ORBCOMM (ORBC) Q2 2019 Earnings Call Transcript

ORBC earnings call for the period ending June 30, 2019.

Motley Fool Transcribing
Motley Fool Transcribing
Aug 1, 2019 at 4:24AM
Technology and Telecom
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ORBCOMM (NASDAQ:ORBC)
Q2 2019 Earnings Call
Jul 31, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, ladies and gentlemen, and welcome to ORBCOMM's second-quarter 2019 results conference call. [Operator instructions] Please note this event is being recorded and a replay of this conference call will be available from approximately 11:30 a.m. Eastern Time today through Aug 14, 2019. The replay service details can be found in today's press release.

Additionally, ORBCOMM will have a webcast available in the investors 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 -- Vice President of Investor Relations

Good morning and thank you for joining us. Today, I'm here with Marc Eisenberg, ORBCOMM's chief executive officer and Dean Milcos, ORBCOMM's chief financial officer. On today's call, Marc will provide some highlights on the quarter and give an update on the business. Dean will then review the company's quarterly financial results and outlook for the remainder of the year.

Following our prepared remarks, we will open the line for your questions. Before we begin, let me remind you that today's conference call includes forward-looking statements and that actual results may differ from the expectations reflected in these statements. We encourage you to review our press release and SEC filings for a full discussion of the risks and uncertainties that pertain to these statements. ORBCOMM assumes no duty to update forward-looking statements.

Furthermore, the financial information we will discuss includes non-GAAP financial measures, a reconciliation of these non-GAAP measures to GAAP measures is included in our press release. At this point, I'll turn the call over to Marc Eisenberg.

Marc Eisenberg -- Chief Executive Officer

Thanks, Aly, and good morning, everyone. Earlier this morning, we issued a press release announcing our financial results for the second quarter ending June 30, 2019. While revenues were within range, adjusted EBITDA margin came in slightly lower than we anticipated by just under 0.5 point. While it would seem straightforward, there were a lot of varying trends.

Let's start with the revenue. Total revenue for the quarter was $67.1 million, down $3.7 million from last year, most of the decline continues to be J.B. Hunt. Even though we completed our portion of their installation process in Q1 last year, we continue to ship large quantities of product into the second and third quarters of 2018.

Excluding the hardware revenue impact of the $2.9 million from J.B. Hunt, total revenues were down $800,000, comprised entirely of product sales. We were pleased with the new customer engagements we made during Q2 and thus far in Q3, having closed approximately 15 in-cab opportunities with fleets ranging in size from 50 to 500. A small portion of these devices were delivered in the quarter with the majority to ship in the near future.

In addition to delivering a record number of in-cab products, we shipped the highest quarterly number of our IsatData Pro or IDP satellite products. This was, however, offset by recent industry trends affecting our base business in the transportation cargo markets. With the number of orders OEMs are receiving for both dry and reefer trailers in Q2 were at their lowest levels in several years. To give you a better idea, the industrywide trailer shipments from OEMs to transportation companies in May and June, were reported to be down over 50%.

While the comparisons are off a record year in 2018, 50% is a significant number as truckers are experiencing softer than anticipated freight rates. As a result, when many of our base customers in the transportation business push out their trailer or reefer builds, the corresponding IoT deployments get pushed as well. On a positive note, despite revenues in our US transportation business being a few million dollars lower than anticipated, our international business in Q2 exceeded our expectations, bringing us back within our revenue range. With many industry analysts expecting demand for new trailer orders to improve over time, our current thought is that this is a short to medium-term correction, as they work through inventory as opposed to a longer term trend.

We continue to anticipate a large step up in revenues in Q3, as the momentum continues in our international business and we kick off new deployments that I'll talk about in a few moments less any continued shortfall from the transportation trends. During these lower sales -- I'm sorry, despite the lower sales volume in Q2, the company achieved adjusted EBITDA of $14.2 million, an increase of over $1 million or up 9% compared to last year. Our continued focus on managing costs and reducing expenses across the company contributed to an adjusted EBITDA margin of 21.1% in the quarter, just a little bit lower than our expectations, entirely due to product margin. Looking at cash flow, the company generated about $2 million in operating cash flow in the quarter, an increase of $13 million compared to last year.

Keep in mind, the second quarter in both years included a $10 million semiannual interest payment on our debt. We continue to focus on improving our liquidity position and our performance demonstrates our commitment to sustainable cash flow generation for the company. Let's move on to our business highlights starting with our in-cab programs, where we're experiencing significant momentum. Our Pro-400 Fleet Management Solution has been independently verified by third-party authority to be fully compliant with the ELD mandate in advance of the December 2019 deadline.

The mandate requires carriers to replace all non-compliant recording devices with ELD devices, creating a safer driving environment and making it easier and faster to track, manage and share our service records. Our Pro-400 is part of an elite group of fleet management solutions in the industry to receive third-party ELD certification, which requires passing 314 technical points of thorough unbiased testing. This is a unique differentiator for ORBCOMM, which sets us above other providers, who are self-certified and ensures our customers are deploying a compliant solution at the highest level of performance and safety. In addition, we're in the process of certifying our solution with Canada's ELD standards, which were released last month and expect to be in place in 2021.

In Q2, we delivered about 1,000 in-cab units to a large global mining company to improve driver safety and vehicle management at their mining sites. We signed a teaming agreement with McNeil Insurance, a leading provider in specialized insurance services for ambulances and first responder vehicle operators to provide enhanced analytics and report for the driver behavior of their clients. McNeil's clients will be encouraged to purchase fleet safety solutions in return for better insurance rates, enhancing the market opportunity. Overall, between our safety and tracking solutions, we delivered over 3,500 in-cab devices in Q2 and expect to ramp to over 4,500 in Q3, which over time should lead to stronger service revenue growth as they get installed.

