ORBCOMM's (ORBC) CEO Marc Eisenberg on Q1 2018 Results - Earnings Call Transcript

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About: ORBCOMM Inc. (ORBC)
by: SA Transcripts

Start Time: 08:30 January 1, 0000 9:31 AM ET

ORBCOMM Inc. (NASDAQ:ORBC)

Q1 2018 Earnings Conference Call

May 03, 2018, 08:30 AM ET

Executives

Marc Eisenberg - CEO

Robert Costantini - CFO

Aly Bonilla - VP, IR

Analysts

Ric Prentiss - Raymond James

Mike Walkley - Canaccord Genuity

Mike Malouf - Craig-Hallum

David Gearhart - First Analysis

Jim Mcilree - Chardan Capital Markets

Michael Latimore - Northland Capital Markets

Scott Searle - ROTH Capital Partners

Chris Quilty - Quilty Analytics

Operator

Good morning, ladies and gentlemen, and welcome to ORBCOMM’s First 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].

A replay of this conference will be available from approximately 1.30 p.m. Eastern Time today through 1.30 p.m. Eastern Time on May 18, 2018. The web link service details for the replay can be found in today’s press release. Additionally, ORBCOMM will have an audio webcast available on its Web site at www.orbcomm.com, an archive of which will be available for two weeks.

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. My name is Aly Bonilla and I joined ORBCOMM this week as Vice President of Investor Relations. With me today is Marc Eisenberg, ORBCOMM’s Chief Executive Officer; and Robert Costantini, ORBCOMM’s Chief Financial Officer.

Before we begin, let me remind you that today’s conference call includes forward-looking statements and that actual results may differ from the expectations reflected in these statements. We encourage you to review our press release and SEC filings for a full discussion of the risks and uncertainties that pertain to these statements. ORBCOMM assumes no duty to update forward-looking statements. In addition, the financial information we will discuss includes non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures is included in our press release.

At this point, I'll turn the call over to Marc Eisenberg.

Marc Eisenberg

Thanks, Aly. Aly joins ORBCOMM with over 20 years of experience in Investor Relations and broad financial management for Fortune 500 companies, including Office Depot and ADT. He’ll serve as the primary liaison between ORBCOMM, our shareholders and the investment community and we’re happy to have him as part of the team.

While Q1 is typically a soft quarter in terms of revenues, this year it was relatively strong. We’re seeing margins on both service and hardware trending back to historical norms now that we’ve cycled out of our investments in large deployments and we expect further improvements in Q2 and throughout the rest of the year.

On this call, we’ll update you on the business including key deployments, new customers and projects as well as some organizational changes. At that point I’ll transitional the call to Robert to walk you through the Q1 financials and wrap up with Q&A. So let’s get started.

Earlier this morning, we issued a press release announcing financial results for the first quarter ended March 31, 2018. In Q1, the total revenues were 68 million, increasing 16.1 million or 31% compared to last year. Growth came from nearly every aspect of our business.

For the first time, as requested by our shareholders, we’re breaking service revenues into two categories; recurring service revenues and other service revenues. Recurring service revenues consist of subscriber-generated revenues plus AIS revenues. Other service revenues consist of installations, professional fees and licensing.

Total service revenues of 38 million grew 29% year-over-year. Recurring service revenues increased 31% year-over-year to 36.7 million and about 1.2 million sequentially over just the fourth quarter of 2017. Other service revenues were 1.3 million versus 3.8 million in Q4 2017.

Growth in high margin recurring service revenues and a corresponding reduction in other service revenues led to total service margins growing from 57.5% to 59.1% quarter-over-quarter as installations at strategic deployments wound down.

Product sales of 30 million grew 7.6 million or 34% over the same period last year. Product margins grew from 13% to 21% quarter-over-quarter as hardware sales at strategic deployments also wound down.

Clearly, our margin improvement plan is starting to take hold. As a result of this margin improvement, adjusted EBITDA grew to 10.1 million from 9.3 million in Q4 2017. Our subscriber count or subs grew in the quarter to over 100,000 net subs taking our base to 2.1 million at the end of March 2018.

Let me provide some color on the business. As I mentioned on prior calls, we’re in the process of designing cost reductions across most of our product line. We shipped our ASIC-based low cost IsatData Pro or IDP products to a greater number of customers in the first quarter and we’re on schedule with the rest of our product releases.

While these products required a significant investment over the last year, there is both a short-term and long-term rationale. In the short term, we believe hardware margins can approach 30% as these products get released.

Long term, these products will give us significant advantages in both capability and price, enhancing our competitiveness for years to come. You might be thinking we liked your margins in 2016 and we’re impressed with your recent revenue growth. Can’t we have both? The answer is yes, I believe we can.

Before I move on to the business highlights, I’d like to discuss thinking around our recent equity raise. We elected to a do a small equity raise to solidify our balance sheet and enable us to continue to pursue growth opportunities well into the future.

We’re chasing a number of key opportunities and can do so in a much stronger financial position. We renewed our shelf for a three-year term as a matter of good corporate governance but we don’t have an immediate plan to utilize the shelf for any specific funding needs. We are fully focused on managing our profitability and cash flows to meet our growth opportunities.

