ORBCOMM Inc. (NASDAQ:ORBC) Q1 2020 Earnings Conference Call April 30, 2020 8:30 AM ET
Company Participants
Aly Bonilla – VP, IR
Marc Eisenberg – CEO
Dean Milcos – CFO
Conference Call Participants
Rick Prentiss – Raymond James
Mike Walkley – Canaccord Genuity
Mike Latimore – Northland Capital Markets
Chris Quilty – Quilty Analytics
Scott Searle – ROTH Capital
Operator
Good morning, ladies and gentlemen. And welcome to ORBCOMM’s First Quarter 2020 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions]
Please note this event is being recorded and a replay of this conference will be available from approximately 11:30 a.m. Eastern Time today through May 14, 2020. The replay service details can be found in today’s press release. Additionally, ORBCOMM will have a webcast available in the Investor section of its website at www.orbcomm.com.
I would now like to turn the call over to Aly Bonilla, ORBCOMM’s Vice President of Investor Relations. Please go ahead, Aly.
Aly Bonilla
Good morning, and thank you for joining us. Today, I’m joined by Marc Eisenberg, ORBCOMM’s Chief Executive Officer; and Dean Milcos, ORBCOMM’s Chief Financial Officer.
On today’s call, Marc will discuss how the company is affected in this current COVID-19 environment, provide some highlights on the quarter and give an update on the business. Dean will then review the company’s quarterly financial results and outlook. Following our prepared remarks, we will open the line for your questions.
Before we begin, let me remind you that today’s conference call includes forward-looking statements and that actual results may differ from the expectations reflected in these statements. We encourage you to review our press release and SEC filings for a full discussion of the risks and uncertainties that pertain to these statements. ORBCOMM assumes no duty to update forward-looking statements.
Furthermore, the financial information we will discuss includes non-GAAP financial measures, a reconciliation of these non-GAAP measures to GAAP measures is included in our press release.
At this point, I’ll turn the call over to Marc Eisenberg.
Marc Eisenberg
Thanks, Aly, and good morning, everyone. Before we begin, we hope you and your families are healthy and safe and secured during this challenging time and our thoughts go out to those impacted by COVID-19.
Earlier this morning, we issued a press release announcing our financial results for the first quarter ending March 31, 2020. Let’s begin what is top of mind for many investors, how our business is impacted by the current environment. Starting with operations, nearly across the globe or comments considered an essential business not only are we a telecommunications company, but we also support a large share of the world’s food distribution.
Therefore, we continue to ship products, support customers and execute on our technology roadmap. That being said, much of this work is being done remotely, which certainly has its challenges, so implemented a number of contingency plans to minimize disruption to global business operations.
Our highest priority is to service our customers while ensuring on employees are safe. In an effort to hit the ground running as markets begins to stabilize and keep our employees engaged, as we’ve implemented our 30 projects in 30 days program which focuses on execution across all disciplines of the business including new product introduction, incremental product features as well as process improvements.
Turning to our Q1 financial highlights, our results were basically in line with expectations for revenue and adjusted EBITDA. Total revenue for the first quarter was $66.2 million similar to the prior year. Service and product margins improved in Q1 over the prior year with service increasing to $67.7% up 110 basis points and product increasing to 32.6% up 300 basis points. These improvement led to an adjusted EBITDA of $13.7 million.
Q1 was shaping up to be a stronger product quarter but it’s market conditions worsened toward the end of March a number of shipments pushed to the right. We generated operating cash flow of $8.2 million in the quarter.
Looking at the macro environment, many of our customers were also deemed essential businesses and played critical roles in stating the flow of goods during this unprecedented time. However looking across our entire base of customers they fall into two camps, those who were extremely busy and those who have increased downtime. Many of our customers have increasing demand for their services such as our refrigerated transportation customers, were shipping food, pharmaceuticals and medical supplies to ensure supermarkets, drugstores and hospitals are stocked.
We’re seen stability in the maritime market where customers leveraging vessel monitoring system, tracking [ph] systems and fisheries management solutions are minimally affected. The other accounts starting with non-refrigerated transportation depending on what they typically hall, customers have seen lower demand due to a decrease in freight loans and are slow to spending on IoT solutions. Oil and gas is an extremely environments and about 3% of our business.
