ORBCOMM Inc.
Q4 2018 Earnings Call Transcript

Published: 28 Feb 2019

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to ORBCOMM's Fourth Quarter 2018 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] Please note this even is being recorded and a replay of this conference call will be available from approximately 7

[Aly Bonilla:]

Good afternoon, and thank you for joining us. Today I'm here with Marc Eisenberg, ORBCOMM's Chief Executive Officer; and Mike Ford, 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. Furthermore, the financial information we will discuss includes non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures is included in our press release. At this point, I'll turn the call over to Marc Eisenberg.

[Marc Eisenberg:]

Thanks, Aly, and good afternoon. Earlier today, we issued a press release announcing our financial results for the fourth quarter and full year end -- ending December 2018. We're going to focus this quarter's call on a number of significant initiatives I'd like to cover in detail and Mike will then provide an in-depth look at the financials and our 2019 outlook. We'll finish the call by taking some questions. So let's get started. Looking at the fourth quarter, the first thing that stands out is that hardware sales were light. Hardware sales were down $9 million year-over-year, but if you back out the large deployments with J.B. Hunt and the U.S. Postal Service hardware sales in the quarter were up almost $2 million. That being said, comparative declines have not been our trend and it's not the entire story. We entered 2018 with a number of initiatives that we believe were absolutely necessary for the long term. While our Company was growing, we were not getting the anticipated leverage in the business. With a desire to improve adjusted EBITDA and optimize our working capital, we embarked on the following initiatives. First, we refreshed nearly all our products with a new feature-rich technology while significantly reducing costs. This gives our customers a better products while also achieving a jump in product margins. Second, we set out to change how we manage our working capital. Inventory was hampered by growing lead times coupled with a wide assortment of products with multiple variations. This led it to escalating inventory levels and dramatically slowed our cash generation. In short, we reduced the number of SKUs Third, we set out to take our newly acquired Blue Tree in-cab solution to some of our largest customers that needed significant integration with their third-party systems. Had we focused on smaller opportunities, we likely would have had experience faster short-term growth, but that's not a representation of our customer base. Throughout 2018, we further developed our fleet manager in-cab solution to meet the needs of these larger customers. With these issues in mind over the course of 2018, we replaced nearly every product in our portfolio with a more-featured less-expensive version. As a result, we've grown our product margins from 13% in Q4 2017 to almost 28% in Q4 2018. We've reduced inventory levels by about 30% from our highs of $48 million to $34 million and have cut our SKUs by more than half. With these initiatives, having a negative short-term effect on the hardware revenues, they're having a significant positive effect on adjusted EBITDA where we improved Q4 year-over-year by almost 80% despite lower hardware revenues. Let's take a minute to talk about the impact of our product transition on revenues. Over the last couple of quarters with inventory levels of discontinued SKUs running low, we were helping customers work through their valuation and integration process on our new products, while increasing production. Breaking that down on a per product basis, our satellite products are almost completely transitioned. Our reefer product is about 50% transitioned, our trailer product, the GT 1200 line, is about 25% transitioned, and our new container product is only just starting to be shipped. With the new products commercially ready and many evaluations completed, we're starting to see the customer reaction we were hoping for. In our container and ports group, we received an initial order from one of our OEMs for 10,000 units anticipated to begin shipping in August, and we expect to supply their customers' total fleet of approximately 200,000 units. We've also completed evaluation programs with five other major shipping companies with additional opportunities totaling between 150,000 and 200,000 units. So, combined with all six customers, they represent approximately $70 million in hardware revenue alone. This would be a substantial increase compared to 2018, where the port -- the container and ports group did about $2 million in hardware sales. In our in-cab group, we've signed letters of intent to our negotiating final contracts to deploy on 10,000 trucks expected this year, which is double what we did last year. Keep in mind, it's only February. Needless to say, we expect revenues to ramp in the back half of 2019. With the 2018 initiatives in place, we successfully improved adjusted EBITDA margins from a low of 12% last year to about 25% in Q4, 2018, achieving $57 million for the full year 2018, a record high for the Company and a 27% increase over the prior year. Adjusted EBITDA margins achieved in 2018 were also insisted by improvements in service gross margins, increasing from 58% in Q4, 2017 to 68% in Q4, 2018. This was primarily driven by steering away from negative margins realized from managing third-party installation services, as well as increased efficiencies in the business. As a result of these efforts, the Company's free cash flow pivoted from using about $24 million of cash in the first half of 2018 to generating about $14 million of cash in the second half. This is the result we expected to achieve and gives us confidence that we're now in a position to be a significant cash generator in 2019 and beyond. Let's move onto our business highlights. We were selected by Lidl U.K., one of the largest supermarket chains in Europe, will be using our cold chain solution to ensure transparency on their refrigerated trucks and trailers. By providing insight alerts and systems integration, we are helping Lidl gain real-time visibility and control of their assets, while ensuring regulatory compliance and improving customer service. In addition Swift one of the largest transport companies in the United States and a longtime customer of our reefer solution has started to deploy our newly designed cargo product