While our base cargo business struggled in Q2 due to slower trailer deliveries, we see momentum in acquiring new customers, who are continuing to choose ORBCOMM for our ability to deliver solutions for multiple asset classes utilizing a single integrated platform. We're working through the contract with one of America's largest grocery retailers, who has selected ORBCOMM's track and monitor 5,000 dry and 5,000 refrigerated trailers with great double-play opportunity. ORBCOMM will enable the customer to gain real-time visibility and control of their transport assets across the United States. We expect to start shipping the first units in Q3 and complete the deployment in early next year.

In addition, Agropur, a North American industry leader in dairy products is leveraging our triple play bundle, including our refrigerated, dry and in-cab solutions to streamline their operations, comply with the ELD mandate and ensure the quality and integrity of their cargo throughout the supply chain. We shipped 500 units in Q2 and expect to ship the remaining 500 in Q3. These customer wins reaffirm our unique competitive advantage and leadership position, serving transportation companies. We've got some great news to share on our container programs.

Last quarter, we announced an order of 20,000 devices from a leading OEM to support one of the industry's top shipping companies. We're excited to report that this project has been expanded to a fleet wide deployment of 150,000. We expect to ship at least 20,000 devices this year across the last two quarters, with the bulk in 2020 and possibly extending into 2021. The full deployment represents hardware revenues of between $4 million and $6 million in the second half of 2019, increasing to $4 million to $6 million a quarter in 2020.

This global deployment will leverage our latest refrigerated container monitoring and control solutions, which helps to increase asset utilization and lower operating costs and ensure temperature compliance. We're continuing to run several additional pilots for containers both on ocean vessels and rail, some of which we expect to win by the end of the year. On a side note, our CT 3000 product was recently recognized as a transformative innovation in IoT with a Gold Stevie from the American Business Awards, the IoT Innovations Award from Connected World Magazine, the Industrial IoT Product of the Year Award from IoT Evolution World Magazine. Continuing with containers, our program with Maersk through our contract with AT&T will not be extended on their legacy 3G platform and will expire at the end of this year.

The contract provides ORBCOMM with about $3 million in annual revenues for engineering support services. The contract and the accounting of revenues was assumed as part of the WAM acquisition. We do not typically price engineering and support on a per-unit basis. If we were to proceed with Maersk on new engineering services, it would be based on build hours and recognized as professional fees under non-recurring service revenue.

The approximately 400,000 subs tied to this contract will cease to have recurring service revenue associated with them by the end of the year. So we will report subscribers both with and without these subs through the end of the year and without these subscribers beginning in 2020. The change to subscriber count should raise ARPUs materially and be more representative of our business. From a strategic perspective, we prefer the model where we transact with transport carriers directly or -- either directly or in coordination with OEMs, allowing ORBCOMM to manage the customer relationship more effectively and be adequately compensated for our efforts.

Turning to AIS, Q2 marked our highest quarter with over $3.1 million in revenue, up about 9% year over year, driven by several new commercial and government customers, as well as contract renewals. We were awarded a new contract with the US Customs & Border Protection to provide AIS data to enhance border, security and increased domain awareness at sea. Moving to our IoT satellite offerings. We shipped a record 35,000 IDP devices in Q2.

We're experiencing significant demand for IDP products in Latin America, driven by our largest partners in Brazil, as well as in the Middle East, where a large telecom provider is using our IDP service to track and monitor border patrol vehicles to increase security and border protection throughout the region. Moving on to operations, we're continuing to make solid progress on consolidating our existing products and platforms, deploying our [inaudible] feature-rich products and moving through older inventory that is in the process of being discontinued. ORBCOMM has acquired 13 companies since 2011, making it difficult to scale with so many products and platforms. We've significantly consolidated the number of hardware SKUs from 243 down to 53 and in the process reduced inventory levels by 27%.

We expect further consolidation in 2020, leading to just 40 SKUs, an astounding 84% reduction. We continued converging the 25 web platforms across our various solutions with the goal of just two, thereby reducing integrations across multiple platforms and better utilizing our resources. Similarly, we've gone from closing the financials from each of these 13 acquisitions to three with the implementation of a global ERP system and expecting to be leveraging just one in 2020, enabling a faster financial close process and simplified billing. All of this effort historically showed up purely as cost, but we're now starting to see the improved inventory levels, higher margins and better customer service.

Over time, we expect to achieve further benefits with lower costs, increased scale and quicker time to market. These operational improvements are absolutely key to the scaling and future success of the company as we transition to a fully integrated, cash generating business. Summing up, we've made positive strides in the quarter. We successfully grew adjusted EBITDA by 9% and increased operating cash flow by $13 million over the prior year.

We see momentum growing in the second half of the year led by our in-cabin container programs. I'm pleased with where the business is heading and look forward to finishing 2019 strong. With that, I'll turn the call over to Dean and take you through the financials.

Dean Milcos -- Chief Financial Officer

Thank you, Marc, and good morning, everyone. Let's start with the company's second-quarter financial results. Total revenue for Q2 was $67.1 million, down $3.7 million compared to the same period last year. As Marc mentioned earlier, Q2 revenues were down $800,000, excluding the $2.9 million realized through hardware revenue from the J.B.