About 60% of ORBCOMM’s revenues are made up of recurring service. This revenue continues to be stable where we typically see about 7% annual subscriber churn and are not trending up significantly. Foreign currently is a minor concern leading us to provide limited concessions for some international customers.
We were also focused on small companies and select industries such as trucking and oil and gas, which has been struggling for quite some time. That being said, recurring service revenues at just $1 million through the end of the AT&T contract are trending roughly flat to last year showing the stability in our model. The average 40% of our business in hardware sales is much more difficult to predict.
Many of our OEM customers which represents approximately 50% of our hardware business have temporarily halted production in furlough employees which in turn delayed shipments of our products. We expect most of these factories to reopen in the quarter but we’re unsure when we’ll resume supply in products creating uncertainties for hardware sales.
Regarding new business the COVID-19 pandemic is making it difficult for sales reps to travel on site to meet with customers as well as our solution delivery team to support new installations and provide training, thus pushing many new opportunities to the reps. Overall in Q2, hardware is trending roughly about two thirds of our recent run rate.
Keep in mind,, majority of our gross profit comes from service with margins in the high 60s as opposed to hardware with margins of about 30%. Said differently, over 75% of gross profit comes from service that is extremely stable. It is difficult to determine the extent and duration of this rapidly evolving crisis. We need to be sure that our company’s liquidity position remains strong.
To ensure that we ride out this storm and hit the ground running as the market recovers in Q1 we drew down $15 million from our revolving credit agreement and in April we received a $10.5 million loan through the US Paycheck Protection Program. We are now evaluating whether we’ll return this loan as the guidelines continue to evolve.
To date we’ve not reduced our US employee count. We made multiple cuts to non-payroll expenses such as travel and marketing and have reduced future production as the company turns a great deal of focus to managing cash.
Let’s move on to our business update starting with our container programs. We’re continuing to support our initial projects with the carrier container group for one of the premier global shipping line companies our largest deployment to date. In Q1 we shipped over 19,000 devices bringing the total shipped to date to nearly 48,000 devices or roughly about one third of the entire 150,000 unit fleets.
We anticipate shipping approximately 8,000 devices in Q2 and approximately 20,000 devices in the second half of the year. To be clear we originally forecasted 80,000 this year and are currently looking at where like 50,000 as the customers experiencing difficulty installing as active support has become more challenging due to work restrictions associated with the virus.
In the end we still expect to ship to ship the same number of devices over the course of this program with the program will most likely extend in another couple of quarters. Partially offsetting this reduction is an additional order for 7,000 devices for a second shipping line in customer, which is expected to start shipping in midyear. Despite current challenges, we’ve made strides on some new opportunities including a recent win with Caravan Logistics a leading truckload carrier in Canada for 750,000 drive and trailers utilizing our solar powered asset tracking and monitoring solution.
We’re continuing to make progress on our plan to integrate the web platform [indiscernible] acquisitions. All new cargo customers are now supportive on the ORBCOMM platform with other market segments expected to go live at various stages throughout the year.
With our new integrated platform, customers will be able to monitor multiple asset types via one seamless application, create far tighter reporting intervals and uncover deeper insights about their business to advance analytics. We built this product with a future with the capacity to support the evolving need for increased data and more sophisticated solutions in the 5G IoT ecosystem.
Our global ERP implementation is just about finished with the last remaining acquisition scheduled to transition in early Q3. Once completed 100% of ORBCOMM’s revenues will flow through one ERP system enabling significant efficiencies, simplified billing and improved inventory management.
We’re continuing to focus on innovation as a key driver to growth. In Q2 we’re planning to launch a new product that leverages ORBCOMM’s strength in satellite IoT integrated with our advanced telematic solutions creating market-leading products of the dual node offering. Our satellite is an statutory offering combines to a satellite with antenna and a dual mode connectivity to almost any ORBCOMM telematic device as well as most other devices on the market. This product is priced at about half of what customers current pay for similar products.
This makes dual mode connectivity a significant competitive advantage for ORBCOMM, as well as easy, cost effective option for customers to resemble plug and play connection. We see significant demand for this product and expect to share dual mode products to increase.
Wrapping up we’re pleased with our results in the first quarter despite a tough environment. We seamlessly transitioned our employees to working remotely with minimal interruption. We continue to manage the business with fiscal discipline. We’ve have a strong balance sheet. We’re confident we’ll emerge from this environment as a stronger, more efficient company with our integration of 13 acquisition behind us.