for their intermodal assets. Swift is a great example of a longtime customer that started with one asset class and is now taking advantage of our Double Player, Triple Play bundles where multiple asset classes utilizing our single integrated platform. These opportunities may use a combination of our in-cab refrigerated dry van or intermodal solutions which is a unique competitive advantage. We've also been selected by SeaCube a large container leasing company has begun offering our ReeferConnect solution to provide end-to-end visibility and remote control of their refrigerated containers in gensets. SeaCube can bundle ORBCOMM's telematics offerings with a sea container into one lease for one monthly price. Our partner AT&T fully deployed an additional 70,000 containers from Maersk after they completed the acquisition of Hamburg Sud in late 2017. All 70,000 devices were activated throughout 2018. The Hamburg Sud deployment demonstrates another key win in the reefer container market. Our resellers in Latin America are gaining market share and have committed to a minimum of approximately 30,000 units in 2019. We've also began significant deployments of our IDP products with a large telecom operator in the Middle East and we can expect them to offer our solution portfolio throughout their sales channels in the region. We're excited to announce the first significant opportunity deployed by our analytics group with Rehrig Pacific Company a leader in supply chain solutions to provide our services to power their business intelligence platform. The platform is designed to help Rehrig customers maximize their ROI and assets across their waste management sites, environmental and retail markets. With the addition of ORBCOMM's Analytics Rehrig enabled its customers to query massive amounts of real-time data in seconds providing actionable information and visibility into their supply chain, including missed customer container pickups, inefficient routes, driver behavior, inventory management and damaged assets. Turning to operations over the last few years we invested tens of millions of dollars to create and redesign 20 cost optimized, feature-rich products that enhance our existing capabilities. We tend to compete more effectively and to improve our product margins. I'd like to go into some detail on a few of these. So you can see the incremental benefits they offer to our customers. For our cargo business which includes trailers containers and railcars we developed a new GT1200 line which replaces the GT1100. This device helps customers locate assets, improve turn times for increased asset utilization, maximize fleet size and improve the speed of cargo delivery to customers. With multiple sensor options the GT1200 helps containers turn from dark dumb and disconnected to visible smart and connected. Our integrated cargo sensor tells customers, if they're asset is full or empty and ready for pickup. Our door sensor reports whether the assets doors are open or close to help manage theft. And geofences alert customers when the asset reaches designated areas to start the loading or unloading process or if the assets deviate from their schedule route. The integrated cargo sensor and the other wireless sensors eliminate the need for up to 40 feet of cable that can take up to an hour to install. With its new streamline design and external installation the GT1200 could be installed on an asset in just minutes even when the trailer or container is full making customer deployments quick and efficient with minimal disruption to their operations. The GT1200 charges 20 times faster than its predecessor even without direct sunlight resulting in three times more messages per day for enhanced visibility and utilization. In addition by offering just a few versions of the GT1200 we were able to reduce the number of SKUs by 80% resulting in faster customer fulfillment while substantially lowering inventory levels and achieving significant cost savings. Our new PT 6000 is an industry-leading trailers solution for cold chain temperature control and monitoring compliance, which replaces the RT 6000. Historically, a fleet with 3,000 trucks with the 3,000 drivers to manage the refrigeration assets while focusing on their primary objective driving the truck. Connecting the PT 6000 directly to the trucks refrigeration unit takes control out of the hands of the 3,000 drivers and puts it in the hands of just a few dispatchers. The dispatcher can adjust the unit temperature settings remotely, while the trailers on the move, monitor fuel levels, observe critical diagnostics, and respond to maintenance alerts by ordering parts and scheduling repairs before the truck even gets back to the yard. Not only does this add efficiency and save temperature sensitive loads, but in today's market with increasing driver shortages, it maximizes the amounts of driving time. The PT 6000 includes multiple new temperature probes and humidity sensor, which protects the quality integrity of the cargo, ensures compliance and mitigates high claim losses. The PT 6000 is also the first three products sold through the Carrier Transicold dealer network, allowing Carrier customers to remotely update the firmware in the reefer, including new temperature applications. Our next generation IDP products continue to resonate well with customers looking for satellite connectivity, for newer existing telematics solutions that are deployed in remote parts to each geographies. You can take a successful telematics application and add satellite connectivity with a single cable for easy installation. Our new IDP products are ideal for markets such as tuna fisheries, secure cargo transport and oil and gas applications that require satellite coverage. These products utilize our dual-mode RFIC custom chip, which was designed to reduce the component counts of our first IDP products from 600 to 1, providing significant cost reductions and higher reliability, while making satellite connectivity affordable. Wrapping up, I'm pleased with the accomplishments of 2018 while we still have a lot of work to do in the year ahead. Our company's foundation is stronger than it's ever been and we're executing at a higher level. With our margin improvement and cash generation plans on track in an unprecedented number of opportunities in our pipeline, 2019 is shaping up to be a promising year as we expect to make substantial strides in all three key metrics of the business revenue margin and profitability. With that, I will turn the call over to Mike to take you through the financials.