Hunt last year. Total revenues in Q2 were in line with the midpoint of our revenue outlook flat in the last earnings call. We anticipate revenues to grow in the second half this year, fueled by many of the opportunities discussed earlier. Product sales in the second quarter were $27.4 million similar to the prior quarter's revenues, we achieved positive revenue growth in our in-cab hardware as shipments have accelerated and many of our customers continue to purchase devices to meet the ELD mandate deadline.

Q2 service revenues were $39.7 million, up 3.3% compared to the prior year period. Recurrent service revenues in the quarter grew by 3.8% over the prior-year period and up sequentially from Q1. Contributing to this improvement was an addition of about 70,000 net subscribers in the quarter, bringing our total subscriber base to 2.51 million at the end of June 2019. Considering the anticipated change in subscriber count leads to Maersk, which Marc discussed earlier.

Our total subscriber base would have been about 2.11 million as of the end of Q2, excluding these Maersk related subs. This change increased total company ARPUs by as much as 15% in 2020. As mentioned on last quarter's call, there are a few factors creating headwinds in recurring service revenue growth. Let me provide with an update on those factors.

First, the deferred revenue upfront license fees from the Maersk implementation that began several years ago has just about been fully amortized. In Q2, we recorded another $60,000 in deferred revenue compared to about $170,000 recognized in the prior year. This year-over-year effect has diminished and translate into a 30-basis point impact to recurring service revenue growth in Q2. The second factor contributing to lower rates in current service revenue growth [inaudible] service revenues from pre-acquisition legacy issues.

For Q2, the service revenue decline was over $700,000 when compared to the prior-year period. This lower service revenue resulted in negative impact to recurring service revenue growth in Q2 of about 190 basis points. We believe the year-over-year impact has now bottomed out and are expected to bounce back a couple hundred thousand dollars in Q3 with further improvements in Q4 and into 2020. Combined, these two factors impacted Q2 recurring service revenues by over $800,000 year over year.

Excluding the impact from these two factors, our recurring service revenue in the quarter grew by about 6% over Q2 2018. Looking at gross profit margin, the company realized a margin of 50.7% in Q2 compared to 46.9% last year, driven largely by improvements in product gross margin. Product margin in Q2 was 28.4%, an increase of 600 basis points over the prior year. This improvement was primarily driven by a higher percentage mix of sales of our newer cost optimized products in the current period versus last year.

Approximately 15,000 of the 70,000 or about 21% of the devices shipped in the quarter were legacy products. Currently, Q2 product margin was negatively impacted by [inaudible] $6 million of the older inventory. We have made great strides over the last year in transitioning our product lines to newer products and as a result has significantly reduced our inventory of older products. Q2 service margin was 66% compared to 67.8% in the prior-year period due to higher terrestrial costs in the current quarter and a positive one-time adjustment that benefited margins last year.

Operating expenses in Q2, were $34.2 million, down approximately $200,000 compared to the same period last year. This year-over-year decrease was primarily due to improved cost management, specifically in selling, general and administrative expenses and more than offset an increase in product development costs waiting for new product lines. Adjusted EBITDA in Q2 was $14.2 million, an increase of $1.1 million or 9% over the prior year period. The increase was primarily driven by improvements in both service and product gross profit and a reduction in operating expenses.

Q2 adjusted EBITDA margin was 21.1%, an increase of 278 basis points over the prior-year period and just slightly lower than the 21.5% we fired on last quarter's call. Turning to the balance sheet and cash flows. The company ended Q2, 2019 with approximate $55 million of cash and cash equivalents. Total debt at the end of the second quarter remained at $247 million.

Cash flow from operations in Q2 was about $2 million nut keep in mind, this result included the $10 million interest payment in the quarter. This was our fourth consecutive quarter of positive operating cash flow, it was a significant improvement over last year where reported a negative $11 million in Q2, 2018. capex for the quarter was $6 million, slightly higher than our recent trend, as the current quarter include a $600,000 payment for AIS satellite's plan for launch in 2020. The exchange will make cash flow generation for the company a top priority, demonstrates our focus on improving operational results and working capital metrics.

Moving to outlook. We expect total revenues for the second half of 2019 to be between $145 million to $155 million, which is currently in the range of the analyst estimates. This outlook is driven by several large hardware deployments ramping up in Q3. We anticipate adjusted EBITDA margin to be between 23% and 23.5% for the second half of the year.

This will push adjusted EBITDA a few million dollars lower than current analyst estimates, probably due to some softness surrounding gross margins and to a lesser extent, slightly higher operating expenses. In closing, we're pleased with the progress we've made with many of our financial metrics in Q2. Revenue came in about the midpoint of our outlook given last quarter. We continue to make year-over-year improvements in product margin, tighter expense management results and significant cost reductions in SG&A.

Adjusted EBITDA grew nearly 9% over the prior-year period and we generated our fourth consecutive quarter of positive operating cash flow. This concludes our remarks for the call. We'll now take your questions.

Questions & Answers:


Operator

[Operator instructions] The first question is from Rick Prentiss of Raymond James. Please go ahead.

Rick Prentiss -- Raymond James -- Analyst

Thanks. Good morning, guys.

Marc Eisenberg -- Chief Executive Officer

Good morning.

Rick Prentiss -- Raymond James -- Analyst

Hey, want to follow up on some of your comments there, Dean, about the guidance to make sure we understand it and Marc, appreciate the color on the in-cab and the container pacing of the orders. But just want to understand as we think through the '19 guidance change, Dean, I think you mentioned some softness in gross margins and higher operating costs. Help us understand, where do you think the components of gross margins are going as we think about the product side and the service side? And where specifically are those higher opex that we're looking at?