We’ve made changes to our organizational structure to more efficiently operate the company. While we have significant strength in engineering and sales in an effort to better manage profitability, process and support, we’ve added a Senior Vice President of Operations role in each of our two distribution groups; solutions and network channel.

We’ve also realigned product support and installations from a corporate responsibility to operate within these groups. We believe this new structure will better streamline the company resulting in 35 less positions and have more flexibility and greater accountability across the organization leading to lower general and administrative costs while adding efficiencies.

Let’s move on to our business highlights, starting with transportation. We completed the JB Hunt deployment for the retrofitted fleet at the end of Q1. They have over 86,000 assets equipped with our telematic solution. JB Hunt has improved control over their fleet operations and can realize long-term ROI benefits from better operational efficiency as well as decreased cargo theft and unauthorized use.

While we invested significantly in this project with the deployment behind us, we expect to see steady service revenues leading to improved adjusted EBITDA for several years. The JB Hunt deployment showcases our scale as well as our ability to support large telematic deployments and we’re thrilled to have them as a premier customer.

We’re also nearing the completion of our program with the U.S. Postal Service. By the end of Q1, we shipped over 34,000 systems in total. USPS does their own installations and they have installed more than 23,000 to-date. We are still on track to complete this phase of the USPS program by the end of Q2.

In Q1, many of our longstanding transportation customers continued to place renewal orders such as Walmart, CR England, Prime, Union Pacific, Carrier, Hirschbach, Erb Group, C&S Wholesale, Shaw Industries [ph], KLLM, Tropicana, COSCO Container Lines and Crawley [ph].

We’ve also closed a number of exciting new customer opportunities in transportation which now includes our Blue Tree Group such as Woolworths Limited who is a premier Australian supermarket retailer, Associated Wholesale Grocers, Colonial Freight, Nationwide Express, Danama Trucking [ph], Cooling Concepts, Little Truck Sales, Marvin Keller Trucking and Kim Transport.

As I mentioned on our last call, the ELD mandate which requires that all transportation companies electronically record hours of service by their drivers became effective on April 1st leading inthinc to shipping over 4,000 devices in Q1. Many of inthinc’s existing customers placed orders including Schlumberger, BG Services, Liberty Oilfield Services, AES Drilling Fluids, FTSI as well as the two new customers we mentioned in Q4, Keane Energy and NW Natural. inthinc also has several pilots underway in new vertical markets including Wind Energy and Emergency Medical Services.

Turning to AIS, Q1 marked another record high of 2.7 million in revenue. As a testament to the value of ORBCOMM’s AIS service, the Global Fishing Watch which is a collaboration with Oceana, Google and SkyTruth to end illegal and unregulated fishing recently published a study analyzing 22 billion ORBCOMM AIS messages spanning 2012 to 2016 to improve global fisheries management.

Summing up, our first quarter ended as we had anticipated. While not an easy task, our goal entering the year was to significantly grow revenue and margins at the same time and we’re well on a path to achieving that. We expect further margin improvements in the second quarter and margins will continue to grow once our cost reduced products start hitting the market in the third and fourth quarters.

We expect second quarter revenues to be slightly higher than Q1 even without a typical large anchor customer like the ones that drove growth in 2017. We expect to do this through our growing base business as well as many more small and midsized deals. Looking forward, we expect to close significant opportunities in the back half of the year and we’re enthusiastic about where we’re headed.

At this point, I’ll turn the call over to Robert to take you through the financials.

Robert Costantini

Thank you, Marc. Good morning, everyone. Q1 2018 was an important quarter. We finished multiple large deployments and demonstrated margin improvements of the lows in Q4 2017. This is reflected in rising margins for service and products that led to improved Q1 2018 adjusted EBITDA margin of 15% producing 10.1 million versus 12% or 9.3 million in Q4 2017. As Marc noted, we believe margins will improve throughout the rest of the year.

Q1 2018 total revenues of 68 million were comprised of service revenues of 38 million, up 29%; product sales of 30 million, up 34% from Q1 2017. Organically, compared to Q1 2017, service revenues and product sales were up 8% and 10%, respectively. On a sequential basis compared to Q4 2017, recurring service revenues in Q1 2018 increased 1.2 million or 3.3% compared to 236.7 million compared to 35.5 million in Q4 2017.

Other service revenues were 1.3 million in Q1 2018 versus 3.8 million last year, down 2.5 million due to a sequential decline in installations. Fewer installations are the first step to margin improvements this year.

Service contribution margins improved to 59.1% in the quarter from a low of 57.5% in Q4 2017. Also impacting service margins are the two acquisitions completed last year that are operating lower margin platforms at their current scale. Excluding the effect of these items, service revenue contribution margins are almost 66% in Q1 which supports our expectation that service margins will further improve with increased scale.

Summing up the story on service revenues, high margin recurring service revenues are trending higher. Other service revenues that have been dominated by installations were down sharply in Q1 and expected to level off at the rest of the year leading to the rise in service margins that we expect to continue.

Product contribution margins in Q1 2018 rose to 21.6% from the 13% recorded in Q4 2017. We are expecting margins to get back to the mid-20% range in Q2. And beyond that over the next few quarters we believe they will continue to grow as new and lower cost products are introduced in the back half of the year.

