeah, they'll be millions, they'll be 400,000s, but it would average out in that range. And, you know, I think you've kind of hit on it that we're closing some 30s, we're closing some 3s, and somehow, it's all coming out of (inaudible). So there's not a whole lot of change there. So, you know, I don't know, I think first of all, it's really hard with 2.22 million subs in a quarter, you know, with ARPUs averaging up or down $1 to make a change of more than a couple of pennies in a quarter. So it's really hard to move that big base of subscribers that we have in one direction or another. You know, you're adding 5% subs on 2 million. But, you know, if I were you, I'd model it out flat.

[Rick Prentiss:]

That sounds good. And then, Mike touched on it a little bit with the cross-selling. You guys had made the two acquisitions last year. Anything else you need, anything else you're interested in, or do you need to spend capital to do anything else and make all those cross-selling opportunities happen? What are you missing in the kit bag, and what do you need to do, if anything?

[Marc Eisenberg:]

You know, I think we're in, from an M&A perspective, and then we'll talk about investments, anything else that we would add would be a like-to-have. You know, from a product portfolio perspective, there's no area of the business where gee, we've got to get that; let's go out and get that, you know, let's go out and get that. But, you know, if there's opportunities out there where we can add scale or it's super accretive for our shareholders, we're looking. And we can be opportunistic that if there's some vertical market that lays alongside ours, it may not be something you have to have, but it is something that we probably would look at. But let me answer your question even more direct. I think if you're waiting for something this quarter or next quarter, it's not going to happen. As I've kind of explained, the complexity of everything that we have going on in terms of moving platforms and reducing SKUs, and you know, our engineers and operations people are busy. And in the back half of the year, we think we're going to show you some really cool deployments, and we're going to execute the hell out of it, and in doing that, we're going to need their full attention. So the big eye is focused internally in the next couple of quarters on doing a better job managing our working capital, getting these assets integrated and everything else. To the second part of your question, investments are-you know, what are we going to be focused on to pull off this dream where we're able to do everything, sell everything to everyone. You know, it's kind of like a three-step process, right? So step one, you know, the synergies and everything we get are all around taking the specialties that the company has in engineering and sales and merging all of those assets together to make sure that we're getting as many customer looks as we possibly can and to reduce the amount of outsourcing and to stress the capabilities that the company has and add those strengths to the acquired assets. And, you know, we leverage our terrestrial contracts and get some cost out of there, and you know those are all like day one things in an acquisition. And then, day two or-day two kind of feels like year two, right-year two or three, then all of a sudden, the hardware starts to converge and you take $50, $60 out of a piece of hardware, and you can either hit better price points or get better margins and continue to get it integrated from that standpoint. And then, year three [indiscernible] and with Blue Tree this is going to have to be quicker [indiscernible] with year three, what happens is you get all of the web platforms that converge. And then, you know, when Walmart wants to see a truck, a trailer, a container, a reefer, whatever it is, they can see it all on one website because you're pulling data from all over the place. And that is the hardest thing to accomplish, because you don't want to leave orphan units out there. So, you know, that's where we are. Now, Blue Tree is different, right, because they're not coming to us, we're going to them. That's the platform that we are going onto. So while there's a lot of focus on that, and I think that is a first half of 2019 deal, so we're not talking 3 years. We're talking just over 1, and I got to tell you, it's the coolest platform in the industry. We're super excited about it.

[Rick Prentiss:]

Great, well appreciate the clean quarter and the afternoon call. Keep up the good work.

[Operator:]

Mike Malouf of Craig-Hallum Capital Group is next.

[Mike Malouf:]

Thanks for taking my questions; I have two of them. Marc, I'm just wondering, if you take a look at your SG&A this quarter, it was a little bit higher than I was sort of expecting, and I'm wondering if you could just tell us a little bit about what was going on with that. Do you expect that level to continue, and just give us a sense on the percentage of sales where you think that might shake out.

[Marc Eisenberg:]

We'll let Dean take that one.

[Dean Milcos:]

Yes, I mean, SG&A was a bit over $19 million this quarter. It might have been higher than you were modeling. We do expect it to come down slightly in Q3 and Q4, maybe in the $18.5 million to $19 million range for a run rate. But that's the level you should be planning on.

[Marc Eisenberg:]

Were there some one-timers there, Dean? I know there was some severance there.