Dean Milcos -- Chief Financial Officer

Yeah. On the product margin, we do still think we'll get to 30% for the full-year product margin. We're looking at roughly 31% product margins in the second half of the year. On service margins, we're thinking between 66% and 67% is still where we expect to land.

Probably second half of the year, roughly 66.5% service margins. And on operating expenses, we're estimating SG&A to be approximately $18 million a quarter in Q3 and Q4. Total operating expenses should be about $34.5 million each quarter.

Rick Prentiss -- Raymond James -- Analyst

OK. And then on the previous guidance you guys had issued, you talked about recurring service-revenue growth in the 5% to 7.5% range for the year, that you will start lower, and you did a good job kind of walking through the two items that said excluding them, you would have done 6% in 2Q. How should we think about recurring service revenue growth in the second half of 2019?

Dean Milcos -- Chief Financial Officer

Yeah, we did see good growth year over year in the second half of 2019. We still think we can get to the range of 5% to 7%, probably at the low end of that range for the full-year growth year over year. I think right now, we expect $800,000 to $900,000 quarter improvement in service revenue each quarter, Q3 and Q4 is probably the range we're looking at.

Rick Prentiss -- Raymond James -- Analyst

And then Marc you called out the 400,000 subs that with the sun setting of 3G would go away with the Maersk AT&T contract. How much revenue is associated with that contract and what else does the sun setting of AT&T 3G, are there some opportunities out there as well with this one dropping off?

Marc Eisenberg -- Chief Executive Officer

Yeah. So we're not quite sure that this one is dropping off, but we're sure that the accounting of it is dropping off the way it is. So we have a relationship with Maersk and we'll continue to call on them and see where we can play in the next generation projects with them. But if it continues to be engineering like it has been in the past, what we're saying is it's not going to be billed in a subs times ARPU basis.

That's something we inherited. That's not the way we do engineering services. So, there is a change. There's no guarantee that Maersk will use this for the next generation platform.

But I don't think that they know exactly what they were going to do with the next generation platform. But what they do know is that does it makes sense with the platform dying to continue to put engineering dollars into building this service up when it's approaching end of life. So that's what we're telling you on this call. The second thing, that we're kind of saying on this call is we've got a handle on -- maybe there's not another 400,000, customer out there.

But you could do better on a fleet of 40,000 or 50,000 operating solo than you will just kind of getting these small scraps that we're kind of getting out of this AT&T deal. And if we were to work ahead in time in three years and take that current model of a couple cents per unit, I think it ends up being $0.68. And take this direct model, the break even is so small in terms of what we had closed, that we choose to go in that direction and we're pretty certain that we're going to end up ahead. So that's what we're going to do.

In terms of AT&T 3G, I don't think we have a ton of risk on the AT&T side, our 3G subs are more on the T-Mo side. So what we believe T-Mo is going to do on 3G is what they did on 2G, where they keep a very small slice of their spectrum, dedicated forward for data only. So less of an issue there. But there are thousands of units in AT&T's 3G, not 10s or 100s of 1000s like there is in T-Mobile.

I'm hoping, it's going to be, over time, a reasonable hardware opportunity as you swap out these subscribers since the majority of our 3G subs are in the reefer business. We got into the driving business already in the world of LTE. So there's not a ton of subs at risk there. So I think that there is an opportunity, but I think that's why we keep telling you, I think as we kind of go forward, I mean, look how big this container opportunity is, where it's going to grow to $4 million to $6 million a quarter.

I don't see hardware issues over the next couple of years unless the market significantly turns. So I think we may reverse the recent trends where the hardware was less predictable and the service was extremely predictable. And now suddenly you're going to have a bunch of hardware sales, some of them lead to new recurring streams and some will be traded out just to keep the current streams on the service side.

Rick Prentiss -- Raymond James -- Analyst

And I think that's good to hear. Visibility may be improving. It's always something the Street likes to see. What do you think organically service revenue or recurring service revenue growth should be as you look out over a medium to long term then for ORBCOMM?

Marc Eisenberg -- Chief Executive Officer

We think it should be 9%. And I think the inthic changed that, having $700,000 of negative comps compared to the $700,000 of positive comps that it should be going forward almost gets you to that 9% alone. And you know inthinc is probably the hottest part of our business right now. So we're doing extremely well there, as you heard in some of those, you know, in-cab statistics.

But I think if you pulled all that noise out there, you'd see that we'd be probably pretty close to that.

Rick Prentiss -- Raymond James -- Analyst

Great. Thanks.

Operator

Next question is from Mike Walkley from Canaccord Genuity. Please go ahead.

Mike Walkley -- Canaccord Genuity -- Analyst

Thanks. Marc, thanks for signing the large container deal in the back half of the year in 2020. Can you just update us on the overall opportunity for that market segment, how penetrated it is, what's the market opportunity for ORBCOMM in that market? Thanks.

Marc Eisenberg -- Chief Executive Officer

Sure. I can tell you exactly, there's about 2.4 million reefer containers in the world and 400,000 of them are Maersk, so you'd say that is the overwhelming majority of the penetration. But all of that stuff is going to hit end of life. So really even Maersk becomes unpenetrated again.

So, the stuff that we're rolling out right now with our customer in Europe, that 150,00 all on LTE should have 10 years of life. So that will be part of the penetration. There's a couple of opportunities out there that we did not win, which is roughly about 150,000 subscribers. There's another maybe 300,000, or 400,000 that we are bidding on, that we think in various stages, but less fleet sizes of 150 and more fleet sizes of 20,000, 30,000, 40,000 and 50,000 and we're kind of closing in on them.

