ORBCOMM (ORBC) Q3 2019 Earnings Call Transcript

ORBCOMM (ORBC)
Q3 2019 Earnings Call
Oct 30, 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 third-quarter 2019 results conference call. [Operator instructions] Please note this event is being recorded and a replay of this conference will be available from approximately 11:30 A.M. Eastern Time today through November 13th, 2019. The replay service details can be found in today's press release.

Additionally, ORBCOMM will have a webcast available in the investor section of its website at www.orbcomm.com. I would now like to turn the conference over to Michelle Ferris, ORBCOMM's senior director of corporate communications. Please go ahead, Michelle.

Michelle Ferris -- Senior Director of Corporate Communications

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 fourth quarter, as well as, 2020.

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 takes 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, Michelle and good morning, everyone. Earlier this morning, we issued a press release announcing our financial results for the third quarter ending September 30th, 2019. The quarter was highlighted by record margins leading to higher than anticipated adjusted EBITDA, despite hardware revenues being lower due to continued weakness in the macro transportation environment. Total revenue for the third quarter was $69.2 million, down $1.8 million from last year.

The decline is entirely based on hardware and it's almost exclusively in our North American transportation group. This is a result of a combination of a challenging macro transportation environment, as well as, difficult comps due to large orders in last year's third quarter to Savi in support of the Defense Logistics Agency or DLA, and JB Hunt. In Q3 of last year, we shipped $4.4 million of hardware to JB Hunt and DLA. Without this impact, total revenues were up over the prior year by $2.6 million.

Both of these opportunities finish shipping in 2018, leading to the difficult comps dissipating by the first quarter of 2020. The improvement in margins more than offset the reduction in hardware shipments leading to strong adjusted EBITDA. In addition, Q3 total revenues were up $2.1 million comps -- $2.1 million sequentially, over the prior quarter. Looking back at the first three quarters of 2019, we executed on several key initiatives to streamline our business, improve profitability, and make better use of working capital.

We set out to raise margins and went from the lows of 13% in product to a record 31.4 % this quarter, and increased service margins to 69%, from the lows of about 58%. This substantial improvement led to Q3 adjusted EBITDA of $16.9 million or a margin of 24.5%. We set out to replace a number of high-priced products in the market with our new cost reduced feature-rich products making us more competitive. We reduced inventory levels that now run 30% lower by reducing our SKU count by over 70%.

About 80% of the 80,000 devices shipped in the third quarter were the new products contributing to the higher margins. We set out to sell off older inventory, and now, just a fractional amount of our inventory is discontinued. We set out to reduce costs and take advantage of the leverage in the model, and we're now running 20 people lighter than last year. We set out to converge 25 web platforms across our various solutions with the goal of two: CargoWatch, our highest volume web portal, and FleetManager or in-cab portal will soon be on the new platform with our other three major transportation portals to follow over the next few quarters.

We set out to move the entire company to one integrated financial system, and we now have 90% of our revenues on our new ERP platform with a goal of 100% in just a few months. We set out to win a number of large opportunities in our 150,000 unit-container opportunity with Carrier, which is expected to start shipping in Q3, and we -- I'm sorry, has started shipping in Q3, and we expect the deployments totaling 30,000 units starting of other large deployments starting in Q4. We set out to be a significant cash generator and cash flow from operations reached $10 million in Q3, which was the fifth consecutive quarter of positive cash flow. From an execution perspective, we accomplished an awful lot this year, but unfortunately, it was met with a difficult transportation environment where year-over-year sales in our North American group are down $12 million in hardware shipments, and trending to $16 million by year-end.

In this market, deliveries from OEMs are down to 10-year lows. For example, according to ATC research, new Reaper deliveries from North American OEMs to transportation companies are trending to 20,000 this year versus 70,000 in 2018. Dry van deliveries are trending to 80,000 versus 260,000 last year, and truck deliveries are trending to 160,000 versus 536,000 last year. Keep in mind while we would not expect to be installed on all of these deployments, had they not been down year over year, we would expect to be on a good portion.

In many cases, we would be replacing our existing hardware. So, it has a larger effect on the hardware sales in which U.S. transportation is down about 20% year over year, and a far less significant effect on transportation service, which is basically flat. In our Q4 guidance, we're not assuming that these OEM orders bounce back.