With that said, I’ll turn the call over to Dean to take you through the financials.
Dean Milcos
Thank you, Mark and good morning, everyone. I think we can all agree that the business landscape has changed significantly over the last two months. Fortunately, many of our products and solutions are crucial and deemed essential in supporting the supply chain during the COVID-19 pandemic.
We’re pleased with our financial performance in Q1 came in s expected and we entered Q2 with caution concerning the business disruption around the world. We continue to make progress on many key initiatives and are focused on executing our cost reduction plan and conserving cash in these uncertain times.
Let’s start with the company’s first quarter financial results. Total revenue in Q1 was $66.2 million similar to the prior-year and in line with our outlook provided last quarter. Q1 service revenues were $40.5 million up 3.9% compared to prior year period. Recurring service revenues of $39.9 million in the quarter end up 6.2% over the prior year. The improvement was primarily driven by new supplier additions and recognizing $1.9 million to accelerate deferred service revenues associated with expired AT&T and Maersk contract.
Excluding these contracts in both years, recurring service revenues improved $1.5 million were up 4.1% year-over-year. Product sales in the first quarter were $25.7 million compared to $27 million in the prior year period. The decrease in revenues was primarily due to decisions made by some customers late in the quarter, with hardware given the current environment. Partially offsetting the revenue decline were increases in our container programs was benefitted from the 19,000 devices shipped in support of our container project with Carrier.
Turning to gross profit margin, the company realize the margin of 54.1% in the first quarter, in turn a 70 basis point improvement over the last year driven by growth in both product and service gross margin. Product margin in Q1 grew 300 basis points to 32.6% compared the prior year period. The improvement was primarily driven by lower warranty expenses specific with our IDP product line as the actual warrant expense has been trending lower the rest we made once the accruals and also by lower manufacturing costs.
Service margin in Q1 was 57.7% a 110 basis point improvement over the prior year period driven primarily by incremental service revenues and lower indirect costs. Looking at operating expenses the company incurred $37 million in Q1 compared $34 million in the same period last year. Keep in mind Q1 of 2019 included $2 million of favorable net benefits associated with the inthinc acquisition.
Excluding the benefit from last year, operating expenses in Q1 increased $1 million year-over-year driven primarily by higher SG&A of $500,000 and depreciation and amortization expense of $700,000. While SG&A was up $500,000 there were $1.9 million of bad debt expense in receivables in Q1 2020 compared to the prior year period, largely related to disruptions caused by the COVID-19 pandemic.
Offsetting these market-driven increases in SG&A expenses were decreases in employee compensation of $1 million largely from prior headcount reductions and from lower professional fees of $400,000. As we forward in the year, we’ll continue to focus on our 2020 cost reduction plan for recognizing the full year benefits from previously implemented cost savings initiatives.
Adjusted EBITDA in Q1 was $13.7 million near the midpoint of our outlook with margin at 20.7%. Keep in mind there were significant accounting adjustments in both directions in Q1 2020 resulting in non-material net benefit compared to the $2 million favorable net benefit recognized in Q1 2019. Excluding these adjustments, adjusted EBITDA in Q1 increased $600,000 over the prior year.
Turning to the balance sheet and cash flows the company ended Q1 2020 with $70.1 million of cash and cash equivalents an increase of nearly $16 million from the end of Q4 2019. The increase came from drilling down $15 million from our revolving credit facility as we felt was prudent to strengthen our cash reserves and our liquidity during the pandemic should business disruptions continue for an extended period.
In addition in Q1 2020, we repurchased over 800,000 shares of common stock for total cost of approximately $2.5 million. And during the current environment and our focus on preserving cash, we put our share repurchase program on hold for the foreseeable future. In Q1 cash flow from operations was $8.2 million and CapEx was $4.8 million resulting in $3.4 million of free cash flow before financing activities.
Let’s move on to outlook, despite these uncertain times, we do have some visibility into Q2 based on orders already received and those currently being worked on. As Mark mentioned earlier, there is uncertainty surrounding product sales in the second quarter as some OEMs have temporarily suspended production lines and due to reduced on-site support simply to delay deployments.
Looking at service revenues, we completed the AT&T contract and anticipate continuing fluctuations in foreign exchange rates both of which was slightly impacted to the second quarter. As a result we anticipate recurring service revenue to be flat to down 3% over the prior year period. We believe total revenues in the second quarter to be $55 million on the low end and $50 on the high-end depending on how market conditions evolve. We anticipated adjusted EBITDA margin in the second quarter to be approximately 19%.