What you referred to before, the container thing, it is so typical of what happens to us, what happens is, we're working through the contracts, the OEM is working through their contract. They need to get the ball moving. So they write us a purchase order for 10,000. So we go and we start buying components for 10,000 and then they start looking a month later and this stuff takes time and they're like, gee, we're going to have this dry spell, let's go order another 10,000, last quarter reported, 20,000.

And now the realization is that unless you deploy all of these devices, you don't really change your operations. So there's all this pressure to get it done. And now the reason we're so unsure about where the quarter ends up is, we're being asked to pull in as much, -- remember at one point we said, eight quarters and even installations are 16,000 and all of a sudden, if you do the math, you're in the mid 20s. We've been asked to accelerate it as quick as humanly possible.

So we're analyzing the costs and whatever we can do to pull in some of Q1 shipments into Q4 and pulling Q2's into Q1, which could be kind of explosive from a revenue perspective. So we're kind of figuring our way around it there. But your simple question is 2.4 million.

Mike Walkley -- Canaccord Genuity -- Analyst

OK. Thanks. And with the visibility in the container ramp, maybe offsetting some of the -- somewhat expected weakness in transportation, given some of the earnings from other industrial companies, can you just talk about maybe hardware growth trends you expect in the near term in 2020? And on the transportation side, I know it's in a tough spell now, but how many quarters do you think it's going to take to correct that market or work through some of the inventory you talked about in the channel ?

Marc Eisenberg -- Chief Executive Officer

Gee, I've done a lot of work on this in the last week, right. And so to be clear what they're reporting in terms of OEMs building new products is -- what they're reporting is something like a 50% decline in dry van and like an 80% or greater than an 80% decline in reefer. But that is an over representation of transportation, really they're working through all of this massive amounts that were shipped in 2018. And there's kind of a leveling off in terms of supply in the market.

So it's going to take just a little bit of time for that to level off. I spoke to one of the presidents of one of the reefer divisions and said, 80 something percent, is that real? I mean, your orders are down 80 something percent, is that real? And his answer was, for this is going to resonate with you, Mike, his answer was almost like IPO numbers, where customers are putting in orders, expecting to get some lower number, and then once all of a sudden, you start getting a full allotment of reefers, then all of a sudden the demand goes down, right. They start putting in those orders with the lower expectations. So it's not quite as bad as that 80%.

But it is relatively soft. I think we're probably going to struggle with it for a couple of quarters. I don't think it's -- I'm not telling you it's a $10 million a quarter problem. That's not what I'm telling you, but it is a couple million dollars, so the sizing for you -- maybe this transportation group is a third of our revenues.

So you've got a lot of heat in the business or momentum, and those other two-thirds, which is a whole lot of SkyWave and international and the satellite businesses is doing really well. You've got some heavy equipment stuff and other stuff that's doing just fine. But our group lost about $3 million last quarter of this base business that we were expecting. So basically a big trucker calls you up and goes, yeah, you know, I'm supposed to take those 500 units from my new build of my carrier of Thermo King product.

And I'm just going to shove that off a quarter. So I'm going to shove that off. And typically when you shove off that quarter, it goes quarter to quarter and quarter and it gets made up a little bit away. And then -- so maybe that's the number of softness that we're expecting.

When you look at our hardware sales, the $27 million or so that we did last quarter and you see what is that $27 million, that $27 million is about $18 million to $20 million of just our current customers that continue to buy stuff. And then the last $7 million to $10 million are new deals or new deployments or retrofits that we sell a quarter back or two quarters back and kind of do it over time. So what we did in this quarter in our transportation business is with the base business a little bit short, it would have been shorter than the $3 million, that new deal -- new customer and I tried to say this in the script but maybe not so well, that new script, I'm sorry, that new -- those new deployments picked up bigger than we anticipated. So we did better in retrofits, and worse in the installs at factory than we were anticipating.

And that's what the quarter looked like.

Mike Walkley -- Canaccord Genuity -- Analyst

Great. Thanks. Last question from me and I'll pass it on. Just want to make sure Maersk one more time, it's going to come out at the end of the December quarter.

And can you remind us what the annual revenue that is coming out on services? Thank you.

Dean Milcos -- Chief Financial Officer

Yes, [inaudible] at the end of Q4, the annual service revenues are about $3.2 million a year.

Mike Walkley -- Canaccord Genuity -- Analyst

OK. Great. Thanks for that clarification and look forward to seeing you next week.

Dean Milcos -- Chief Financial Officer

Thanks.

Operator

Next question is from David Gearhart from First Analysis. Please go ahead.

David Gearhart -- First Analysis -- Analyst

Good morning. Thank you for taking my question. So I wanted to go back to the financial model. Can you repeat what you said about the SG&A per quarter and the total operating expenses? I didn't get that.

And as well, I think in the last quarter, you had mentioned $50 million in operating cash flow for the year and $25 million in free cash flow. Just wondering if you could update that with adjusted EBITDA coming down for the back half a little bit.

Dean Milcos -- Chief Financial Officer

Yes, So SG&A should roughly be about $18 million a quarter in Q3 and Q4, and total operating expenses in each quarter should be roughly $34.5 million.

David Gearhart -- First Analysis -- Analyst

Got it.

Dean Milcos -- Chief Financial Officer

On the cash side, I would expect the cash flow from operations to be more in the range of $35 million for the year and free cash flow would be minus capex, somewhere in the range of $10 million to $15 million.