Operating expenses were 33.1 million, up last year by 8.1 million; these costs which have been higher mostly to operate the two new acquisitions. Interest expense for Q1 2018 was 5.2 million versus 2.4 million in the prior year including the amortization of debt fees reflecting the new bond offering in Q2 of 2017.

In the first quarter of 2018, the company had a net loss of 10.1 million compared to a net loss of 3.3 million for the same period last year. The expanded loss this year in Q1 was due to higher operating expenses from the acquisitions and higher interest expense.

As Marc mentioned, the company is implementing organizational changes that we expect will lead to improvements in operating efficiencies. This should be reflected in lower operating expenses, benefits from increasing scale and improved working capital utilization from the latter half of the year, the goal being to improve the operating leverage in our business.

Looking at the balance sheet and cash flows. Cash totaled approximately 28.2 million at March 31, 2018 compared to 34.8 million at December 31, 2017 decreasing 6.6 million. In Q1, the net cash used in operations was 1.2 million. Also in Q1 2018, capital expenditures of 5.6 million included 1.4 million of sustaining CapEx and approximately 4.2 million of investment CapEx for new products and services. Our total debt outstanding at March 31 is 246.7 million net of debt issuance costs.

On April 6, 2018, the company sold 3.45 million shares of common stock raising net proceeds of 28.3 million after expenses. On a pro forma basis, at March 31, 2018, common stock outstanding are 78.5 million shares.

Now moving on to Q2 2018 guidance. We expect total revenues to be between 68 million and 73 million. Keep in mind we don’t expect a significant large deployment in the quarter, instead we expect revenues to come from a larger base business as well as multiple new small and midsized deals.

We expect service revenues to be over 39 million, mostly driven by increases in high margin recurring service revenues. We expect product sales to be between 29 million and 34 million. We also expect adjusted EBITDA to be between 12 million and 13.5 million in the quarter reflecting continued improvements in adjusted EBITDA margins. Capital expenditures should be consistent with Q1 at about 5 million to 6 million.

For the full year 2018, we are reiterating our guidance of 290 million to 310 million for total revenues driven by a larger base business and aided by multiple large opportunities expected to be deploying in the latter half of the year. We are also maintaining our adjusted EBITDA guidance of 55 million to 60 million and net sub adds to be between 350,000 and 400,000 for the year, of which we added 100,000 subs in Q1, a great start.

So wrapping up for the first quarter; was a solid start to 2018 with great opportunities to grow recurring service revenues along with margin improvements for services, products and adjusted EBITDA that we expect will continue to rise throughout the year.

This now concludes our remarks for this call and we're happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. We’ll go first to Ric Prentiss, Raymond James.

Ric Prentiss

Hi. Good morning, guys.

Marc Eisenberg

Good morning.

Ric Prentiss

First, a housekeeping question. Thanks very much for breaking out the service revenue between the recurring and the one-timers. Do you happen to have 2Q and 3Q handy so we can kind of finish out the model splitting out the recurring versus other, or can you shoot it to us later?

Robert Costantini

Yes, I can give you a little bit of guidance. I think the increase we had in this quarter is going to look like Q2, Q3 and Q4 in terms of the recurring, like a little over 1 million, maybe 1 million and change. The other service revenues are relatively flat. They’re going to range between let’s say 1 million and 2 million a quarter. So if you model the growth mostly in the high margin recurring service revenues, I think that’s the way it should look.

Ric Prentiss

Great. And do you have the actuals from 2Q and 3Q '17 broken out as well?

Robert Costantini

That I don’t. So I’ll have to get back to you on that.

Ric Prentiss

That would be great. I appreciate the color. Obviously good to see the margin story playing out, the expansion. You called out SG&A work you’re doing there. How should we think about the run rate of that 17.5 million SG&A that we saw this quarter and how it improves over time?

Robert Costantini

Most of the improvement you’re going to see in that is not – it won’t be in 2Q but it will be starting in Q3, so it will be probably rising just a bit in Q2 and then it will be moderating back to that level in Q3 and just slightly lower in Q4. So it’s not going to move a whole lot but that’s roughly the trending that’s going to happen.

Marc Eisenberg

Sometimes when you make those changes, the first quarter you get the severance.

Ric Prentiss

Sure and then you got the new bodies. It’s not as efficient yet but it’s putting you on the path to get there.

Robert Costantini

Yes.

Ric Prentiss

Makes sense. And last question for me is obviously you’ve made a lot of sales, you’ve made the acquisitions. Help us understand about what other needs you might have in your kitbag when you’re making sales, but also how the cross-selling is going because you kind of made the point to bring these guys in-house should help your cross-selling efforts on both their side and your side.

Marc Eisenberg

I think we kind of hinted at it in our earnings release. The Blue Tree sales are – they’re doing fine but what kind of blows us away is when you take this relatively small company with a really cool product and you kind of merge into our distribution force that knows everyone in transportation, all of the valuations and pilots you start running. And you’re looking at these pilots and if they’re successful, there’s more units available in the latter half of the year. And I’m not saying we’re going to close everyone or get them all installed in time. But you’re looking at more units out there than the company that has at current. That’s how explosive it can be. And remember, those are like 3x refer [ph] ARPUs and 9x dry [ph] ARPUs. So we’re super excited about the back half of the year in terms of the larger deals. And this cost savings initiative on the product is helping us and hurting us, right. So where it’s helping us is you’re going to see margins rise. You’re already seeing it, right. And they’re going to continue to rise but some of these opportunities in the back half of the year moved to the back half of the year, because they’re waiting on these products; so kind of helping and hurting. But there’s these great stories all over the company where the people in Europe closed their first container deal and the people in South Africa closed a really super 1,000 of units which in South Africa it’s a big opportunity of our new GT1100 which is the GT1110 which is the SkyWave version of the GT1100. And we’re just getting bits of this success. Gee, we’re not struggling currently with revenues. There’s opportunities all over the place. And this quarter there was an awful lot of focus around our organization as to really kind of ramp up execution.