However, the older trailers are aging, and we would expect to see demand improve over time. At the very least, we'll start to comp out 2018's record-shipment levels in the first quarter of next year. With the work we did through the initiatives I talked about earlier, as well as, the $12 million in revenue growth across our non-transportation products. We expect adjusted EBITDA to grow about 10% in 2019, even on a relatively flat revenue year.

A growing industry trend we're seeing in our markets involves an increasing number of customers choosing to implement IoT solutions in a subscription model where the hardware connectivity and software are all bundled into one monthly price. Typically, these types of contracts averaged five years. Many customers like this model because they can avoid the upfront capital needed to purchase LTE devices, and speed up their internal decision process. We like that we can substantially increase our closing percentage while making good use of our capital.

As this model becomes more popular, a few of our new large customers are opting for this type of arrangement, as opposed to our current model where our hardware revenues are recorded upon shipments, and service revenues are recorded over the life of the units. In this type of transaction, all revenues will be recognized as subscription service revenue over the life of the contract. And while it will impact hardware revenues in the short term starting in Q4, we believe this model benefits ORBCOMM over the long-term. First off, the lumpiness in our hardware revenues that we sometimes experience historically should lessen.

In addition, the subscription model should increase sales predominantly in recurring revenues over time. Lastly, it's moving some of the opportunities that have been sitting out there for quite sometime to closure. We're currently offering this model to solutions customers, mostly in transportation, which is approximately half of our hardware revenues and anticipates this model to be used on about 20% of our transportation deployments or 10% of overall product sales. This translates to about $3 million transitioning of hardware revenue a quarter.

We begin offering this model in Q4, and Dean will get into the effect on accounting in a few moments. Let's move on to our business highlights starting with our container programs. We've made great progress on the large deployment with who we can now face Carrier, the largest refrigerated transportation OEM globally, in support of one of the industry's largest shipping companies. As a reminder, this is a fleetwide project global deployment of 150,000 devices, leveraging our expertise to help create Carriers' customer-specific refrigerated container monitoring and control solution.

We shipped over 12,000 devices in Q3, and anticipate shipping an additional 9,000 devices in Q4, representing just over $4 million in hardware revenue in 2019. Looking ahead to 2020, revenues for this opportunity will continue to ramp and should average between $4 million and $6 million a quarter, until the full retrofit deployment is completed in 2021. After this retrofit is completed assuming this deployment is like most others, we would expect to continue to supply roughly 15,000 assets per year, as Reefer containers typically get upgraded over a 10-year cycle. The customer is scheduled to go live with this project in the fourth quarter, and we anticipate there will be more to share with you on our next call.

This project represents one of our largest opportunities to date, and we hope our collaboration with Carrier yields many more customers. We're excited to report on another significant refrigerated container opportunity with a producer and distributor produce who operates their own private fleet of ships and containers. We are pursuing this opportunity directly for a fleetwide deployment of our refrigerated container monitoring solution to be fielded on between 15,000 and 20,000 assets, as well as, our vessel monitoring solution on five vessels. Through our onboard cellular network, our application captures location and operational status data from the containers, and sends it back to the land-based portal via satellite connection, extending visibility and control of their containers at sea.

We have integrated the latest controlled atmosphere technology, which regulates carbon dioxide, oxygen, and nitrogen levels inside the container to enhance the shelf life of perishable produce in four platforms to enable complete command and control of these assets. We expect that they will be one of our first customers to utilize our new subscription model that I mentioned earlier. So, while we had been projecting a good portion of this project's hardware revenue in Q4, instead, we expect it to be recognized through an all-in-one monthly pricing within recurring service revenues over the life of the contract. We're working through the final details of this contract and hope to make an announcement with them at the Intermodal Europe trade show next week.

Digging into our transportation business. Despite the difficult challenges for trucking companies, we continue to win a number of new customers, many of which, were in private fleets that are not as sensitive to the macro transportation environment. They're choosing ORBCOMM for our ability to deliver solutions for multiple-asset classes using a single integrated platform. Last quarter, we mentioned an opportunity with one of America's largest grocery retailers who has selected work on to track and monitor about 10,000 assets, consisting of both dry and rephrased refrigerated trailers, a great double-play opportunity.