Due to the uncertainties surrounding the level of business disruption caused by the COVID-19 across the multiple markets ORBCOMM serves, we’re withdrawing our previously announced full year 2020 outlook and expect to provide better visibility on our Q2 earnings call.
In closing we’re pleased with our performance in Q1 came in line with expectations despite business disruptions causing revenues to be similar to the prior year we continue to improve on our service and product margins. The second quarter will be challenging for many of us but we have taken necessary steps to enhance our operations and strengthen our liquidity position to converse in this environment fully integrated and stronger company.
This concludes our remarks for the call and we’ll now take your questions.
Question-and-Answer Session
Operator
[Operator instructions] Our first question will come from Rick Prentiss of Raymond James. Please go ahead.
Rick Prentiss
Thanks. Good morning, guys. Hope you and your families, employees are safe and well as well. Couple of questions obviously very uncertain times but focusing on the recurring service revenue you mentioned Mark I think that you hadn’t really seen any real change in the 7% annual churn rate, versus new churn rate and how about any effect on ARPU? Are people using it less, how much of the revenues are kind of monthly recurring versus usage charges and does it vary by segment?
Marc Eisenberg
Yeah Rick. I think you’re kind of hitting to the heart there. We’re going to add subscribers this quarter. You know there’s no doubt about it but we’re focused on first and foremost some foreign-exchange and wrong most of what we sell is priced in dollars, but in places like Brazil when the Real has gotten weaker by about 30% in some cases, you’re charging your customer more than they’re charging your reseller more than their charging there.
So there is hundreds of thousands of dollars but that’s going to affect us but not millions of dollars. So you know that is the first thing that you’re seeing and then the second which is pretty clear in our financials is the other thing that you’re monitoring is your ability to collect and we just came out of a transportation recession, it was improving early in Q1 was just beginning to the turn and then some of these companies in the trucking side that were already struggling kind of walk into this environment.
So we’re focused on them as well but if you kind of look at the Q1 versus Q2, we’re predicting it down a little bit, assume 50% of it is the end of the AT&T Maersk deal and the other 50% are just these maybe a million dollars in the dogs and cats but that being said, after — service revenues will be within 97% last year but maybe it’s eyes on 100%.
Rick Prentiss
And have you experienced any bad debt collection issues yet? I think you mentioned I think Dean but where are your thoughts first reserve and what might happen on the bad debt side?
Dean Milcos
We’re actually seeing greater collections through the first month of the quarter. So nothing significant on the bad debt side. We did clean up some stuff in Q1, some stuff from the patient market slowdown last year and are a bit aggressive in just cleaning up that risk accounts but I don’t see it coming anywhere near that in Q2.
Rick Prentiss
And then you mentioned some of the factories that have temporarily shut their lines. I know you guys are doing some stuff in Mexico. How is Mexico doing from its lockdown and I was assuming you mentioned you guys are considered essential business not just because it’s telecom, yours is food distribution but is it Mexico where your similar factories you said have been felt and what is your visibility on them returning to open?
Dean Milcos
So our factory is open Mexico is open because we’re deemed an essentially essential business and I believe we could be the only lines open in this massive Sanmina factory, but we are open continuing to produce goods. We’ve taken so far this year I know there is a different what US but we’ve taken about $8 million of costs over the next two quarters and pulled it out of our production plan. So we are going to produce less unit to make sure that we focus on cash.
Separate from our factory in Sanmina in Mexico you’re also focused on every factory that builds components that to use in your in your devices and there’s products coming out of China which is actually pretty stable right now. There is stuff coming from all over the world and so far we believe we’ll be able to make our entire Q2 build. So where we struggled with the component, we were able to find another component.
It’s pretty wild we got a letter the other day from [indiscernible] they just can’t supply SIM cards because their factory in the Philippines is closed down. So — but we do another supplier for that and we’re able to find that product from somewhere else but it is something that every company that manufactures in the world is focused on right now.
Rick Prentiss
Okay. Appreciate and stay safe and well, we’ll come out of this.
Operator
Our next question today will come from Mike Walkley of Canaccord Genuity. Please go ahead.