[Mike Ford:]

Thank you, Marc, and good afternoon everyone. Let me start with our Q4 results. Total revenue was $66 million compared to $76 million in the same period last year. Keep in mind, last year included over $13 million of revenue from the JB Hunt and U.S. Postal Service deployments. Excluding the revenues of these two customers in both years, total revenue from our base business was up nearly 3% versus Q4 2017. Even with some revenue shifting to the right, we successfully increased adjusted EBITDA to $16.5 million, an improvement of $7 million over the prior year. There were a number of non-recurring accounting entries in the quarter mostly associated with inthinc and Blue Tree acquisitions, which resulted in a net benefit of $1.5 million. Adjusted EBITDA margin continued to improve reaching 24.9% in Q4 2018. This is 40 basis points higher than Q3 2018, and more than doubled compared to Q4 2017. Our adjusted EBITDA performance was primarily driven by higher service and product margins. Q4 service gross margin increased to 67.7%, up 90 basis points from Q3 2018 and up over 1,000 basis points from Q4 2017. Product gross margin in Q4 improved to 27.5% compared to 12.7% in Q3 2018 -- Q3 2018 24.2%. This is the fourth consecutive quarter of increasing product margins. In Q4, we saw a significant number of our older models skews, which carried lower margins and had a negative impact on the impressive 27.5% we reported. We sold off about $9 million of this older inventory in the quarter. Excluding these sales, our Q4 2018 product margins would have been significantly higher. We believe there is further upside to product margins, as we shipped out greater quantities of our cost reduced products to customers in 2019. We ended the year with almost $54 million of cash on our balance sheet strengthening our liquidity position. This was an improvement of nearly $8 million from Q3 2018. Even after making a $10 million interest payment on our debt in October, we generated operating cash flow of $12.4 million in Q4, an increase of $10.2 million compared to the prior year, primarily driven by favorable operating results and reductions in inventory. With CapEx of $5 million in the quarter, the Company generated free cash flow of $7 million in Q4, our second consecutive quarter with positive free cash flow. With improvements in cash generation, coupled with higher adjusted EBITDA, our Company's trailing 12-month net debt leverage ratio now stands at 3.4 times, down from 3.9 times in Q3 and from our high of 4.9 times in Q1 2018. Turning to our full year results, 2018 total revenue was $276 million, an increase of about $22 million or 8.6% compared to 2017. This increase is driven by our growing service revenues, which ended the year at $154 million, up nearly $19 million or 13.8% over the prior year. More importantly, full year recurring service revenue grew 17% over the prior year, driven by nearly 350,000 net new subscribers, bringing our total subscriber count to approximately 2.37 million at year end. Contributing to the improvement was steady growth from our AIS business, achieving a record high of $11 million in 2018, 17% increase over the prior year. Higher service and product margins drove gross profit margin for the year to almost 47%, a 600 basis point improvement over 2017. Compared to the full year 2017 product margins climbed 730 basis points and service margin grew 290 basis points. Full year 2018 adjusted EBITDA increased 27% over the prior year to a record $57 million, with adjusted EBITDA margins reaching almost 21%. This is an improvement of $12 million or 300 basis points over 2017. Better operating results along with improvements in working capital and cash management practices led to operating cash flow of $11 million in 2018 versus a $5 million use of cash in 2017. This is a $16 million year-over-year improvement. Let me summarize the six key financial highlights of our 2018 performance year-on-year. Revenue was up 8.6%. Service margin was up 290 basis points. Product margin was up 730 basis points. Adjusted EBITDA margin was up 310 basis points. Operating cash flow was up $16 million. Subscriber count increased by nearly 350,000 units. Moving to our 2019 outlook they will -- we will provide full year guidance on recurring service revenue, service margins, product margins, adjusted EBITDA, operating cash flow and capital expenditures. For the full year 2019, we expect recurring service revenues to grow 5% to 7.5% compared to 2018 with service margins anticipated to be between 66% and 68%. We expect product margins to continue increasing throughout 2019 and average over 30% for the full year. We anticipate adjusted EBITDA to be between $70 million and $75 million in 2019, weighted more heavily toward the second half of the year. We expect operating cash flow in 2019 to be approximately $50 million. Capital expenditures are anticipated to run at approximately $25 million this year. As Marc pointed out earlier, our sales pipeline includes several customer opportunities with large-scale deployments leading us to provide quarterly guidance on product sales and net subscriber counts due to the uncertain timing of these deployments. Looking at Q1, we expect product sales to be similar to Q4 2018 as we work through our short-term hardware issues over the course of the quarter. We expect to bring onboard about 70,000 net new subscribers. In summary, we look forward to delivering sales growth, margin expansion, improved profitability and greater cash flow this year. This concludes our remarks for the call and we'll now take your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will be from Mike Walkley of Canaccord. Please go ahead.