David Gearhart -- First Analysis -- Analyst

Got it. And then can you talk a little bit about the terrestrial expense, I think you had mentioned that there was some impact from terrestrial costs on the services gross margin. Wondering what that is exactly, is it permanent, should that kind of normalize? And also on the product gross margin, I'm kind of surprised with five consecutive quarters of increasing sequential gross margin, as you increase the mix of new optimized products and kind of wind down legacy, that you'd see it down. Just wondering why that was down.

Is it just a greater number of legacy units being sold in Q2 and in kind of when should that roll off in terms of legacy inventory being kind of wiped out and it being less of a headwind on the quarter on a quarterly basis?

Marc Eisenberg -- Chief Executive Officer

So I'll answer the legacy hardware, and you can take the first half.

Dean Milcos -- Chief Financial Officer

Yeah, the terrestrial cost, we did see a jump of about $300,000 of terrestrial costs from a couple of our carriers. We're working through that to make sure they're [inaudible] the right rate plans. And I think part of that's just going to be a onetime blip and part of them might be continuing. So we're still looking at that.

But I think it will come down a little bit in Q3.

Marc Eisenberg -- Chief Executive Officer

You know, and if I'm correct, Dean, sometimes we get the averages within a quarter, we get the bill and then you bill it the next quarter. So there's this catch up sometimes when you get a larger than anticipated.

Dean Milcos -- Chief Financial Officer

There is, sometimes there's catch-up customers and sometimes you get a rebate from the terrestrial carrier if there was a wrong rate plan set up. So we'll see how that plays out.

Marc Eisenberg -- Chief Executive Officer

On the other part of the question, the legacy. So in this quarter, we shipped more legacy products than the quarter before. And kind of looking at some of our legacy reefer products, the GT 1100, which at one point was tens of thousands of units, [inaudible] it was down at 3,000 this quarter. And the legacy reefer product, which at some point had reached a high point, when we were converting at about 14,000 units is down to under 2,000.

And what else, there's almost nothing left [inaudible], it's pretty thin right now. Maybe there's $6 million total left of legacy product, which may be sold in the quarter, not in the quarter. You know, that's not even what worries me. I think we're going to get through that pretty quick.

What worries me is, not anywhere near $6 million, but we probably still build $1 million to $2 million a quarter of legacy products. So there are certain configurations of GT 1100 that we continue to build. And because the GT 1200 is out, but the dual mode version isn't out. So we still ship the dual mode version GT 1100 for those people that want a satellite backup.

And then over time as the engineering gets done, that will convert. But I think to your point, it's going to get pretty de minimis by the end of this year.

David Gearhart -- First Analysis -- Analyst

Perfect. Then the last --

Marc Eisenberg -- Chief Executive Officer

21%, that was a big number.

David Gearhart -- First Analysis -- Analyst

OK and last question for me, sorry to interrupt you. On the in-cab side, nice to see some orders and things that pulled through. In prior quarters, you had mentioned Blue Tree and not having some of the integrations. So some deployments kind of being on pause or not in a position to order because of that.

Can you give us an update? Are the integrations complete? Are you starting to see flow through as a result of that? And orders in the quarter, is it a result of actually having some of that stuff completed?

Marc Eisenberg -- Chief Executive Officer

Yeah. So every customer has different expectations. So the answer is it will never be completed. But I think a lot of the work for the customers that we were closing in on, when we threw out that 10,000 number, to get those guys complete is pretty well complete.

And you can see we're trending well above those numbers, that we originally guided to and doing really well. We learned something as we did this. And I think it's directly related to the integrations that you're talking about. The business is a little different than we thought it was, in that we thought that we would win a few, 3,000 , 4,000, 5,000 unit in-cab orders and instead what we closed was tens of 150 to 500 unit orders, which is a little more complex in terms of integration, because each one has their own needs, but it's a whole lot better in terms of margins and ARPUs, because you're dealing with smaller fleet sizes but we kind of ended up at the same place.

David Gearhart -- First Analysis -- Analyst

All right. Thank you so much for that color.

Marc Eisenberg -- Chief Executive Officer

Sure.

Operator

Next question is from Scott Searle with Roth Capital. Please go ahead.

Scott Searle -- Roth Capital Partners, LLC -- Analyst

Good morning. Thanks for taking my question. Hey, Dean, just to quickly follow-up on the opex front, the $34.5 million number, I assume that's a GAAP number, correct, including stock comp. And then as you go through some of the integrations and new product development, integration on the Web platform side consolidating, when does that number start to come down? Do we start to see that ebbing a little bit in 2020 or is that going to continue throughout 2020?

Dean Milcos -- Chief Financial Officer

I'll take that, the opex question, that is the GAAP number, it includes stock-based comp. I believe the stock based comp is going to be about $1.7 million a quarter in Q3 and Q4. On the synergy front, Marc, you want me to --?

Marc Eisenberg -- Chief Executive Officer

No, I don't mind. I think definitely that business has to scale. We're working full time on 23 Web platforms. And those 23 Web platforms have teams of 8 to 10 as opposed to having two platforms with much more functional teams.

I think this is -- this thing that we're building called Project Synergy on the Web platform side, it's less like painting the Mona Lisa and a little more like tuning an engine, in that it will be perfected in perpetuity. As you continue to -- you watch the product and then almost every week, you're adding new features to it. So believe it or not right now there's more work flow than less workflow. But the action start to turn down in the middle of 2020 and we get more efficient.

In addition, on the hardware side, there's two big SKUs coming out over the next six to nine months, that will continue. We've done a pretty good job getting the 1,200 -- the GT 1,200 out there ready for prime time. It's reporting about 98% of the time these days, considering -- it's pretty good considering [inaudible] coverage and everything else. So even at a higher standard the GT 1100 was getting out and the two big platforms that are coming out in the next six months in the hardware side, which will get us from that 53 to 40, is the FM 5000, which is the inthinc device.