Mike Walkley
Dean, maybe I’ll jump in the queue, just obviously some higher bad debt expense in Q1 but there’s cost savings ongoing. How should we think about overall OpEx levels into June and going forward. Can you kind of help us with the run rate of the business?
Dean Milcos
OpEx was high with some of the cleanup we had in Q1. I expect SG&A in Q2 to be about $17.5 million which is a pretty big drop from the 19.6.7 [ph] we had in Q1 and product development of $3.8 million of the pre-consistent going forward for the rest of 2020. So that’s the Q2 plan and I won’t expect SG&A to grow much beyond that in the remaining quarters for the 2020 year.
Mike Walkley
And then Mark just on kind of the visibility it’s challenging out there, but and talking with some of your larger customers any comments may be on how the year plays out? I know you’re pulling guidance but any comments just on how they may be thinking about orders of the canceled orders just pushed to future period just given logistics challenges open up and then just with the difficulty of getting to your customers to install equipment, how should we think about the impact to net ads on the shorter-term that’s implied in your guidance?
Marc Eisenberg
Yeah I think I almost have a separate comment for all 1,000 companies because they’re all experiencing something different right. You’re experiencing from our refrigerated guys is GE was struggling to install because they’re so busy and then your marine guys out in the fishing fleets and their business really hasn’t changed at all. And then every trucking company has a completely different story depending on what you install.
The commodities guys are off a little bit, the guys that ship on rail, if you’re — a lot of our guys ship auto parts and their business is struggling and then some of them are shipping consumer goods and their business is through the roof. There is a separate story, which is what makes it hard to guide because it’s literally one plus, one plus, one plus, one plus you need to keep going until to get to a 1,000 to figure out what the story looks like and then it’s evolving because if your are delivering auto parts then you’re not just sitting there, you’re moving.
You’re now bidding on other types of goods that you don’t typically carry and then that affects other guys right. So it is just a wildly evolving scenario. From an OEM perspectives that one is tougher to predict or tough to predict but if you look at like the carriers and the — to predict JLGs they furlough their employees for like 30 days and then we expect them to open and I imagine that they’re sitting on the product that they were expecting to build over the last month and probably take a month or month and half for them to work through that product and have us begin to ship which you can understand is why it’s so difficult to predict what we’re shipping in the second quarter right versus the third quarter.
But I am not aware that any orders that we have in hand have been shut down or canceled but what we are experiencing is most like that carrier deal we’re still going to take the 150,000 units but it may just take another quarter or two to get this done because it’s not an ideal situation to be installing at these ports and then ones in there doing what they consider nonessential activities.
So and it varies port by port really in the world which is why we’re still shipping 50 of those 80,000. So like I said it’s a complex story, it’s kind of evolve over the board and I think $55 million I think it’s in play but maybe on the less likely side and then you kind of look at $60 million and you say all right Q1 was $66 million, you pull out the thing make is $64 million, carriers is going to be a couple million instead of $4.62 million and then at the high end $60 out of $62 million you’re right there.
So we are certainly less affected than most but I guess it’s a 55 level we are concerned about lots of moving parts and are afraid something is going to slip through the course. So I am sorry, so we believe what I know for a fact right. we’re going to end April at about 7,000 to 8,000 positive net subs and the carrier subs are all put it in one day and that doesn’t include that.
So you’re going into May with roughly 15,000 subs in hand and the first month of the quarters is always the strongest number providing subs. I think it’s the worst-case scenario would be something like a positive 25,000 and the best case scenario would probably be closer to 40,000, but we’re not anticipating negative sub growth even in the 2009 timeframe ORBCOMM never went negative on a sub count.
Mike Walkley
That’s very helpful. One last question and I’ll pass it on. Dean with lower kind of hardware levels, how should we think about gross margin? They were very strong in the quarter but kind of your visibility on what you expect in mix and maybe a little lower hardware usage how should we think about gross margin trends going forward in the short term?
Dean Milcos
For Q2 depending on where the product revenues are, there is a fifth component to similar cost of product with our warehouse and employees that support that warehouse and we’re not changing our fixed cost component to at least not in the near-term. So on lower product revenues, I would expect a lower product margin for the quarter and I think something in the 27% to 28% range if revenues come in lower on the product side like we’re thinking right now.
And on the service margin side, we should stay to close to 67%. I know we’re losing this deferred revenue, which doesn’t have much costs or very little cost well actually no cost in Q1 and the deferred revenue which is going to hurt the service margin slightly but that’s where we’re thinking for Q2 right now and beyond that we’re really not giving a forecast right now just because we’re just seeing the other things evolve.