[Mike Walkley:]

Great, thank you. Marc, just trying to get a little more color on the 5% to 7% recurring revenue guidance. Is there any puts and takes maybe a drop in the mix for ARPU or some greater churn this year that's pointing to year slower recurring revenue growth versus last year? Thank you.

[Marc Eisenberg:]

I think what we experienced toward the end of 2018 is -- you heard me say that AT&T put on those units. And you remember the ARPUs on those units are just a fraction of what some of the other ones are. So when you're churning the units in normal numbers and you're adding on -- based on that -- based on the ARPU of those units it had a kind of a slowing effect in Q3 and Q4. I think we're being conservative in the first half of next year because we're seeing hundreds of thousands of units that we're going to have to start turning on, especially in that container group and transportation group in the second half. And when that stuff comes on or when you're little back heavy in the year, you don't get the full year effect of the service revenues that are coming on like you do if we were installing them early in the year. So I think when you do the math that's just the way the timing comes out.

[Mike Walkley:]

Okay, thanks. And just on the short-term just with the adjusted EBITDA guidance and it sounds like there is a little bit of some positive effects that helped in Q4. Should we expect higher OpEx levels from what you posted for Q4 to start the year and a little bit dip in adjusted EBITDA then kind of build from that level throughout the year that kind of how we should think about it?

[Marc Eisenberg:]

We've been pretty strict with our field organization about OpEx growth. We don't expect to see much growth at all of the course of the coming year. We stabilized the workforce. We don't anticipate adding much of them -- anymore employees. We'll be concentrating heavily on cost control as we move forward. We're at the point now we’re scaling our business is possible and will be a high priority for us.

[Mike Ford:]

But I think you know Mike you were referring to the seasonality in the first quarter where there is like another $0.5 million or $1 million because the FICA and some of the public company cost to come in earlier in the year. So yeah, there's probably, just like it was last year, it spikes up like $0.5 million or $1 million in costs.

[Mike Walkley:]

Okay, great. Last question from me and I'll pass it on. Just as you look at the pipeline Marc, just a little color on kind of the mix of the ARPU and particularly on maybe the Blue Tree. I know that's been given some good traction, how you see the front of the cap business developing throughout the year? Thank you.

[Marc Eisenberg:]

Yeah, so I kind of see the Blue Tree stuff or in-cab in general if you look at Blue Tree and then think they tend to average around 30-ish give or take a couple of dollars in the other -- in either direction. And then the container stuff is kind of in the low single digits, but you're talking about hundreds of thousands of units, we expect to be fielding. So I think the timing can push ARPUs around in multiple directions, but I think if the number is 10 to one then you end up just where you started between those two.

[Mike Walkley:]

Thank you.

[Marc Eisenberg:]

Sure.

[Operator:]

The next question will be from Ric Prentiss of Raymond James. Please go ahead.

[Ric Prentiss:]

Thanks, good afternoon. I want to follow-up on a couple of Mike's questions. If we can go back to the non-recurring items in 4Q that had to do, I think you said with Intech and Blue Tree. What line items did those effect with that $1.5 million. Was it revenues? Was it margins? Just kind of where should we think that $1.5 million was in 4Q 2018?

[Marc Eisenberg:]

They will be in our SG&A line.

[Ric Prentiss:]

Okay. And then if we think about the guidance going forward for 2019, I think you've mentioned recurring service -- sorry service gross margins of 66% to 68%. But I think you guys have been putting up kind of closer to 67% already. What would cause service gross margins to go back down into the 66% range versus being able to get up to the 68% range?

[Mike Ford:]

Not a whole lot. You've got to 66% to 68%. So you're going to model 67%, but I don't know I mean to come up with a range of an exact number, I don't know. Something can happen. You get an increase from one of your terrestrial providers where we're doing an awful lot of work with Inmarsat. We do have some vendors there. I think that our products -- our costs are going to hold steady. In some cases, they even fall. So I would probably bet closer to the higher end of that the lower. I think that's a good assumption.