[Dean Milcos:]

There was some severance there and some other one-time items. We did a small reduction in force halfway through the quarter that we'll get some more benefit from for a full quarter. But in general, it's close to our run rate currently.

[Mike Malouf:]

And then Marc, just as a general question, can you remind me as we stand now with the 2.2 million subs, how many of these subs are exclusive to your satellite constellation, and maybe how many, a rough percentage, are dual mode, and then maybe what rough percent is cellular only? And then, maybe just remind me of where J.B. Hunt was with regards to either one of those three buckets.

[Marc Eisenberg:]

Okay, let me see. I've got a chart here I'm trying to pull up for you. All right, exclusive to ORBCOMM satellite is somewhere around 700,000. Exclusive to the Inmarsat network is around 300,000. Terrestrial is about 1.1 million, and then the rest is some cats and dogs. There's some Globalstar, some Iridium, you know, some other stuff out there. Oh boy, dual mode is hard, right, because we don't necessarily know what's going on in the asset. You know, we only know which ones are on our assets. So, you know, there's somewhere between 100,000 or 200,000 dual mode units. J.B. Hunt is in the cellular business. It's not a satellite device. So, you know, we offer single mode satellite and dual mode, so J.B. Hunt would be an example of the cellular, and Walmart would be an example of the dual mode.

[Mike Malouf:]

That's helpful, and then as you look out to some of these large contracts, is it sort of a mix between all of these, or are they leaning toward some particular direction?

[Marc Eisenberg:]

You know, this was a good quarter; everything grew, and you saw there was a lot of focus this quarter on our satellite products. You know, this RFIC thing that pulls so much cost out of the satellite products is-you know, these are price points that we've never seen before, and we've improved margins and hit better price points at the same time. But you take 600 components and you blow it into an $8 chip, and that's what you get, you know. So, I don't know, the solutions group grows quicker than the satellite group, right? So the satellite group grows at high single digits, and the solutions group grows in the 20s, and that's why we end up with growth rates in the teens, typically. So it's a little bit quicker, but I think on the satellite side, we're certainly reliant on a number of bars to resell our products, even though sometimes we are building it into our own products as well. But, you know, gee, our salespeople have really been hitting the ball out of the park lately.

[Mike Malouf:]

Thanks for the help; appreciate it.

[Operator:]

Next up is Jim McIlree, Chardan Capital.

[Jim McIlree:]

Dean, you talked about second half service margins, 66% to 67%, so I'm not quite sure why they're coming down from the Q2 levels?

[Dean Milcos:]

Well, for the recurring service revenues, we're in that range. The other service revenues, depending on whether it's high-margin professional services or low-margin installation services, could swing that number up or down a little bit. I was just being save and giving you the recurrent service revenue margin as it currently stands.

[Marc Eisenberg:]

In other words, we don't know what we don't know, from the installation standpoint.

[Dean Milcos:]

Yes, it's tough to predict the installations [indiscernible] professional services.

[Marc Eisenberg:]

But is it clear that installations in Q2, I think they were almost 0, right?

[Dean Milcos:]

They were less than $200,000.

[Jim McIlree:]

So the 66% to 67% that you referred to is not what we're seeing on the income statement. That's a subset, and that refers only to the recurring service revenues. Is that right?

[Dean Milcos:]

That's correct, and it could go up or down in a given quarter depending on the other service revenue's makeup.

[Jim McIlree:]

I got it. I got it. Okay, and so..,

[Marc Eisenberg:]

Models, right?

[Jim McIlree:]

Yes, yes. And so, was there anything atypical-or let me rephrase that. Was there anything about Q2 that would be important to point out relative to second half in terms of installation or professional services?

[Dean Milcos:]

You know, Q2 had very few installation services. You know, that might go up a bit in the second half. We also had professional services that were strong, and that might also go up in the second half, but we're not certain of that yet.

[Jim McIlree:]

Got it. Okay, thanks; appreciate it.

[Marc Eisenberg:]

Yes, I don't think that this is purely modeled out, that we know the exact number that Q3 is coming out. Dean's just giving you his best guess.

[Operator:]

Next up is Mike Latimore, Northland Capital Markets.

[Unidentified Analyst:]

Hi, this is Rasheed for Mike Latimore. Do you expect subscriber adds in the second half to be more from diverse sources, or is there one, two big deals in the mix?