Operator
Our next question will come from Mike Latimore of Northland Capital Markets. Please go ahead.
Mike Latimore
Thanks. Good morning. Just on the supply topic, I guess Mark it sounds like pretty much you have access to components and contract manufacturing output. So there is not really any kind of supply issues lingering out there.
Marc Eisenberg
We don’t see that but we’re constantly concerned that we’re going to turn over some stone and because sometimes these letters just out of the blue. You built a telematics box and there is literally hundreds of different components in there but I don’t see anything at this point that is going to interrupt Q2 production.
Mike Latimore
And then from a churn perspective, I know you kind of touched on that a little bit, but I guess how are you thinking about that sort of 7% number, does that become 8%, 9% in the second quarter or do you think 7% is kind of where it holds?
Marc Eisenberg
In April shockingly we’re seeing less than 7% on net run rate. So we’re not seeing it yet but to say that that couldn’t flare up would be certainly because we just don’t know but we’re not expecting that, but what I can tell you from history in that 2009 timeframe when we went through that recession churn was 6%.
Mike Latimore
And then historically you talked about kind of a base hardware revenue level I think in the $15 million maybe $20 million range. I kind it’s kind of a different environment now, but is there a way to kind of frame what a base hardware number looks like?
Marc Eisenberg
Just for Q2 or looking beyond Q2 because when you’re shipping to your heavy equipment OEMs and it’s pretty stable amount every single quarter and their furlough it’s a tough question to answer right, but typically you know that base hardware business is somewhere between $15 million and $20 million of hardware. So maybe if you’re asking me of that $15 million to $20 million how much are you going to ship to those very customers in the second quarter, which might be what you’re asking, I would take a full out guess because I don’t know that number of something like 12.5.
Mike Latimore
And then just last one obviously you’re doing your food transport business but your customers are very busy. Does that lead to are they looking to add more units or again a little bit of pricing flexibility there or are they just like really good visibility good visibility because of how busy they are?
Marc Eisenberg
First of all Wal-Mart and Kruger are busy. They’re putting on units. Wal-Mart typically buys units when they have budget more than its market dictated but we have today roughly 70% of Wal-Mart fleet and we think by — which is over 60,000 devices and we think will be at 100% by year-end. So they continue to do well. Kroger’s entire fleet were in the middle of installing were about 25% to 30% of the way through. So still a lot to go there, but that’s the strength of ORBCOMM right.
I don’t know if you know C&S wholesale, they’re kind of a quiet giant out there but if you were to ever look them up, the amount of grocery stores that they supply food chains the piggly-wiggly is a bunch of these guys now support customer doing well, [indiscernible] that does the shoprite business also doing well, there’s probably 15% to 20% of our business that is refrigerated over the road trucking and those businesses are very strong.
And in the first quarter the end of the first quarter and the beginning of the second quarter you sensed it right. These guys all of a sudden there’s this transition from people standing half their time in offices, in restaurants and eating out moving to grocery stores where you no one is leaving home and everyone is eating home and you could imagine the incredible work that these guys did moving those goods and filling these stores and what euros are truckers are.
Operator
Our next question will come from Chris Quilty of Quilty Analytics. Please go ahead.
Chris Quilty
Just a couple of housekeeping questions here. AIS revenues for the quarter Dean?
Dean Milcos
AIS revenues were $2.9 million for the quarter, pretty consistent with the prior quarter.
Chris Quilty
So I think it’s actually down a little bit, I just didn’t go into my model, was there a particular reason on a sequential basis it might have been down?
Dean Milcos
It might have been down $50,000 or $60,000 it wasn’t down more than that. Maybe there a couple of customers there that are usage based where the usage was down slightly but I’ll have to get back to you Chris.
Chris Quilty
Okay I mean no major changes to the outlook of that business for continued growth.
Dean Milcos
No, no major changes on that business.
Chris Quilty
Okay you also talked about some continued cost savings going forward. I think most of the employee reductions were done last year and obviously if you do all the PPP loan those wouldn’t be part of any of the cost savings for 2020. Can characterize where you expect to see those savings going forward?
Dean Milcos
Sure, well in the immediate quarter we’re definitely see lower travel entertainment and commissions and marketing costs those are already part of our plan going into 2020 but we’re going to see a more significant cost savings there in Q2.