Ric Prentiss

Great. It sounds like some good opportunities with the cross-selling; looking forward to that.

Operator

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

Mike Walkley

Great. Thanks.

Marc Eisenberg

Hi, Mike.

Mike Walkley

Hi, guys. Great to see the margins improving in both divisions. As we think about just the recurring revenue ARPU and thanks for breaking out the other ARPU, we’re doing a lot of installations late in the quarter impacting ARPU so we should see maybe a list to your recurring revenue ARPU sequentially and throughout year. And also just given the traction with inthinc and Blue Tree that are higher margins, how do you see those impacting the model both on the ARPU side? And then as we think about these two acquisitions ramping in scale, when do you see them getting closer to corporate margins in terms as a margin impact?

Marc Eisenberg

So to be clear, the installations – the timing of the installations can affect our ARPU, but the installation revenues themselves are not in ARPU. So let’s do the math here, right. You’ve raised recurring revenue about 1.2 million and you did it based predominately on last year’s – I’m sorry, last quarter’s sub adds which is roughly 90,000. So if they were put on in a straight line, you’d have roughly $4.50 ARPUs on the net subs that you added within the quarter which would get you to that 1.2 million on the 90,000 subs. That $4.50 – I don’t know, there’s some churn in there. The gross numbers were obviously much, much larger. So it’s not a pure translation but it’s close, it’s close. So as you kind of look at that math and you say, all of these container stuff that we did with Hunt is lower, all of the inthinc and Blue Tree stuff is higher and it averaged out to $4.50, the math is not off there. When you look at service revenues and we’re hoping everyone sees this. Recurring service revenues did just what they’re supposed to, just what they’re supposed to as you kind of model that out. And we were able to ramp down the ugly stuff a lot sooner. So you look at total service revenues and you’re scratching you head. But as you break it down, it’s like cholesterol. Your good cholesterol went up and your bad cholesterol went down. And then the margins kind of shoot up just like we were hoping to. This is great news, right, because you’re flying into Q2. You’ve gotten rid of all of your ugly hardware. April is shaping up every bit what we thought it would be. We were looking at it yesterday. And I think other is going to flatten out or maybe just grow a little bit in Q2. But it’s not installations that’s growing. It’s the other two things that are in there. It’s the NRE and the licensing which again is high margin. So I think the model is just what we told you it is.

Mike Walkley

Great. Thank you. And then I guess just thinking about the ramp you had with JB Hunt. You’ve ramped up big volumes with your contract manufacturers. Is this helping kind of your scale going forward and the improving margins at this new run rate? And Q2 sounds like there’s a broad base of opportunities. As you go to Q3 and Q4 with some of these larger opportunities, can you kind of walk us through your thought process of higher margins giving you bigger scale, maybe offset by some volume price discounts?

Marc Eisenberg

Sure. So I guess other than the margins, the second thing that I would point out in Q2 and I don’t know in our initial moments if this thing is just like screaming at you. But we said a couple of times that it is not like that big massive JB Hunt, U.S. Postal Service anchor customer in Q2 and we think it’s going up. Because as those names that I keep reading off every quarter of who we’re shipping product to that take their reorders, every quarter it gets bigger because these customers that we keep adding, you’ve got more repeat business. And the base business has grown so large that we can do $70 million plus quarters without an anchor customer, and when you do that on smaller opportunities even more opportunity with margins. So, wow, are we excited to tell you that with 68 million in Q1 minus 4 million or 5 million of those large opportunities and you don’t have this big anchor customer in Q2, how are you going to go from 63 to 70? That is a big number. And the answer is we’re going to do it and we’re going to do it based on numbers of opportunities instead of really depending on those units. Now I’m actually going to answer your question. So your question was, does this stuff help scale? And of course it helps scale. And even the products that we’re building from a scale perspective, they’re still using a number of the same components as the older products. So the new cost reduced products, they’re still using our GPS chipsets and our GSM or our 4G modules and everything else and scale is awesome and it’s definitely going to repeat. But unfortunately you can’t see what I’m seeing in those two large opportunities that we’re driving a lot of the business in the last couple of quarters. I think we’re looking at 8 or 9 or 10 of them. I can’t tell you the day they close or when they start deploying, but it kinds of looks like the back half of the year and that’s why they’re still such a wide range for the year. But I think there’s an awful lot more coming. And with the base business growing and those opportunities that are going to add to that business, that’s led us to reiterating the guidance for this year.

Mike Walkley

Great. Thanks. Last question for me and I’ll pass it on. Just given the skill set and learning curve from the JB Hunt installation, is this now a competitive advantage for ORBCOMM for winning deals? It sounds like based on your other revenue guidance flat for the year, you’re not expecting big installations, but is there something that’s in your toolkit now that can give you a competitive advantage and maybe can walk it through if that’s the case, how you cannot have negative margins the next time you do one of these type installations? Thank you.