And the next generation Haley [ device, which is the AIS device that comes soon. So I think that there is a scaling coming. I think it's six to nine months away. But I think it's coming.

Scott Searle -- Roth Capital Partners, LLC -- Analyst

Got you.

Marc Eisenberg -- Chief Executive Officer

Meanwhile, we got more work and we know to do it.

Scott Searle -- Roth Capital Partners, LLC -- Analyst

And Marc, I'm not sure if I heard it earlier, but did you give a number for Maersk contribution in the June quarter?

Marc Eisenberg -- Chief Executive Officer

The contribution, they do $3.2 million a year.

Scott Searle -- Roth Capital Partners, LLC -- Analyst

$3.2 million, a year. OK, helpful, OK. Thank you. And just two other items.

If you have some -- I don't know if they're updated numbers in terms of subscriber counts for Blue Tree and inthinc and as well I think you've talked about a pipeline, and you've alluded to some of those positive conclusions in terms of -- I think there were six to eight pilots, there were 100,000 plus types of opportunities. Could you just update us on that front in terms of what end markets they're in as well and kind of what the AROU profile looks like that? And so we can start to formulate an outlook for 2020 and beyond. Thanks.

Marc Eisenberg -- Chief Executive Officer

inthinc and Blue Tree have about a 100,000 subscribers. And I think the good news on that pipeline is we've -- are starting to close in on it or those few hundred thousand, you're seeing 150,000 of them now moving as quickly as humanly possible. There's maybe another 150,000 containers out there. I wouldn't call it pipeline, I call them leads that we're trying to close in on -- maybe we close them, hopefully we close them, hopefully we don't, we'll get it done soon, there's something like 60,000 of them between our OEM and two other customers that we've kind of got the handshake on and we're working through the contractual arrangement of it.

So definitely closing in on that. In the rail part, there's another 50,000, 60,000 that we're hopefully closing in on over the next couple months. There's plenty of pipeline out there. We need our closing count to do 9% service revenue growth and hit a good 15%, 20% number next year in growth.

We would need a closing count closer to 50% or 60% in order to get there.

Scott Searle -- Roth Capital Partners, LLC -- Analyst

Great. Thank you.

Marc Eisenberg -- Chief Executive Officer

Sure.

Operator

Next question is from Mike Latimore with Northland Capital Markets. Please go ahead.

Unknown speaker

Hi, guys. This is Colin. I have two questions. Does the Inmarsat acquisition have influence on your SkyWave business?

Marc Eisenberg -- Chief Executive Officer

Claims on our SkyWave business?

Unknown speaker

Yeah.

Marc Eisenberg -- Chief Executive Officer

So I don't know if there's claims on the SkyWave business, but we share the technology of IDP together, so they have the ability to sell it and pay us some sort of revenue share or we have the ability to sell it and pay them some sort of cost for access to their satellites. And that's how we kind of go together. We have a contract that extends kind of through the life of I-4. And I-4 should last through the mid-2020s, that being said, it's going to be, I believe I don't want to say for sure, but I believe it's going to be renegotiated pretty soon to include I-6, which will give us life closer to 2040.

But we've -- I think in terms of the SkyWave business, we bought a business that had just over 200,000 subs and today it's between 350,000 and 400,000 subs. And I don't know that the relationship with Inmarsat has ever been more positive than it is right now. I don't know if that answers your question?

Unknown speaker

Yeah. Got it, got it. And the next question is related to the upfront amortized fees recognized in the quarter, like when do you expect this headwind to dissipate completely?

Dean Milcos -- Chief Financial Officer

Well, right now it's down to a pretty de minimis amount for the quarter, that should extend out a few years. However, with the contract position we're in right now, it's a question whether we have to accelerate it or if we let it run out past January 1, if there's any additional work to be done. So we're still looking at that number. But it's pretty de minimis at this point.

Unknown speaker

Got it. Thanks.

Operator

[Operator instructions] Next question is from the line of Mike Malouf from Craig-Hallum. Please go ahead.

Mike Malouf -- Craig-Hallum Capital Group -- Analyst

Great. Just a couple of clarification. So with regards to the $3.2 million, that annual subscription revenue that gets allocated to other service revenue, or is that lost at the end of the year, I'm just a little confused about that. Thanks.

Marc Eisenberg -- Chief Executive Officer

I think it's lost. You know, that being said, we hope to participate in Maersk's next program. But in terms of -- which there's no guarantee. But this program is over.

Mike Malouf -- Craig-Hallum Capital Group -- Analyst

OK and then with regards to costs associated with that revenue, is it pretty much a 100% margin revenue or is there some cost that will also go away with that?

Marc Eisenberg -- Chief Executive Officer

No, it's engineering services, there's contemplated with the contract about 6,000 hours of service on an annual basis that we need to support them on. So we can either figure out how to rationalize that cost or there are six or seven other container programs that we do not need to hire to support. We can move those resources over or Maersk kind of says, all right, we're going to need your engineering support, but it's not going to be a recurring fee and it ends up in non-recurring. We just don't know, I get the feeling it's not going to look like it does now, subs times ARPU.

Is it going go to zero? I don't know, I don't know, I think -- let's take a look, Mike, technically what we do for Maersk, and maybe that'll help you. Technically what we do for Maersk is, we design the firmware that goes on their hardware. That's the first thing we do. And then we update that over time, as new features come out or new SKUs come out from the reefer OEMs and everything else.