While the initial shipments of this customer was pushed from Q3 to Q4, which had an impact on Q3 revenues, we expect to ship about 2,000 devices a quarter, starting in Q4 and hope to finish in 2020, representing one of our largest opportunities expected to close this year. We're expecting increased activity at our longtime customer, Wal-Mart, America's largest private fleet. And we'll be ramping up to extend our dry and refrigerated solutions across the remainder of their assets, increasing the speed of deployments, an additional fourth-quarter winning cargoes with paddles transportation, who was using our drive and solution to enhance visibility, improve utilization, and lower costs for their trailer fleet through location and cargo-sensing data. We continue to gain momentum with our integrated in-cab and cargo-product offerings and closed multiple single- and double-play opportunities in the third quarter, including Alan Ritchey, West Side Transport, Texas Freight, and Clean Transportation, which represents a total of over 2,000 assets.

Alan Ritchey, a leading provider of transportation services is using our integrated in-cab and trails solutions across their fleet, which transports mail for the U.S. Postal Service. Westrac -- West Side transport, a mid-size trucking company is using both our in-cab and dry van solutions to track and monitor their trucks and trailers. Clean Transportation, an asset-based truckload carrier and logistics provider; and Texas Freight, a drive and truckload carrier are both using our in-cab solution across their entire fleet of trucks.

These customers are already seeing improvements in driver safety, productivity, and ELD compliance through our best-in-class fleet management solution. In all, we shipped over 3,900 in-cab units in the third quarter, which should lead to stronger service revenue growth as they get installed. Looking ahead, there is a significant demand for our solutions across our markets that leverage our advanced functionality, value-added services, and deep industry expertise. We're working through the final stages of a number of contracts totaling nearly 100,000 units.

Many of these opportunities represent double- and triple-plays, ranging in size from 1,000 to over 30,000 units, and we anticipate about half to utilize our new subscription model. While we expect most of these deals to close in the short-term. We expect the majority of these units to ship throughout 2020, leading to a strong year for deployments. Turning to AIS.

Q3 revenues were $3.2 million, up over 10% year over year. Global Fishing Watch extended their contract to receive our AIS data for another three years. So, we can continue to aid them in monitoring global commercial fishing activities, and supporting ocean resource conservation. Oceaneering also extended its contract with ORBCOMM through 2022, and we'll continue to use our AIS data to support its vessel tracking platforms, which improve navigation and safety for ports and riverways, and its environmental and emergency response applications, which monitor underseas pipelines and offshore oil and gas operations.

Continuing with our satellite offerings, we had another great quarter and shipped about 34,000 IDP satellite devices. We won a large opportunity with Vishipel, a leading provider of telecommunication services and maritime equipment in Asia to provide our vessel monitoring system or VMS, for commercial fishing vessels throughout Vietnam. ORBCOMM's VMS is helping Vishipel's customers improve maritime safety, and operational efficiency while ensuring compliance of Vietnamese fishing regulations. Technological advancement is paramount and our greatest differentiator in the market.

While we completed a number of key product development initiatives in 2019, continued innovation will be pivotable -- pivotal toward our success in 2020. Let's highlight a few. The FM 5000 supports the features and capabilities required for both fleet management and safety and compliance in one comprehensive solution. The FM 5000 will have the option of an integrated vehicle camera system that significantly improves fleet safety with in-cab notifications on aggressive driving, as well as, driver coaching and instant feedback.

We expect commercial launch in Q2 2020. For the maritime market, we're in the process of having two additional AIS satellites built to add incremental visibility of ships at sea, as well as, the capability to detect small Class B vessels, including pleasure craft and fishing fleets. We expect to launch the first AIS satellite in the second half of 2020, and the second one in 2021. We've also developed a handheld product called Halle combined AIS data along with ORBCOMM's 2H satellite IoT technology for small vessels with an addressable market of over 2 million vessels.

Halle will be the only AIS solution in the market that provides two-way messaging. We currently start -- have started fielding trials for Halle, and expect to make it commercially available in mid-2020. We've also made great strides in converging our 25 web platforms down to two, thereby, reducing integrations across multiple platforms, and better utilizing our server -- our resources. We began field-testing the new platform, which we branded as the ORBCOMM platform with a select group of transportation customers in Q3, and received great feedback in the ease-of-use and functionality of the user interface.