[Marc Eisenberg:]

You know, well there's a couple cool things that happened in this quarter, in Q2, and that was we had a pretty damn good $71 million quarter, and we did it from a larger base business. In other words, you know, we keep talking in the last couple of quarters around U.S. Postal Service and J.B. Hunt, and guys like that. But as they finish their first deployment and they become repeat customers, right? So, you know, in the second quarter, J.B. Hunt goes and starts building new containers in China, and we ship to China, and they're going to be a customer as long as they're a customer, you know, for years to come. And as we, over the years, have added more customers, that base business has grown, which is why the hardware sales have been more steady than they've been in prior years. So with that larger base business, and then certainly aided by we finally learned how to sell 100. You know, really good at 100,000, but you know, we finally learned how to sell 100, and we had lots of those this quarter, and that's going to help with margins and keep a lot of good, steady business coming in. And, you know, in-house sales had a good quarter, and I think that helped as well. So, what I'm saying is that base has kind of grown, and I think we can pull off these $70 million quarters really much easier. And then to get to the $75 million and the $80 million and the $85 million, you know, that last 20% is where the big deals come.

[Unidentified Analyst:]

So how much did inthinc and Blue Tree contribute in this quarter?

[Dean Milcos:]

So for the quarter, quarterly revenue for inthinc was about $5 million, and Blue Tree was about $4.7 million.

[Operator:]

Our next question comes from David Gearhart, First Analysis.

[David Gearhart:]

I'd like to start off quick with a housekeeping question. In prior quarters, you've given the number of units shipped. It was 70k last quarter. Just wondering what the number was this quarter.

[Marc Eisenberg:]

We knew that one was coming-we looked it up 3 minutes before the call-77,000.

[David Gearhart:]

And then, in regards to two of the areas where we kind of haven't heard much about, you know, CIMC and landing rights in China, and then also wondering if you can give an update on your cellular backup connectivity offer, and we haven't heard about that in a few quarters, I'd say.

[Marc Eisenberg:]

Sure. So let's start with CIMC and landing rights in China. You know, where we're thinking CIMC through one of their telco partners-we're the only guys in China that are allowed to hold such things-has received our license in China. So, you know, that's some really good news that we've been holding, but we need to work through the contract of getting [indiscernible] ions installed and all of those other things. So, before we were going to make a big splash with that, the idea was to make sure that we button it up and get the whole deal in place, now that the incredibly hard part has been done. So, you know, I think there's good news there, but when you see the press release come out, then you'll know it's more of a sealed-up deal and we'll all pop the champagne and celebrate then. Your second question, the backup routers, that business is doing-from a revenue perspective, it's doing really, really well. You know, Dean, I don't know the exact number, but it's probably double where it was last year, right?

[Dean Milcos:]

I do believe so, and it's over 6,000 subs, I think.

[Marc Eisenberg:]

Yes, so 6,000 subs at 4x to 5x standard ARPU, you know, it kind of feels like 24,000 subs for just kind of a little side business we built because we owned all the technology already that we needed to get it deployed. And we had these great opportunities to sell service from our terrestrial partners. You know, it's a pretty cool deal.

[David Gearhart:]

And then, lastly, some of the other players in the IoT and (inaudible) side, you know, seeing some challenges with components and shortages and whatnot. I'm just curious if you're experiencing similar issues. Is that part of the reason inventory has built, besides just some legacy SKUs? Have there been challenges just getting the right components and building the hardware, and you know, flash memory, et cetera? Just wondering your thoughts there.

[Marc Eisenberg:]

That's exactly why inventory is built. You know, I think that is a major initiative at the company is to reduce SKUs, and the reason we want to reduce SKUs and have these things more convertible is we used to have 90 days of guess between when you needed to order the components and when you needed to build the products. And then that 90 day guess gets up to a 6 month guess where, all right, now I've got to figure out what I'm going to sell in six months to customers that I haven't met yet. And then you add 6 months, and you're building up more inventory because you're trying to guess which SKUs you're going to sell. And then, you know, 6 months goes to 9 months, and then we're like you know what the solution is? Everyone gets the same SKU. You don't guess wrong. So, yes, it's definitely led to the inventory buildup, and it's definitely led to this mad dash to get the SKU count down.

[David Gearhart:]

All right, that's it for me. Thanks for the color.