We also have professional service fees. We negotiate some contracts. We’ll have lower fees for both legal and audit and then on the consulting side, we did reduce some of our external consulting costs.
Chris Quilty
And marketing is running at about 50% of the original plan.
Dean Milcos
Yeah some of that is tradeshows which we typically do a number of quarter which we’re not doing right now and a lot of trade shows aren’t happening either.
Chris Quilty
So I guess hopefully those savings will be temporary and once the world gets moving again.
Dean Milcos
Some of that will be kind of very correct and some of them — some of better contracts, professional service fees and consultants were already baked into our cost savings for the budget.
Chris Quilty
Got you and number of devices shipped in the quarter?
Dean Milcos
Just under 80,000.
Chris Quilty
And so do you expect the mix of devices to turn more favorable just in the current environment in terms of the usage patterns? Should there be any kind of a benefit to ARPU?
Dean Milcos
Well anything and any benefit that we think we’re getting in ARPU is kind of being wiped out from the foreign exchange offset. So the base is so big and based on shipping and other 30,000 or 40,000 assets are a $1 or $2 higher or lower isn’t going to change the company’s ARPU at 2.2 million subs.
Chris Quilty
And if you want to maybe is it as you look at your business and the way business is changing, are there any silver linings that you see coming out of this in terms have already started a trend towards improved asset tracking, but do you see any of your customers or potential customers that you think might be more aggressive coming of this due to the impact of the coronavirus?
Dean Milcos
Yeah, well there is two things, the customer based ones are the guys that have full IoT deployments and they’re able to command the control over the air instead of getting to a place travelling where you can’t travel, getting to places you can’t go. The guys that can command and control their assets via IoT is massive advantage right.
Could you picture running out and setting these containers as opposed to hitting a button with your mask and your gloves and your suit on in places that you can’t get into and massive advantages for the people that have already deployed and I think there is a big disadvantage for the guys that haven’t done that.
In terms of ORBCOMM, there is definitely a silver lining for us in that we spent the last 12 months kind of paying the price for 13 acquisitions and then getting the integration finally done and we’re on-boarding all these new customers, we’re shipping 80,000 new products in a quarter and at the same time, we’re balancing getting the integration done, new developments and new features and supporting and implementing where current customer want and trying to do that while trying to reduce cost and scaling the business put us in a very difficult position and this kind of slowdown in the last quarter we’re kind of taking a deep breath and why are we executing and really taking major strides toward getting this integration done, which is welcome that they’re planning.
I would say the second silver lining is I think you guys are getting a sense of it. We’re doing 75% of our gross profit through our service revenues. The service revenues aren’t going anywhere and you’re going into Q2 and you’re like gee, this could be worst quarter 20 years looking backward or 20 years looking forward for the entire markets and you got ORBCOMM that’s focused on hey, are we going to burn a million of cash, are we going to burn $2 million of cash or maybe we’re going to million in cash.
But we’re not blowing through $70 million in cash on the worst quarter. So the fact that our stock is traded down because people are worried about liquidity just don’t understand the model, but that being said, if you look at ORBCOMM kind of marching forward, integration behind us, 60% of our business is in service revenues. We got this capital and coming out of this recession when our competitors are going to be drastically weaker who are not sitting there with 60% service revenues and we see them cutting heads and not able to hit the ground running. As this thing progresses, I think we can we can take an advanced step a big step forward. So that would be the silver line.
Chris Quilty
Great. I’ll end my question at a silver line, you guys stay safe.
Operator
[Operator instructions] Our next question will come from Scott Searle of ROTH Capital. Please go ahead.
Scott Searle
Thanks for taking my questions and Mark, Dean and team glad to hear you guys are safe and doing well. Dean just quickly to just make sure I am properly calibrated I may have miss couple of things. AIS was $2.9 million for the quarter for product gross margins in the second quarter you’re expecting in the 27% to 28% range and OpEx should be down about $2 million sequentially, is that correct?
Dean Milcos
Yes that’s correct.
Unidentified Analyst
And then Mark you’ve made a couple comments throughout the call in some the different end markets. So I think you said oil and gas was 3%, refrigerated food and grocery 15% to 20%. Can you kind of take us through the $2.2 million subs and kind of how they break down by end markets. I know in certain cases you don’t always know but just kind of help us understand what the exposure is maybe give us an update on inthinc and Blue Tree and as well maybe some color in terms of large customers versus smaller SMB like trucking guys for example?