Once beta testing is completed in Q4, we'll begin the first phase of customer migration. New customers will be automatically integrated into this platform, ensuring optimal performance, speed, and advance supporting, and diagnostics. There are over 10 key additional products and service innovations planned for launch in 2020, such as a chassis solution for managing utilization and maintenance on chassis that transport containers. The consolidation to one global Reefer truck trailer device, dual-mode products for vehicle monitoring and asset management, as well as, several new peripherals, including a wireless sensor hub, and camera-based cargo sensor for load detection, cargo volume estimation, and monitoring of asset conditions.

We're also expanding our products for Reefers, dry vans, and refrigerated containers to include analytics. Enable us -- enabling us to provide greater value in ROI-driven insights to our customers about business operations. With our accomplishments in 2019 and plans for innovation in 2020 and beyond well under way, we're executing on a strategic plan to drive ORBCOMM to a higher level of growth in the global industrial IoT. We are becoming the vendor of choice in our markets by integrating multiple asset types on a single platform.

We are developing more best in class products with the most options such as dual-mode, an array of sensors, and customer-specific integrations to meet the evolving needs of the industry. We are continuing to reduce costs and add new disruptive technology, including 5G connectivity, video, and in-cab scanning. We are continuing to support the world's largest OEMs and deploying our solutions globally to solidify our future market position. We are creating incremental value in our solutions to bring us closer to the customers, enabling us to serve not just as an IoT-product company, but as a consulting group helping companies in their operations over the long-term.

We are focused on continuing to scale the business and driving revenues of high incremental margins expanding the leverage in the model. We are confident in our plan and believe that we are in a strong position to support the future success of the company. Wrapping up, we've made significant progress in the third quarter across a number of initiatives, such as, taking cost out of the business, improving our operating efficiency, and deploying new products while increasing service and product margins to record levels. We raised our adjusted EBITDA margins to 24.5% and generated $10 million of operating cash flow in Q3.

With several new opportunities expected to begin shipping in Q4 and several more high-profile customers starting to fall in line and the introduction of our new subscription model, we're setting the stage for a strong strong start to 2020. With that, I'll turn the call over to Dean to take you through the financials. 

Dean Milcos -- Chief Financial Officer

Thank you, Marc and good morning, everyone. Let's start with the company's third-quarter financial results. Total revenue for Q3 was $69.2 million, down $1.8 million compared to the same period last year. As Marc mentioned earlier, Q3 revenues were lower, mainly, in our North American transportation group due to a larger-than-expected downturn in the transportation market in 2019, as well as, the comparable period from 2018, which included several large deployments that did not repeat in the current-year period.

Sequentially, total revenues in Q3 were up, $2.1 million over the prior period quarter. We anticipate revenues to continue on an upward trend for the next several quarters. Broad sales in the second quarter were $28.6 million, down $3.9 million from the prior-year period, and up $1.3 million sequentially from the second quarter's revenues. Q3 service revenues were $40.5 million, up 5.4% compared to the prior-year period.

Recurring service revenues in the quarter grew 5.3% over the prior year and were up sequentially from Q2. Contributing to this improvement was an additional of about 80,000 net billable subscribers in the quarter, bringing our total base to 2.6 million at the end of September 2019 or 2.2 million, excluding the subs to the AT&T contract from Maersk. Looking at the gross profit margin. The company realized the margin of 53.5% in Q3, a sniffing improvement compared to 47.3% last year, driven by growth in both product gross margin and service gross margin.

Product margin in Q3 was 31.4 %, an increase from 24.2% in the prior-year period, and up from 28.4% in Q2 2019. Improvement is primarily driven by a higher percentage mix of sales of our newer CLOS-optimized products in the current period versus last year. We made great strides over the last year in transitioning our product lines to newer products, and as a result, have greatly improved our product margins. With regards to our traditional products sales and recurring service revenues, we're seeing growing interest in the market with respect to the subscription service model, as Marc mentioned earlier.

The basic structure of the model allows the customer to contract for data service offering at a fixed monthly subscription rate with our ORBCOMM team title and control over the device asset. Under this contract model, there's no product sale. Many devices we utilize will be maintained on our balance sheet since [Inaudible] over the user life of the asset. Over the life of the contract, total revenues will be similar.