[Ric Prentiss:]

Yeah I just want to make sure that there wasn't something unseen or that we didn't know about out there.

[Mike Ford:]

No. There is nothing in our head that made us change that number. I think we like that 67%. So we drew ourselves as a point in each direction for the unforeseen.

[Ric Prentiss:]

Makes sense. And final one for me. Marc, obviously the timing is important as you pointed out to Mike earlier. But if we thought about maybe recurrings service revenue growth like second half 2019 over second half 2018, how should we think about that because there is the optics so the guidance is 5% to 7.5% on an annual basis, but you thought apples-to-apples like whether it's 1Q 2019 over 1Q 2018 or 4Q 2019 over 4Q 2018. Can you help us understand on which order of magnitude kind of what would be a more normal rather than calendar year to look at that kind of growth rate?

[Marc Eisenberg:]

I think in -- I'm trying to remember what Q1 was last year. So if you took Q4 and just flat put it over last year what would the growth be? Let's -- I'm -- these guys are feeding me the numbers. Maybe Mike, you could answer here?

[Mike Ford:]

So yeah, so I think if you expect the first half of the year to be up low-single digits growth year-over-year the second half of the year will be closer to 10%.

[Ric Prentiss:]

Okay. I think that helps Mike's question a little bit more to just understand that the optic looks kind of odd so that helps I appreciate.

[Marc Eisenberg:]

I agree, I mean, if you take a look at Q4 and you run the Q4 against our own Q1 that's the 5%. So that's the low-end. And then any growth on top of that gets you to the higher number.

[Mike Ford:]

And you we put on -- as we sell more products in the second half of the year that's when the subscriber show up. So that's when you'll start to see an uptick in our service revenue.

[Ric Prentiss:]

And then that leads to probably more sustained growth even on calendar 2020 then?

[Marc Eisenberg:]

Yeah. We haven't seen any change -- real change in our churn rates. So I don't -- I think that you can -- I think you can rely on the subscriber growth following closely the product revenue sales growth. And I think Rick the hardware thing that we're dealing with now I think it's kind of a blip on the radar. I think as we -- if you look at just this container deal that we're talking about you're going to start shipping about 2,000 a week in August and if we could stay at that rate which I don't think we can it would have to escalate. But you'd be shipping that 8,000 to 10,000 a month for the next 3.5 years. And so I think there is --when you're in these big game hunters like we are you get these peaks and valleys.

[Ric Prentiss:]

Yeah and that gives us some comfort too on the visibility than on the product sales of having that big contracts?

[Marc Eisenberg:]

I would love to see these guys with $70 million worth of backlog versus $2 million of hardware sales in 2017.

[Ric Prentiss:]

I guess, one other question. You see teed up one. Have you guys thought about giving backlog numbers as far as what the backlog on sales or product sales or service revenue might be?

[Marc Eisenberg:]

Maybe but let me explain why we come up with something that says first order of 10,000 against the fleet of 200,000. Why it kind of looks like that? There is a long lead item in those components that is like four or five months. So what happens is the OEM is always giving you orders to keep you running four five months ahead. So you get -- so what you get is a 10,000 in order to get you started in August against a fleet that's much larger. But in fact you continually get these purchase orders as you continue to put up the fleet. Because putting it out a year or two in advance doesn't do them any good. So just to be clear that's the way J.B. Hunt was done. That's the way Hub Group was done. That's the way every deal gets done. So I -- to answer your question, I don't know if the backlog is 200 is the backlog the 10 I don't know.

[Ric Prentiss:]

Okay. We'll see you down here in Orlando next week. Take care. Thanks guys.

[Operator:]

The next question will be from David Gearhart of First Analysis. Please go ahead. Mr. Gearhart, your line is open you may be muted on your side.

[David Gearhart:]

Sorry, about that. Thank you for taking my questions. My first question for you is just a housekeeping question. Did you provide the AIS revenue for the quarter? Because I think you mentioned $11 million for the year and it would imply I'm not having the full number that it's down quarter-over-quarter. So I just wanted to clarify what the number was for the quarter?

[Mike Ford:]

No, it was flat quarter-over-quarter.

[David Gearhart:]

Okay. Flat. And then Marc throughout the year you were providing forecasted number of net additions 350,000 to 400,000 for the year you came in at 348,000 for the year slightly below that. So just wondering if you could quantify the impact for Q4 if that's being pushed into 2019. And if you can give us an update on kind of what you're expecting for the sub number for the year if possible?

[Marc Eisenberg:]

Yeah, I think we're expecting 70,000 for Q1 because the hardware is going to be similar to Q4 and we shipped about 750,000 units in Q4 of hardware. I think that's the struggle with the timing on the hardware. I think if everything kind of goes off flawlessly which it never does and we're shipping all these container units and bunch of trailer units and all the stuff we're looking at it would be well over 100,000 in the back half of the year. But the timing is what's pulling back us our ability to give you full year hardware guidance. So it's the same problem.