Marc Eisenberg

Yes, well, the negative margins – okay, so when you do something as large as Hunt, there’s no way you have enough people. So the people that were working on that deal were near a 100 and ORBCOMM has got about 10 or 12 installers. So your installers are spread out all over managing sites. They’re not necessarily doing installs. So they’re out there, they’re training, they’re doing Q&A checks, they’re making sure that the units get turned on in a switch when they’re supposed to. And it leads to a really good operation. I think going forward what we’ve been doing is still managing those but taking the deal with the vendor and instead of being in the middle, letting these folks negotiate with the vendor and then just hiring us to do the oversight. So don’t flow all the dollars through ORBCOMM but still have ORBCOMM responsible that the work gets done right. And just kind of moving it off our financials and that seems to be working for us.

Mike Walkley

Great. Thank you.

Operator

We’ll go to Mike Malouf, Craig-Hallum Capital Group.

Mike Malouf

Great. Thanks for taking my questions. I’m wondering if we could just get a little bit more color on inthinc. Where are we with regards to subscribers there? And can you give us a sense of what kind of CapEx needs surrounding that what seems to be an accelerated rollout with regards to the ELB market?

Marc Eisenberg

So inthinc has – when we bought inthinc, they had roughly 35,000 subscribers and between activations and churn, you’re sitting at roughly 50,000 subscribers. So the company in its first nine months has gotten roughly 50% bigger. So that’s going well. But your question kind of resonates with me in terms of it is a leasing model or what they call a Chaz [ph] model where you do lay out capital upfront and then you get it back over time. ARPUs at inthinc are – depending on satellite or cellular or whatever, but they could be between $500 and $1,000 that you’re laying out the capital upfront and then you’re getting it back between $30 and $60 a month. From a return on investment, it’s a no-brainer. It’s a great opportunity from a working capital and laying out cash perspective, it could be a little bit painful and part of the reason that we did this equity raise is roughly $15 million of our cash was put into some of these deployments that it’s coming back and it’s coming back quick. And for the future, some of the big guys, we still are doing it – obviously there’s contracts out there. Schlumberger is a massive deal. In Schlumberger, we have to deploy 7,000 of these and we’ve been funding that and it’s somewhere halfway through that deployment. But in Q1 roughly – I think it was 25% of our deployments were either done where the customer finances their own hardware. Basically they’re buying it upfront or we used a third party bank to better manage our working capital in the short term within that group.

Mike Malouf

Okay, great. And then as you look on the product revenues, it’s nice to see the return to better margins in the first quarter. But your comments that perhaps you can get to the 30% level. How long do you think that will take just sort of given the current flexibility in ramp?

Marc Eisenberg

The numbers are – they jump off the page at you for the new products. And the reason we’re kind of hedging between Q3 and Q4 is we’re trying to time the day the hit the market, the day they get piloted and the day they get deployed in larger numbers. So I think they’re going to be rolling out in full force in Q4. We’re not backing off Q2. Q2, I think we’re going to be in the mid-20s. We’re looking at where April is trending. It looks like mid-20s and super healthy. If we weren’t selling off some of the older inventory before the new stuff hits, it could potentially be mid-to-high 20s. But we are focused on selling off the old product as well. And then once the inventory gets clean and moved over, I think you’re going to – maybe a 1.5 a quarter, you’re going to continue rising from Q3, Q4, Q1 until we get close to the 30 points.

Mike Malouf

That’s great. Thanks for that color. And then just a quick question on the satellites. Can you give us an update on how those are doing and any change with regards to the operational upkeep of those?

Marc Eisenberg

All good news there. No news is good news. And there are operating as you would expect. There has been absolutely no change to the health of the satellites. In terms of how we operate them and the care that we put in those satellites, gee, we could spend a day on that. But everything’s working as it should and there’s absolutely no bad news to convey to you there.

Mike Malouf

Great. Thanks a lot. I appreciate it.

Operator

We’ll go next to David Gearhart, First Analysis.

David Gearhart

Hi. Good morning. Thanks for taking my questions. Just following up on the satellite question before then, previously you had mentioned contemplating launching four to six satellites. Just wondering where we are in that process? Are you still evaluating that potential need? Any color there would be helpful.

Marc Eisenberg

So the answer is we’re always evaluating it and we look at it every day and we’re looking at shared payloads and anything we can. But the clear answer is there’s not a need for them right now. If we can figure out some sort of model where we kind of share costs and do something new or unique or cover some new grounds, then we’ll consider it. But there’s nothing imminent that we’re looking at. And I think the satellites that are up there right now are working just fine. There is – gee, they’re sitting at like single digit capacity. They’re not flexing a muscle up there. They’re doing just fine. They’re spaced out real well. And the changes that these guys made to keep these things in service are taking effect and there’s no have to done right there. There’s also all kinds of little experiments that we’re working on in terms of AIS satellites and picking up different types of signals that we look like, but there’s nothing imminent there either. So I wouldn’t model anything if I were you, David.

David Gearhart

Okay. And then usually you give us the devices shipped in the quarter. Just wondering if you could give us that number for the aggregate devices shipped for Q1?