However, there'll be no upfront product revenue and there will be higher-recurring service revenue over the contract term. Current expectations are for the subscription model to impact product sales by approximately 10% in the upcoming quarters, misled with incremental positive impact on a recurring service revenue over a longer time period. Moving onto service margin results. Our Q3 service margin was 69%, a record service margin low for the company, and a significant improvement compared to 66.8% in the prior year.

The increased service margin was due to incremental service revenues and reduced costs in the quarter, and to a lesser degree, the acceleration of the first service revenues late-expiring AT&T contract. Normalizing in the margin with respect to the accelerated deferred revenue would result in the service margin of over 68% in the quarter, which is still record margin for the company. Operating expenses in Q3 or $34.7 million, up approximately, $3.6 million compared to the same period last year. This year-over-year increase was primarily driven by two items: the first was a net benefit of $2.5 million of SG&A in the prior period -- in the prior-year period composed mostly of a reduction in their net fair value.

And the second is from an increase and appreciation of $700,000 in Q3 2019, compared to Q3 2018. Adjusted EBITDA in Q3 was $16.9 million, a decrease of $450,000 in the prior-year period. But once again, there was a lot -- there was a large earnout adjustment in the prior-year period that benefited adjusted EBITDA by approximately $2.5 million net. On a normalized basis, adjusted EBITDA improved by approximately $2 million from the prior-year period, and adjusted EBITDA margin improved from 21% to 24.5%, an increase of 350 basis points.

The increase in margin was primarily driven by improvements in both service and product gross profit. To be clear, a significant increase across our margins, offset by relatively small increases in cost led to a 15% improvement in adjusted EBITDA, which is essential to our 2019 plan. Turning to the balance sheet and cash flows. The company ended Q3 2019 with approximately $51 million of cash and cash equivalents.

Total debt at the end of the third quarter remained at $247 million. During Q3 2019, the company purchased 1.6 million shares of common stock under the stock buyback program announced in August. Reducing the outstanding shares by possibly 2%, and using $7.8 million of cash. Cash flow from operations in Q3 were about $10 million, and free cash flow before financing activities were $4.7 million in the quarter.

Cash flow from operations was strong despite a working capital use of cash of $3.8 million in the quarter, as inventory levels grew and insist piece of upcoming sales. This was our fifth consecutive quarter of positive operating cash flow, and since June 30th, 2018, we generate positive free cash flow of $18.9 million before the stock buyback activities, $11.1 million after buyback activities, raising our cash balance from $39 million on June 30th, 2018 to $51 million on September 30th, 2019. This positive free cash flow improvement over the past five quarters was produced during a period of continued investment with regards for to product transitions and SKU count reductions. Our integration activity with their back offices and global ERP system, and ongoing integration with respect to our customer-facing platform conversions.

Our improving margins and our revenue growth forecast for 2020 should result in even greater cash flow generation from what we experienced over the past year. Capex for the quarter was $5.7 million, in line with our recent average trend and expectations. Looking ahead to 2020. This is my first planning session as CFO of ORBCOMM.

Clearly, planning has not been one of our strengths in the past. I'm working to improve this area through the following initiatives. We've hired a new lead of planning who has had -- who has years of public company experience. We're incorporating more industry data and trends in our planning analysis.

We're more closely collaborating with the business units, and we're also taking a more conservative look at our numbers. I'm confident these steps will lead to a more accurate planning on forecasting across our business going forward. Moving to our outlook in the fourth quarter of 2019. We expect total revenues to be between $68 million and $72 million, below previous expectations due largely to the slowdown in the North American transportation market, and a number of opportunities moving to our subscription model with revenues recognized as a recurring service revenue over the life of the contract.

We anticipate adjusted EBITDA margin to be approximately 24%. Moving on at 2020. We're providing preliminary guidance as we finalize our budgeting process. We see a large hardware tailwind based on a number of factors.