[Operator:]

[Operator Instructions] We'll now go to Chris Quilty, Quilty Analytics.

[Chris Quilty:]

Hey, Marc, I got dropped from the call earlier, so forgive me if this has been asked. But given the fact that so many of your customers are in transportation and logistics, have you seen any impact or customer skittishness around a lot of the trade and tariff talk that's been going on for the last 6 to 9 months?

[Marc Eisenberg:]

Yes, so from a transportation perspective, our European business sells in Europe; our American business sells in America. There's not a lot of goods moving back and forth, so I haven't seen it there. Where we see more issues from customers are the folks that build their containers or something in China and then you ship your telematics box. It gets installed at the factory, and now you've got a more expensive piece of equipment coming back in the United States. You know, it hasn't affected any orders yet, but that might be something to look at. But, the average American trucker isn't seeing it.

[Chris Quilty:]

Got you, and one other question. The 20 products that you've got in development, I know that you've said in the past that you typically did not design any new products unless they were sort of driven by a specific customer demand. Could that be possible with that many products in the pipeline, or are you doing some prospecting here with some new product development?

[Marc Eisenberg:]

So, you know, in some cases there were some features that we need, but most of the products that we talked about on today's call was, you know-I mean, we are maniacal about price points, and we understand that at one price, you can own a piece of the market and at another price you can hit a really big piece of the market. And Chris, I know you were around when we announced the GT 1100, and you know, four years ago when we announced it, or five years ago, that was a great product. It was at the high end of the market, and no one had ever built anything like it. It was cool, and it was meant to be for the high end of the market, and then it became the unit for the whole market. And, you know, 4 years later, you reengineer it, and you know, you've made advancements in terms of battery life and components, and you have to upgrade the components to newer ones that you can get inventory on because of the issues that we just talked about. And you know, you learn about your customers and your products, and you learn that the GT 1100 gets sold a lot, but the cargo sensor almost gets attached to it on every single deal. Well, why are you selling a separate unit with a separate cable, with a separate box, with separate power and everything, when you could just build it all into one box and take 35% of the cost out of it and then hit those damn price points that we want to hit? You know, I don't know that these are all gee, we need this feature to be competitive. You know, there's some of that, but there's an awful lot more of gee, we'd love to hit these price points to be competitive as well, and that was most of what we talked about on the call.

[Chris Quilty:]

Great, and did you mention the timeframe by which the 20 will be rolled out? Is that like an x12 months, or an x24?

[Marc Eisenberg:]

No, no, I think most of it's quicker. Most of them are rolled out this year, and as we kind of said in the script, a lot of them are already rolled out but we haven't gotten the conversion yet. Like, you know, the IDP products are-you'd know them as the SkyWave products-they're almost 25% of our shipments. So imagine you've got 25% of your shipments, but your customers aren't completely through integrating the new product as opposed to the old one. It takes a little bit of design change on their part, so you're only shipping to 10% of your 25% or your 2.5% of your products with this SKU, knowing that in two quarters, it's going to be 25%. You've already done the hard work, right? You've built it, you've deployed it, it works. So you've got a little bit of that, you've got that same scenario with our reefer product, with our heavy equipment product. We started to ship in small quantities and we're getting offers. And then you've got your low-end asset management products, you've got your in-cab product, you've got three or four more products that you haven't rolled out a single unit yet, and those were going to get the pilots out in Q3 and Q4. So, I mean, this is like a real changeover, man. I mean, we're hitting almost everything, and we're hitting it almost all this year. Chris, if I were to tell you if we were to pocket every dime from the savings that we made-and let me warn you, don't model it; we're not-but if we did, you know, you're talking about $10 million to $20 million across $120 million or $130 million a year. I mean, you know, the margins would be much bigger, right? But, you know, we-that's why we're so excited, because we're able to raise margins while hitting price points, and you know, you get to kind of take advantage of both. So, you know, I want you to model it somewhere in the middle. I think we're going to get to that 30 level. I think we'll also be able to improve the price points and, you know, lots going on around hardware this year.

[Chris Quilty:]

That's great. Keep up the good work, and congrats on the quarter.

[Operator:]

At this time, there are no further questions. The company thanks you for participating on the call and looks forward to speaking to you again when they report third quarter results in November. Have a good day. You may now disconnect.