Marc Eisenberg

Yes. So we shipped in Q1 about 70,000 devices in the quarter, just under.

David Gearhart

Okay.

Marc Eisenberg

I’m sorry, fourth quarter.

David Gearhart

Lastly for me, I just wanted to know if you could give us an update on JLG Oshkosh. I think last quarter you said you did 10,000 to 20,000 for 2017 in aggregate and I think your long-term plan or hope is to get the 40,000 a year. Just wondering how Q1 shaped out and looked penetrating the rest of Oshkosh’s business?

Marc Eisenberg

Yes, so in terms of penetrating Oshkosh’s business, we’re working with the snow group, we’re working with the fire group. And there is handfuls of those out there. And we are shipping thousands of units every quarter to JLG. So I think we’re doing really good penetrating their new builds in their factory. And then the retrofits in the fields, they’re really lumpy. You’ve got a – you sell thousands of units in one group – one of these rental companies. Their business is very much unlike the rest of our heavy equipment where they sell through rental houses that go on rent and on a daily basis as opposed to selling one backhoe excavator at a time. I think we’ve got some opportunity there but I don’t want to jump in front of them with their news.

David Gearhart

Okay, sounds good. And that’s it for me.

Operator

We’ll go next to Jim Mcilree with Chardan Capital.

Jim Mcilree

Thanks and good morning.

Marc Eisenberg

Good morning.

Jim Mcilree

It seems like inventory and receivables levels were a little bit elevated. Can you just talk about that a little?

Robert Costantini

Yes, that’s reflected in where we came off of Q4 in both receivables and then part of that issue is what Marc described in terms of the Chaz model where you’re putting a higher receivable number on the balance sheet getting it back for a longer period of time. The other component there would just be inventory, finished goods that were built in anticipation of future orders. So we looked at the pipeline and tried to get ready for what’s coming.

Marc Eisenberg

We’re in the middle of two SKUs. So you’ve got last builds of a bunch of SKUs where you’ve got a few quarters of inventory to get you to the new products. So that tends to be high. And you watch, we’re going to trim it down quarter-by-quarter as the new stuff comes in and the old stuff starts to exit.

Jim Mcilree

Okay, great. That’s helpful. I think Ric asked a question early in the call about installed revenues and I didn’t quite get the answer. Can you help me understand again? So, Marc, I think in response you were saying that going forward you think installed revenues are kind of like 1 million to 1.5 million a quarter or were you talking historically that’s what they’ve been?

Marc Eisenberg

Okay, let’s start with what’s in other service because I don’t want you to think it’s 100% installed.

Robert Costantini

Yes, that’s what was what was in other installations.

Marc Eisenberg

So to be clear, in other what was like a 1.5 million this quarter. And of that 1.5 million, roughly 600,000 or 700,000 of it is what’s left of installs. Whereas in Q4 when we did 3.8 million, of that 3.8 million maybe 2 million was installs. So installs went down from like 2 million down to 600,000 or 700,000. So that is the overwhelming decrease or if not the entire decrease of what happened there. And I just get the sense that you’ve got these customers that are paying for ORBCOMM to manage these installs which we’re still willing to do and we think it’s better for our customers and better long term for ORBCOMM and better for our warranties because it gets done and done right the first time and that’s why we got into that business in the first case. But in some cases now we’re just pushing the end users to contract directly with the service that is doing the actual installs and still putting our management insight on the scene. So there’s still revenues there but as opposed to just taking something in one pocket and putting it in the other at zero margins, there’s just no need to do that. Does that make sense?

Jim Mcilree

Yes, it does. Thanks. And Robert you might have said this, but after you do the reductions in force, what is the – what are the operating expenses level at?

Robert Costantini

I’m anticipating right now depending on the timing of those things taking hold to, if you want to say level out in Q4, you’re probably looking at a number under the 17.5 million. But I wouldn’t call 16.5 to 17 by Q4. But again, there’s going to be a little bit of work between now and then. So I was anticipating that they’re going to increase in Q2. Start to come back down, let’s say, Q1 levels in Q3 and then those improvements start to take hold. A lot of what we’re doing is not going to be – was in our plan but was not going to be reflected just in cost savings exercise as opposed to more efficiently running the company.

Marc Eisenberg

Yes. When we do something like this, it’s starts with what products are we going to build, what are we going to focus on, where are we going to key our efforts. And then one you figure out the stuff that we’re not focused on, then you figure out where your support is. But I think from a payroll perspective, imagine something like 3.5 million is coming off, imagine 1 million is coming on and you’re going to net 2.2 million a year plus benefits --

Robert Costantini

Yes, over a year.

Jim Mcilree

Right, got it. Okay. And then lastly on the hardware side, I just want to make sure I’m understanding the vector here. It sounds like hardware revenue is kind of in this 30 million range Q2, maybe Q3 to how quickly you can get the new products in there? And then Q4 you get a – there’s definitely a pop in Q4 and maybe you get a little bit of a pop in Q3. Is that kind of how it’s reasonable to think the year plays out on hardware?

Marc Eisenberg

Yes. So we’re looking at deployment schedules for these larger deals and it’s like one of these crazy things between Q3 and Q4. It could be one of these things where it depends if it ships September 27th or it ships or October 4th. But between those two quarters, we’re relatively confident. Make it 55-45 between Q4 being higher than Q3. That way it’s easier to move it up than to move it backwards, right.