And because those units were 3G, there's no need for us to continue to perfect that firmware on this generation for Maersk. And then the second thing that we do is after it goes over the AT&T network and it gets collected, there's an instance of SkyWave technology sitting at Maersk that takes that data and fills the fields of Maersk's systems so that they can manage the business. And then you're doing two things there. You're doing further integrations.

You're helping them with the reporting. And then the second thing you do is, you're there in case there's some sort of crisis management, and that's the part that they really need to be worried about, right. Gee, it's not feeding my data anymore and I don't know what's going on my reefers. So that's kind of where we are.

Mike Malouf -- Craig-Hallum Capital Group -- Analyst

OK, great. That's helpful. I appreciate that. And then just a quick follow up on, as far as capex goes, as we look into 2020, can you give us a sense of how much these AIS Sats will cost? I know you've started, I think you said $600,000 in the June quarter that you paid, or maybe it was the September quarter that you're expecting to pay.

But just a sense of how that will impact capex as we look into next year?

Dean Milcos -- Chief Financial Officer

Yeah, so the total program is -- it's roughly $2.5 million and payments we spread out over milestones, we expect to pay about $1.3 million this year and the remainder in 2020. So in the back half of the year, we're looking at about $700,000 in capex and then the rest in 2020.

Mike Malouf -- Craig-Hallum Capital Group -- Analyst

So Q2 could be the peak for capex --

Dean Milcos -- Chief Financial Officer

For a single quarter.

Marc Eisenberg -- Chief Executive Officer

We paid -- 45% of this program is for the year in the quarter. So looking at capex, it's $23 million this year, right. I mean, it could be -- I know we got it at $25 million but it looks like $23 million, could it extend to $24 million? Yeah. Could it be a little under $23 million? No.

But there's not like a wide margin forever there.

Mike Malouf -- Craig-Hallum Capital Group -- Analyst

And next year looks to be about the same?

Dean Milcos -- Chief Financial Officer

Yes, I think next year is about the same in that $22 million, $23 million range.

Marc Eisenberg -- Chief Executive Officer

So we will have paid half the satellite roughly this year and you'll have half left for next year. I don't know, Mike, if we can synergize these platforms like we talked about, and how much of that gets in next year, a huge portion of that is capex. That's where a lot of it's being spent.

Operator

Next question is from Chris Quilty from Quilty Analytics. Please go ahead.

Chris Quilty -- Quilty Analytics -- Analyst

Marc, I just want to follow-up on the ELD Mandate, do you feel like at this point you have with six months to go, before implementation of 100% visibility on what the customer pipeline looks like or is there the potential that you could see some follow-on sort of late compliance demand that surfaces up?

Marc Eisenberg -- Chief Executive Officer

I think it blew away, in the oil and gas markets, where they typically roam in inthinc, we have a pretty good deal, the contracts have been pretty much signed and we'll continue to recognize the revenue as it gets installed. So we're kind of betting on how quick Schlumberger installs and that's how we get the revenue. But believe it or not, most of it's been shipped but not recognized for some of those contracts. But some of this, my guess is you're going to see three to four times the amount of deployments over the next year in this ambulance business than you are in the oil and gas business.

So we think that's where the growth is, some of these other types of emergency vehicles that we're working on. So there's potential for a whole lot of growth, it'd just not be, may not be strictly ELD growth that you were anticipating.

Chris Quilty -- Quilty Analytics -- Analyst

Understand. And with the consolidation of all of your accounting platforms on the ERP, how does that play out in terms of any potential operating expense savings? And am I correct that you've kind of gone through this process without any major hiccups?

Dean Milcos -- Chief Financial Officer

Yes, that's correct. We had no major hiccups, we went live in North America with the system in 2018 and it went relatively smoothly, we're still looking to pull in the last acquisition we did in Europe, Blue Tree in Ireland, Ontario. I think operationally it gives us a lot more insight into managing inventory and managing the business. So there's definitely efficiencies that are pulled out through that process.

Does that --?

Chris Quilty -- Quilty Analytics -- Analyst

Got you.

Dean Milcos -- Chief Financial Officer

Yes, OK.

Marc Eisenberg -- Chief Executive Officer

[inaudible] Q2 last year.

Dean Milcos -- Chief Financial Officer

Yes, we went -- that's when the majority of our business went live on the ERP system was Q2 of 2018.

Marc Eisenberg -- Chief Executive Officer

So I mean, I've been through some rough patches with other companies, but everyone got their bills and we got paid.

Chris Quilty -- Quilty Analytics -- Analyst

Understand. But have there been any significant costs that you've been bearing over the last year or so that could fall off potentially as we look out into 2020?

Dean Milcos -- Chief Financial Officer

There will be some synergies, we've already made some consolidations of some back offices and finance and accounting operations, which had some small savings in SG&A already.

Marc Eisenberg -- Chief Executive Officer

Contractors. Yes and contractors too. We definitely have some small dollars we picked up through this process.

Chris Quilty -- Quilty Analytics -- Analyst

Got it. Very good. Well, thank you for the feedback.

Operator

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

Duration: 65 minutes

Call participants:

Aly Bonilla -- Vice President of Investor Relations

Marc Eisenberg -- Chief Executive Officer

Dean Milcos -- Chief Financial Officer

Rick Prentiss -- Raymond James -- Analyst

Mike Walkley -- Canaccord Genuity -- Analyst

David Gearhart -- First Analysis -- Analyst

Scott Searle -- Roth Capital Partners, LLC -- Analyst

Unknown speaker

Mike Malouf -- Craig-Hallum Capital Group -- Analyst

Chris Quilty -- Quilty Analytics -- Analyst

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