First, assuming we deploy 80,000 of the remaining 120,000 units in 2020, as part of the Carrier contract for the first customer, that would represent about $17 million in 2020 revenue versus the $4 million we expect to do in 2019 or a $13 million increase year over year for this one contract. Second, we have a large number of opportunities totaling nearly 100,000 units that we anticipate closing shortly, which is a far higher figure leading to the next year than in prior years. Third, as most of the reseller networks are announcing 3G sunsets over the next 18 months, we're already working with customers, as well as, customers of competitors to deploy next-generation hardware to beat these impending deadlines. Based on these tailwinds, we expect hardware revenue to grow 10% to 15% even with as much as $12 million of hardware projected to be deployed for our subscription model.

Looking at service. We anticipate recurring service revenue to grow to a low single-digits to start the year versus last year due to the expiration of a AT&T and Maersk contract, and then, approaching higher single-digit growth, as we execute our deployments and start to recognize our subscription revenues in greater numbers in the back half of the year. Other service revenues are expected to be flat. We expect SG&A to grow about 4%, which is 2% after the nonrecurring adjustments in 2019.

We expect capex to be around $3 million to $3.5 million based on the quantity of deployments using our new subscription model. Adjusted EBITDA margins is expected to be in the 24.6% range. In closing, we're pleased with the progress we've made with many of our financial metrics in Q3 2019. Revenues grew sequentially from Q2, as more opportunities continue to fall in line.

We continue to make significant year-over-year improvements in product margin. Service margins reached a record of 69% in the quarter. Adjusted EBITDA margin grew at 24.5% in Q3 2019, and we generate our fifth consecutive quarter of positive operating cash flow, and continued free cash flow generations during the buyback activity. This concludes our remarks for the call, and we'll now take your questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Rick Prentiss with Raymond James. Please go ahead.

Rick Prentiss -- Raymond James -- Analyst

Thanks. Good morning, guys. 

Marc Eisenberg -- Chief Executive Officer

Good morning.

Dean Milcos -- Chief Financial Officer

Good morning.

Rick Prentiss -- Raymond James -- Analyst

Hey, I want to start out with questions on the subscription model. We've seen one of the other people with satellite space, KBHI, have a pretty good success with their agile plan. Similar concept, reduce the upfront capex hurdles for people to get into mini visa market for maritime. They've had really good success as far as take rates.

Help us understand a little bit, why you think just 20% of the transportation deployment will take it, and then, that would be a 10% of total, obviously, if I carry that way. What would keep it from not being higher than that 20% take rate and that stifle?

Marc Eisenberg -- Chief Executive Officer

Sure. So, let's talk about why transportation first, as opposed to, you know, the satellite group or others, and then, we could talk about within transportation. So, the reason it's starting in transportation is, in transportation, people buy an entire solution for us -- from us. So, it's kind of pays to get that type of financing across the entire asset, as opposed to our satellite group, where you're buying almost an accessory to some sort of telematics solution.

So, imagine if you had a cell card that was going into a Dell laptop, and you were financing just the cell card, you know what I mean? It's just -- doesn't really lend itself that business to financing. And then, in our heavy equipment business, most of the people that we sell to their OEMs. You know, OEMs with a lower cost of capital than ORBCOMM has. So you know, we're charging ourselves something like an 8% or 9% cost of capital for the customer built into that model.

So, once you get into the transportation group, it's just starting, and there's two contracts that we expect to close imminently, and in that group, just those two deals are something like 50,000 units between them, and that's off to a relatively quick start. A big portion of that in Q4, and then, spread over, over the next year. So, when you look at ORBCOMM's customer base, looking at some of the names that we announced today, some of the the smaller transportation companies that have similar cost of capital to ORBCOMM will definitely take advantage of the solutions, which is so exciting for us because that's the part of the business that we really want to grow. But a good portion of our customers as well, are the Walmart's of the world and the swift knights, and guys like that, and JB Hunt where their cost of capital is lower than us.

So, it's not a perfect model for them. So, we kind of split it that way. 

Rick Prentiss -- Raymond James -- Analyst

OK. And then, I think, Marc, you mentioned five-year contracts. Why just five-year contracts? Would think some of these assets have longer life, like, maybe a 10-year life of some of the items are being put on. 

Marc Eisenberg -- Chief Executive Officer

So, of the two that I just referred one of them as a seven-year and one of them is a six-year, and you know, we need to leverage this across what we believe the expected life of LTE is. 

Rick Prentiss -- Raymond James -- Analyst

OK.