[David Gearhart:]

Okay and then lastly from me. Just one of your initiatives I know that you've been working on is rationalizing your acquired platforms kind of standardizing on the Blue Tree platform and just wondering where you are with those efforts?

[Marc Eisenberg:]

So seven platforms web platforms are going to move into one. We call it Project Synergy. And I think all along the plan is to have that available in Q2. But all new customers are already being deployed on it. So there is the conversion but in terms of new customers there are already being deployed that way. So in Q2 what's going to happen is people that have been on the old platforms are going to have visibility on both platforms. They're going to be able to run them both concurrently and while we're going to keep those old platforms alive we're not going to do any more development on it.

[David Gearhart:]

Got it. That's it from me. Thanks so much.

[Marc Eisenberg:]

Sure.

[Operator:]

The next question will be from Mike Malouf of Craig-Hallum Capital Group. Please go ahead.

[Eric Des Lauriers:]

Hi, guys. This is Eric Des Lauriers on for Mike. Thanks for taking my question.

[Marc Eisenberg:]

Hi.

[Eric Des Lauriers:]

I was wondering if you could just dive a bit more deeply into ARPU? I know there is obviously a mix difference between you're Blue Tree and inthinc products and your container products. So I was wondering if you could kind of give us your take on how -- where you expect the bottom to be come down pretty steadily for the past four quarters. And just wondering if you guys see that trend continuing or if this Q4 range is about bottoming out? Thanks.

[Marc Eisenberg:]

Well, I think those Blue Tree products while the backlog keeps building and the workload for the engineers keeps building Q4 didn't have an actual lot of shipments. We're getting more excitement, but we still have a huge amount of integration that the engineers are doing. So you didn't get any of the impact. But when I said -- when we say a quarter of 70,000 net adds, those are net adds. So the gross adds, it could be north of 100,000. And then you add some new churn and over the last year, you turned on 70,000 of those AT&T units at these super low ARPUs. And then your churn could be $4 ARPUs, $5 ARPUs, $6 ARPUs. So those units kind of cancel each other out. The rest of your subscribers you're putting on have to eat up the difference, and it's been ticking away from ARPUs. And I think that's literally what you've been seeing in the ARPU. So, I think there's maybe one or two partnership deals with AT&T that we're still looking out of the six that I talked about on the call today. One of them is an AT&T deal and six of them are not. So as opposed to one of these deals, that's kind of turned upside down when your ARPU shrink. But you have very low costs. The deals that are coming forward, ORBCOMM is the lead on these deals. So the economics are kind of turns right side up like a normal ORBCOMM deal. So I think that should be helpful.

[Eric Des Lauriers:]

Okay. So do you think that this sub 5 range that we've seen in the back half of the 2018 should basically touch the bottom out and then start to trickle up again, or is this kind of like the new normal do you think?

[Marc Eisenberg:]

I hope so. I think that's the case. The only reason I'm hesitating is the Blue Tree units, I think those are the ones that are -- they're going to come in the back half of the year. We're pretty certain of that. So I think that's going to help us. And then I think we're going to close 400,000 or 350,000 units on the container side. And if they all zoom into this year, good news is, wow, you're going have some great revenues. Vendors is, they are the lower ARPU than the average, and if they kind of get some split over the course of the next two years, it could be more balanced. So I think it still depends on the mix. But I just want to emphasize that regardless of what the ARPUs are, there is not a single sub that's a bad sub. If you look at some of these licensing subs, where the ARPUs are all the way down at $1, there's no cost on those. There is no -- in the cost of service line, there's nothing there. So it's a great sub. A $30 with the $6 cost is a better sub, but it's still -- from a margin perspective, it's a good, but it's not as good as the service one. So I'm kind of routing for all of them, and let the chips fall where they may.

[Mike Ford:]

Our ARPU has been dropping over time because of pricing concerns. It's all mix.

[Eric Des Lauriers:]

Sure. Yeah. That definitely makes sense. I was just trying to get a gauge of where do you expect the mix. Thanks guys. I appreciate the color.

[Marc Eisenberg:]

Thanks.

[Operator:]

The next question will be from Mike Latimore of Northland Capital Markets. Please go ahead.

[Unidentified Analyst:]

Hi, guys. This is Pawan [ph] on for Mike Latimore. I have two questions. What percentage of your shipments now are from newer low cost products?

[Marc Eisenberg:]

I'm sorry say that again.

[Mike Ford:]

The new product shipment?

[Unidentified Analyst:]

What percentage of your shipments now are from newer low-cost products?