Jim Mcilree

Yes, and I think we’ve seen this move before, so I know what you’re saying. But it also sounds like you have enough of the – I don’t use this in a [indiscernible] of these small and midsized orders that you can do these, the 30 million quarterly.

Marc Eisenberg

Yes, remember we used to talk and we used to say our base business was $15 million or $16 million of hardware and then we needed the big opportunities to get to 20 million or 25 million. Well, the good news is the base business kinds of looks more like between 25 million and 30 million. And then the bigger stuff kind of gets you well north of that. And every time you sign a new customer, you retrofit their fleet but then you get all the new builds and then you get this huge base of hardware business and the customers that we ship to get bigger every quarter. And there’s a little bit of a recurring nature to our hardware business too.

Jim Mcilree

Right, understood. All right. Thanks a lot, guys. I really appreciate it. And good luck with everything.

Robert Costantini

Thanks, Jim.

Operator

Our next question is from Mike Latimore, Northland Capital Markets.

Michael Latimore

Thanks. Just on the couple of these larger deals, so I guess have you effectively won some of these deals already such that when the new products come out, you can start deploying right away or is it that you still need to win these deals kind of once the new products are out, then you would have a little bit longer time to deploy?

Marc Eisenberg

It’s all over the board. There’s things in all sort of categories. There’s ones that we believe we won but you got to work through the end. There’s others that we’re trying to figure out the best way to deploy. There is opportunities out there where they’re like, gee, I like 98% of what you do but gee, if you could just show me features X and Y and get me working on that, then gee I’d really be sold. So it’s all over the place. But it’s exciting because there’s a lot of people running around the building doing some really neat stuff.

Michael Latimore

Got it. Any other bigger opportunities coming from inthinc or Blue Tree?

Marc Eisenberg

Yes. Certainly – inthinc is kind of steady, right. inthinc grows there between 3,000 and 5,000 a quarter. In their business, those 3,000 or 4,000 compared from an ARPU perspective compared to the guys who sell on containers or trailers, 3,000 or 4,000 looks like 30,000 or 40,000. So inthinc is in really good shape. But Blue Tree is – this in cap [ph] stuff, it’s got a six-month lead time unlike the eight weeks or nine weeks in our cargo business. So there is integrations in all kinds of stuff that you do, because you’re interfacing with a human as opposed to interfacing with a metal box. So, boy, am I excited about some of those deployments. They’re pretty cool.

Michael Latimore

And then just last on ARPU service, ARPU trends. Over the next year or so just generally should service ARPU trend up, trend down or be stable?

Marc Eisenberg

They probably kind of stay stable, right. I would keep it where you have it. You’re asking me to hedge. Do I sell more of the product A or product B? And there’s an awful lot in the pipeline for both. So go model the new subs at $6. In Q1 when you do an awful lot of cargo like we did with JB Hunt and U.S. Postal Service and when you’ve got 10 of those for every trailer or truck, then ARPUs can go on at $4.50 or so like they did in the first quarter. And in Q2 when maybe those things slow down and the other stuff pick up, then it can go up. But I think maybe a safe bet would be to keep it where it is.

Michael Latimore

Thank you.

Operator

[Operator Instructions]. We’ll go next to Scott Searle, ROTH Capital.

Scott Searle

Hi. Good morning. Just a couple of cleanup questions. Marc, to follow up on the gross margins for hardware. So starting in the second quarter, mid-20s and then it sounds like as you work through some of the existing inventory and older product mix of 350 basis points a quarter improvement. So sometime in the first half of [Technical Difficulty]

Marc Eisenberg

You’re breaking up. But let me answer the question I think you asked. So if you think we’re in the mid-20s and then you add your 1.5 each quarter, then you’d end the quarter in the high-20s or nearing 30%. That’s exactly what we’ve guided to today.

Scott Searle

Okay. And just to follow up. It sounds like I think when you reported last quarter results, you talked about a 100 deals were still in the pipeline. It sounds like you’ve won quite a few of those since then. So do you have visibility and have actually won that 350,000 sub number for 2018 and right now you’re just dealing with what the deployment schedule would look like?

Marc Eisenberg

Yes. Gee, you’re asking me to tie numbers together not the way I think of them. But listen, we came out of the shoot with 100,000 subs and a plan of 350 to 400. So let’s do the math. My goal for three quarters is 250 to 300. I’m sitting here looking at where April is and I don’t think Q2 is going to fall much short of Q1. I don’t in terms of subs. So I think we’re on a great path to hitting those numbers. If you’re asking if I’ve purchased orders for the other 200,000, I don’t. But if you’re asking me if the stuff that we see that we’re working on plus the high probability stuff gets me there or even easily gets me there, it does.

Scott Searle

Okay, great. And just last thing to clarify on Jim’s question. You were indicating that possibly hardware could be a higher number in third quarter versus four quarter based on potential deployment schedules but not clear at the current time. Is that correct?

Marc Eisenberg

I think what we’re trying to tell him to do is model Q3 just a little lower because it’s easier to move Q4 forward than to move Q3 backward.

Scott Searle

Got you. Okay. Thanks, guys. Nice job.

Robert Costantini

Thanks, Scott.