Marc Eisenberg -- Chief Executive Officer

Because LTE -- you know, if we're sure 10 years then we can do it over 10 years but we're just not that confident.

Rick Prentiss -- Raymond James -- Analyst

Sure. OK. And then, if we think about this -- sorry for all the questions. Obviously, it's a new model for us to look at. 

Marc Eisenberg -- Chief Executive Officer

Do it, do it. I'm sure everyone else has the same questions. Go ahead.

Rick Prentiss -- Raymond James -- Analyst

And then, if we think about maybe, and Dean, you mentioned also, maybe $12 million of what would have been previously hardware revenue will show up as this kind of subscription model within calendar '20. If we assume a five-year life on that $12 million sales, should we be thinking that over time that turns into like $2.5 million of service revenue than a year for the sales that happened this year? I think of it take the $12 million divided by five years?

Dean Milcos -- Chief Financial Officer

Yeah. No. And a little bit higher than that because services are in there too. If you think about the model that was the product, and then, recurring service, and now, it's going to be the two combined spread over five- or six- or seven-year term.

Marc Eisenberg -- Chief Executive Officer

And the interest income. 

Rick Prentiss -- Raymond James -- Analyst

Right. To get a return on capital. So, how should we think about kind of the -- if we move $12 million out as hardware sales, how much should we be putting in whether it's monthly, quarterly, annually for that, on a services revenue line? 

Dean Milcos -- Chief Financial Officer

Yeah. Well, as you mentioned, that hardware translates into the current service, and then, you have a few dollars more for the monthly traditional service. And then, we're not going to be recording an interest income, but then, of course, there's some financing component too that we factor into building that model and a monthly price.

Rick Prentiss -- Raymond James -- Analyst

Sure. And then I think, you may be hit my other question. Working capital is an issue, obviously, when you start this kind of program you get paid overtime. So, it sounds like the capex of $30 million to $35 million is up versus maybe what people might have been thinking of what would've been in the low $20 million range? Is that how we think about that the working capital item, it really hits the capex?

Dean Milcos -- Chief Financial Officer

Yeah. The inventory will flow through capex, and then, go into fixed assets. So, that $12 million is on top of our normal $20 million to $25 million of capex.

Marc Eisenberg -- Chief Executive Officer

So, I think what you were thinking in terms of low 20s, we think that's right. You know it's still low 20s and just layer this plan on top of it. So, when you take $12 million of hardware, and then, you take it down to cost, you're under $10 million, and you add that to capex and the numbers, clearly, are just that simple.

Rick Prentiss -- Raymond James -- Analyst

Sure. OK. And last one for me. I apologize.

Obviously, there was a lot on that subscription model. When you talk about recurring service revenue starting out in the low single-digits in the first part of '20, and then, approaching high single-digit. What are you expecting either for the year or help us kind of bracket, what does low mean, and what does approaching high mean?

Marc Eisenberg -- Chief Executive Officer

So, I think we tried to give you some visibility, as we finalize the business plan for next year. So, I think for your model now, I would probably stick in the 3s maybe at the beginning of the year. And then, by the fourth quarter kind of trending to seven, eight or nine.

Rick Prentiss -- Raymond James -- Analyst

OK, great. I apologize. Let me be able to jump in. I appreciate all those answers, guys.

Marc Eisenberg -- Chief Executive Officer

Sure.

Dean Milcos -- Chief Financial Officer

Sure.

Operator

Our next question will come from Mike Walkley with Canaccord Genuity. Please go ahead.

Mike Walkley -- Canaccord Genuity -- Analyst

Great, thanks. Congrats on the strong margins of both products and services, and it appears with all the moving parts the 2020 adjusted EBITDA guidance is roughly in line to maybe even above consensus. So, just on them on the margins. How should we think about the synergies continuing, as you talk about combining all these platforms, and then, how should we think about product and services margins trending into '20 that's implied in your guidance?

Dean Milcos -- Chief Financial Officer

Yeah. So, on a service margin, like I said, normalizing in the recurring service revenue, and to pick up we had on that for revenue with AT&T and Maersk, it's in the 68% range. We see that trending slowly up as we do more work on the synergy model with that with the platform conversions. There should be some cost savings as we get that program finished over the next year.