[Marc Eisenberg:]

Yeah. Yeah. So, in my script let me say 50%. But of that 50% the satellite products are complete the GT 1200 which is the cargo product was -- we only shipped 3,500 of them because that's all we built last quarter in time, so that was -- I don't know 25%. If you look at the PT 6000 which was the reefer product, it was about 50% and the cargo products for the most part that was just hundreds of units, but we're not shipping the old ones. So it was 100% of a very, very low number. But I guess if you were to just rough estimate average all those things out, it would be about half. So there is a long way to go. I mean, Mike said something -- I went and did the math because if I was struggling to believe it and then we're kind of parked here with our Chief Accounting Officer that was splitting out the numbers. We did $9 million of the old products at high-teen margins. And then the other 50% -- whatever we did it averaged to 27.5%.

[Unidentified Analyst:]

Okay. Thank you. So my second question is related to Chinese tariffs. Are you seeing any difficulty in sourcing components or like is there any impact which we could expect on the income statement going forward?

[Marc Eisenberg:]

I don’t know, China kind of scares me. I think the good news in China is we've got upside there. We're in the middle of installing an earth station and we're going to go into China, assuming that whatever these issues are by the time we get installed, it will work out. And if not it's not, it’s not like an incredible investment, but I don't think there's anything built into our plan or our guidance today that -- some tariff or something is going to blow up in China. We've got upside there. There's very little business there today. There's almost no downside, but our plan is to go forward.

[Unidentified Analyst:]

Yeah. Thank you. That's all for me. Thank you.

[Marc Eisenberg:]

Sure.

[Operator:]

[Operator Instructions] Your next question will be from Chris Quilty of Quilty Analytics. Please go ahead.

[Chris Quilty:]

Thanks. Marc. It sounds like you've done a tremendous transition on the hardware side, but I know you've always got some new tricks in your back pocket. Can you talk about what is next or what you have in development in terms of hardware and is it having already done cost reduction, are you targeting new markets or new applications, what's the emphasis on the hardware side?

[Marc Eisenberg:]

Well, the emphasis on the hardware is -- I don't know it feels like each one has a different story. And Chris, you've been -- this is 50th call. So I'm guessing this is your 50th call. So like -- and I know you're -- you've got such great expertise in satellite, but our goal on the satellite side is -- I think the satellite business across the entire IoT is growing, it's growing, but it is not growing like the cellular side is growing. And the reason it's not growing is as you know it's not features. I mean, gee, you've got a platform you know, that's going to last for an awful lot longer than 2G converting to 3G or 3G converting to LTE. Plus you get all the benefits of global coverage. I think everyone would want to you satellite but that being said the price per byte and the price for the hardware it's always been a very difficult comp for satellite and why satellite struggled and when you can take 600 components and put it down on one chip. The idea is to make satellite affordable. Blue Tree, Blue Tree is super cool. It's a in the in-cab side and it is a perfect customer for dual mode. But they never were able to do dual mode before because if they sourced it from one of our competitors then the cost of just the 15% of the time they would have used satellite would have been greater 5x what the cellular was and then you were burdening it with this great hardware and then we figure to ourselves. As opposed to 10% of the in-cab business being satellite, what is the price point that makes it 30%? What is the price point that makes it 50%? What is the price point that makes it 100%? And how could we get there right? That is the -- that is the purpose there. The other big one is this container business. Maersk went first they are up to 350,000 to 400,000 units now with the acquisition of Hamburg Sud. Everyone's going to do something it feels like over the next year or two years we think we're going to win the lion's share of that business. And it's funny I'm sitting there with these customers and it's not GEO, your competitors here and you're there and what makes you excited. That's not what we're seeing at all. What we're seeing is this is the price that -- makes this a positive return for us. And this is the go forward or not go forward. It's almost like that discussion that we had with JB Hunt. And we went pulled the cost out of it ripped it apart and the good thing here is the volumes are so damn high right. So you have the economies of scale. So that is part of it. And then secondly, we did a -- we took a long time to take a look at the model and took a step back and -- yeah we had a little hardware blip this quarter. It's not going to matter but you have this hardware blip in the quarter. But what's really -- look at what's happening here right. You had some sales that weren't profitable last year and you've like more than doubled your -- you more than doubled your margins at a small decrease in hardware and I think it all day all day right. Of course you do. And I think in order to get running on all three cylinders, in order to get the margins back in line, to get our cash in line because well we had too many skews and in order to get the revenues up we took 2018 to -- I mean this is the year of the product and these things are really cool.

[Chris Quilty:]

Got you and Mike, I mean, clearly, you're focused on cash flow -- free cash flow generation but at some point what becomes the primary goal here in terms of de-levering to a certain level or do you start to look at tack-on acquisitions once again?