Marc Eisenberg

Thanks.

Operator

We’ll go to Chris Quilty, Quilty Analytics.

Chris Quilty

Marc, I wanted to follow up on Blue Tree. You had indicated before that you expect a large portion of your customers move over to that platform. Is that something you’re actively promoting and also tracking in terms of the conversion? And I guess for Robert, how does that translate either into ARPU or service revenues as that transition happens?

Marc Eisenberg

So let’s start with the customer part and then I’ll turn it over to Robert. If you read our earnings release, 20 people are currently – 20 of our customers are already piloting or in actual deployment for Blue Tree products with another 10 to be added by the end of Q2. Actions speak louder than words. So we’re pretty comfortable that that’s coming to fruition.

Robert Costantini

And on the ARPU side, they have the same sort of feel and heft like an inthinc sub, so they’re much higher than the average. That is just then a question of timing and size and how much can it move the base. So those are definitely uplifting elements for ARPU.

Chris Quilty

And how long would it take a customer to transition their software platform from a legacy platform to a Blue Tree? Is that like a flip of switch or is it a software deployment, is it training, is it --?

Marc Eisenberg

Sure, so definitely training. The driver is going from the equivalent, not actually – like an iOS to like an Android. It’s significant. There’s stuff that you got to learn there. But you get through that. So what happens is the companies with 70 or 80, you can move relatively quickly. The 500s to the 1,000s take four months from beginning to end. And then we’re looking at ones in the multiple thousands and those companies typically you go through a relatively sophisticated RFP and then you get down selected and then you fill – you fields 100 units. And then you start integrating to their dispatch or yard systems and then you fully deploy. But this is what should get you excited, Chris. 2019, none of these guys are going to be fielding their 3G units and these guys in 2018, 2019 need to make their choices in filter and there’s the motivation to get that changed on because once you change out all that hardware, you kind of live with it for a while. And most of the units out there believe it or not are not on LTE, they are on 3G. So the motivations there, the products there, the trust in ORBCOMM from our customers are there and we’re in an all-out sprint to get this done.

Chris Quilty

Okay. And a clarification, I think you mentioned the volumes were increasing on your IDP dual mode product but you’re also developing a dual mode ASIC. And where is that in terms of the development and can you talk about maybe what the impact of that product – what the impact is when that is productized both in terms of the ASP or your margins?

Marc Eisenberg

Sure. Just to be clear, I don’t think I said IDP dual mode which is the first ASIC product. And when you mean dual mode, do you mean ORBCOMM and SkyWave or do you mean cellular and SkyWave?

Chris Quilty

The ORBCOMM SkyWave.

Marc Eisenberg

Okay, all right. So the ones that we’re shipping now are SkyWave only. And then in third or fourth quarter, it will transition to the dual mode. But you’re taking 600 components down to roughly one chip and the cost that you’re taking out of that is maybe 40% of the cost of the entire modem.

Chris Quilty

Okay. And how big of an impact does that have across the product line in terms of --?

Marc Eisenberg

Of the SkyWave product line?

Chris Quilty

Yes.

Marc Eisenberg

Long term, I think it’s a huge impact. Ever since I started when modems were $1,000 and I can only sell on locomotives because a $20 million locomotive doesn’t mind a super expensive telematic box. And then when I got down to a few hundred, I’m on trucks. And when I got down to less than that, I got on heavy equipment. And then until I got a $70 modem, I couldn’t be on a container. So hitting price points and scale is the very basis of our belief and why we’ve been successful deploying into these markets. So in terms of improving that, another order of magnitude, gee, that’s important.

Robert Costantini

It gives you benefits and efficiency of manufacturing in downstream component supply and just has a lot of other facets to it.

Chris Quilty

And --

Marc Eisenberg

And I think from an efficiency standpoint – I’m sorry, Chris. From an efficiency standpoint, the economy is a little bit hot right now, which is leading people to the long lead items on our products. For some of them, they’ve gone out six months. So to take 600 components and hold one chip instead of all these components, gee, that’s helpful from a working capital standpoint as well.

Chris Quilty

And presumably that new chipset will be forward compatible with whatever new features and Morris Sat [ph] will be bringing to market with the ASIC satellites?

Marc Eisenberg

Yes. So understand we are not selling in Morris Sat service. We’re selling in ORBCOMM service that uses the Morris Sat satellites. So they give us some of their capacity and a little bit of their spectrum. And then we’re running our service. But if you’re asking me if we’re going to be compatible with our own service, we will.

Chris Quilty

Got you. And final question, just haven’t talked about in a while, any update on CIMC?

Marc Eisenberg

Yes. CIMC is doing fine. We’re shipping them products this quarter and they’re making an awful lot of headway in our license in China. So I think there’s extremely positive news there. We’ve partnered with them with a number of our devices where they’re building in ORBCOMM products at our factory, and that’s a pretty strong relationship.

Chris Quilty

Good. We’ll wait for more news. Thanks.

Marc Eisenberg

Great.

Robert Costantini

Thanks, Chris.

Operator

Mr. Eisenberg, there are no further questions at this time. I will turn the floor back to you for any closing remarks.

Marc Eisenberg

Great. Thank you for your questions and for participating on our call. We look forward to speaking to you again when we report our Q2 2018 results in August.