Marc Eisenberg
Well there’s a lot there. So let’s start breaking down our subs. 62% of our subs are in transportation, which is made up of a lot of things. It’s made up of our container business which is the reefer containers which today is probably sitting at about 80,000 subs but it’s going to be about 200,000 within a year. You’re looking at the refrigerated, which is 15% million or 20% of our entire business, which means it’s 30% or 35% of our transportation business.
But the transfer in terms of in cab units it’s Blue Tree and inthinc there is roughly 80,000 out there but that 62% also includes what we resell on the satellite side to the guys in Brazil and around the world. So that would be a portion of the remainder of that and then there’s another 200,000 dry van stuff out there whether it be JB Hunt or Hub Group or stuff like that.
The other 38% of our business that’s not transportation is heavy equipment is a big one and heavy equipment is thousand subs and 2.2 million is like 20% or 25% and then the rest is a lot of marine governments and other. I am sorry to hear this. Transportation is about 62%, heavy equipment is about 15%, marine is about 11%, oil and gas is 7% and government is 5%.
Unidentified Analyst
Great. Very helpful and then Mark I know things are certainly change into fluid environment out there, but there were some larger deals from the RFP standpoint that were percolating out on the horizon. Have they completely gone away what is the general tone tenor expectation on that front, are these things that are start to come back this year start to get decided if we have some stability in the marketplace or they have been withdrawn?
Marc Eisenberg
So I think I don’t think anything has been withdrawn. I think if you want move to an IoT world, I think if anything you’re seeing more of the benefits there but that being said it may not be the best time to allocate your capital and it may not be the best time to install and figure out how to get in touch with your employees in order to get you trained that’s the bigger issue.
But as I was saying to Chris before the silver lining is if you didn’t understand the need for IoT before you sure is healthy now. So stuff is shipping to the right. In Q2 we’re guiding to two thirds a normal hardware quarter, two thirds of a normal hardware quarter. I am hoping it’s a blip on the radar there is some U-shaped recovery. We get half of that back in Q3 and then Q4 looks like a regular quarter. That be a really good outcome and Q4 people start buying and getting out and starting new programs.
Unidentified Analyst
Mark probably premature cycles and end-of-life opportunities that are out there, is there any sort of dialogue or potential for that starting to build later this year particularly during time periods like this when assets are less active there is the opportunity to install and upgrade. So is there anything going on, on that front.
Marc Eisenberg
Oh yeah, in some cases it’s a great opportunity to swap out some of those 3G units. So incredibly busy, places like the [indiscernible] Group getting stuff installs swapping those out and our fixed asset business, we’ve got our eye set into format it’s been replaced by [indiscernible] and is approaching an end of life and we’re in the middle of replacing out 15,000 of those and that has been a big part of our hardware business.
Unidentified Analyst
Great And lastly on the balance sheet, how much do you need to really run the business and talking about silver linings, you do have cash flow, you do have a large services business and some of your competitors are potentially a little impeded as we start to recover at some point. Do you go on the offensive or are you opportunistic in terms of pursuing M&A or too early to think about those things. Thanks again and stay safe.
Marc Eisenberg
So strategically we’ve not been looking at M&A because I think the bigger issue is the I would say it’s 50% operations and 50% strategic. While we were doing this integration as I was describing before and trying to onboard these new customers and close these large opportunities literally there wasn’t enough time in the day to onboard a new acquisition and that was a struggle but on top of that we from a technology perspective we really found that we had every technology that we needed.
So when you lend it to a JB hunt or Wal-Mart and you look at their assets and you look at the technology you had after Blue Tree and inthinc you really are a good fit there right. Whatever they had, you had and you strategically completed what you have to own.
Going forward as out stock starts to kind of trade at a normal pace and a normal valuation and kind of gets healthy. if you can build up some scale and buy at multiples similar or less than yours and synergize it to a good opportunity at a point that you can onboard it would be considered that in the future we would what we consider it in the next three or six months probably not. We still have another three or six months to finish our integration and then the company is going to evolve in a much different spot.
Operator
And at this time, there are no further questions. The company thanks you for participating on the call. Hope you and your families remain healthy and safe and look forward to speaking you again when they report second quarter results. Have a good day.
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