[Mike Ford:]

Yeah. I think we will -- we're going to get on too fast right? We're going to generate as much cash as we can between now and when our debt comes due. And we can start to pay it down. But between now and then we're going to -- we'll have -- we'll have positive operating cash flow even positive free cash flow I believe from this point going forward. So two years from now, when it's time to make our final decision about what to do with our debt. If we are in an economy where there are acquisition bargains, there are attractive technology we want to buy, we'll go down the acquisition path. If there are not any good bargains there, then we'll consider we can -- we will consider restructuring our debt.

[Marc Eisenberg:]

I don't think you're thinking far different than what we are, Chris. We are just looking at the math. 2020 you may call disappears and you've got a 4% penalty to refinance; 2021, it's 2% and 2022, it's -- there's no penalty. So that's just a whole lot of math, right?

[Chris Quilty:]

Yeah.

[Mike Ford:]

Because of our increased EBITDA, our cash is on the balance sheet -- our leverage ratio as I mentioned those earlier, they will be much more attractive by the time it's -- we are ready to make a decision about what to do with our debt. So, we're going to have more options this time around than we did last time.

[Chris Quilty:]

Great. And final question here. When you look at the company structure, you've had a lot of consolidation of hardware and manufacturing in the EMS providers, is the structure of the company in terms of number of facilities and capabilities where you want it, do you see a need to expand or are there areas where you can make some cuts?

[Marc Eisenberg:]

I think in terms of where we are, there are definitely areas of excellence that have evolved in the company based on the acquisitions. Some offices have been shrunk down other ones have been built up. But if you look at ORBCOMM as a whole, if you want to know where ORBCOMM does it's hardware, it's in Ottawa, Canada. May be supported by some other building, but there are 145 people in Canada and predominantly they do hardware engineering. The largest office ORBCOMM has believe it or not it is not in Dulles, Virginia, it's in Hyderabad, India. Hyderabad is about 160 employees and that is where the overwhelming majority of customer service and where most of our web design is. Our in-cab products are really designed out of go-away. There is so damn talented there. We couldn't consider moving them. And then our space operations are in Dallas, Virginia. I think we've really kind of built even though through acquisition, the people that came through the acquisition are not necessarily doing exactly what they were doing then. So I think that's worked out pretty well for us. Are there efficiencies out there? Yes, there's always efficiencies out there and I think we can find them. I mean if you're thinking that you know the company goes from 860 employees to 500 and to be able to support the growth that we're looking to achieve, not likely. But that being said, if we're wrong and the business isn't what we think it is then there is certainly opportunities there.

[Chris Quilty:]

One final if I can. You just made the announcement a couple of days ago with the Rehrig Pacific and the poorly named Analytics Services which is sort of a generic name. But clearly that looks like something that you're selling now as a separate service software platform. Can you add a little bit there of color in terms of -- does this become a branded packaged product or is it just an add-on to existing customers in terms of capability and can that help drive some of service margins up?

[Marc Eisenberg:]

Yes. So -- let me start by saying, if you have a better name for it, you know my -- you've got email, you've got text, you've got my phone number whatever you need. But I get it's a bit of a buzzword these days. But we really are doing it. I mean for Rehrig, it's pretty neat. They've got this -- garbage is a good business, right. So they monitor these garbage trucks and they're monitoring it by the second. And when they miss a stop, they know precisely where it is and how to reroute and go around. I mean, it's pretty incredible what they're able to do and we were put up against some of the biggest companies that you've heard of. And we were able to get the timeliness and get that data spun much quicker than they were. So I think that's pretty neat. But for Rehrig, it looks like a sub-times ARPU deals. It does. Because it's not really a telematics deal, it's something that we're doing on top of what they already have. So -- but -- there is no telecommunications, but it's just software times ARPU. And I think when there is something unique, that's kind of the model, it could be a flat fee or something. But I think that is a portion of the business. The real part of -- not the real, but the other part of the business is taking some of our best practices and some of the data that we have across entire fleets and helping companies with best practices, helping customers with, gee, I mean, there is everything you want to know about reefers. There's is only one company that knows at all and that's ORBCOMM or that business or how long the average time that you are sitting there waiting to unload or be picked up or whether you're using the amount of time you use continuous cool versus start-stop and driver efficiency over time. I mean, there's so much stuff that we already know that we're almost -- those are the next generation stuff that we're building. And I think we're perfectly happy to continue offering to a refrigerated customer, let's say, the product that they have today, but maybe for another $2 or $3 of ARPU. They can kind of get the LinkedIn plus, as an example.

[Chris Quilty:]

Great. Thank you for the color and good luck with that.

[Marc Eisenberg:]

Sure.

[Operator:]

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