So, we do see incremental growth in service margin. Also, just from adding more service revenue, the incremental margins are typically higher. On the product side, the 31%, 31.4%, we did in Q3. We think that's the range going forward.

It's depending on the mix that we sell. We see that's kind of where we're landing with the new products that we've rolled out.

Marc Eisenberg -- Chief Executive Officer

Yeah. There's still 20% of our base that needs to move to the new queues. I think we went over some of them like the FM 5000, which is the [Inaudible] business and the Blue Tree business. You know, that still hasn't converted.

So, maybe in a revenue quarter where we grew -- up 15% or 20% because it's a little more large-yield centric, which may be lowered a little bit, kind of offset by the higher margins on the last 20% of the product that still needs to be fielded. You know, maybe they average it out, but we're hoping that that north of 30 is the new normal. 

Mike Walkley -- Canaccord Genuity -- Analyst

Yeah. All right. Thanks. And a follow-up question for me.

Just on the outlook for the 10% to 15% product growth, and yield, we understand now, some of the bundled deals against that. But the transportation market -- industrial transportation market's weak. You can see it from some of your end customers their weak trends. Implied in your guidance there, are you expecting that market's flat next year, bouncing back, taking a conservative look in that market.

Obviously, just that one large Carrier deal almost can make up for your full 10%-type guidance growth. So, I'm just wondered what you're assuming for that transport market and how it might bounce back or not implied in your guidance.

Marc Eisenberg -- Chief Executive Officer

If Carrier takes their 80,000 units next year, you're up 10%.

Mike Walkley -- Canaccord Genuity -- Analyst

Exactly.

Marc Eisenberg -- Chief Executive Officer

So. You know, that feels pretty good. And then, I don't know that you're kind of -- oh, boy. There's a little bit of excitement here in that.

There's not included in Carrier. You know, we're sitting here in the final negotiations of another 100,000 devices, and this isn't the base business. You know the 34,000 satellite subs that we do or I'm sorry, pieces of hardware we ship every quarter. That's not what we're talking about.

You know, there's -- including this new container win that we're talking about. That we wanted to throw the name out there, but we were forbade until next week's conference. There's a lot of opportunity there. And I don't believe that $12 million is a straight pull from hardware revenues to subscription model.

I think $6 million of it is, but I think the other $6 million are deals that if we didn't have this model, we couldn't have closed.

Mike Walkley -- Canaccord Genuity -- Analyst

Got it. Understood. And last question me. I'll pass it on.

So, just kind of looking at your guidance ex-Maersk on the services. Roughly 6%, 7%, services growth, is that kind of what you guys are implying in your guidance? And if so, is that potentially conservative given kind of a high single-digit outlook over time on an organic basis? Thanks.

Dean Milcos -- Chief Financial Officer

Yeah. I think, you know if you're saying 6% for the full-year general range. Yes, yes, that's the direction we're going in for the full year. And you know, we'd love to see how much the recurring service revenue picks up with this new model on top of that.

Marc Eisenberg -- Chief Executive Officer

I think that if you pull out that  $3 million or $3.5 million or so of Maersk next year, on the guidance that we've given, we think we are at high single-digits.

Mike Walkley -- Canaccord Genuity -- Analyst

Great. Thank you.

Operator

Our next question comes from Aransas Audrey with Credit Suisse. Please go ahead.

Unknown speaker

Yes. Hi, a couple of questions from me. First, in terms of the model that sort of like sensitizes higher capital expenditures. What do you think, if you look at the overall range of $30 million to $35 million, if you're wrong how much higher over the long run can capex go?

Dean Milcos -- Chief Financial Officer

Yeah. I think if we're more successful then capex can go higher, but we're not worried about the $12 million model at all because the $12 million model, it cost -- it's closer to -- you know, let's specifically look at 2020. The $12 million model at cost is really a $9 million investment, and of that $9 million investment, as one of the analysts saying before, 20% or 25% of it you get back in the first year. So, it really looks like a $7 million investment.

And then, as you take that $7 million investment, and a bunch of these deals, we've been kind of pushing toward closure for a long time. So, you're not deploying new capital. A large portion of this, you're shipping out of the current inventory. So, we're kind of looking at $4 million of capital for 2020, which now, on the guidance, we've given immediate $25 million in cash that you generate.

And you know, putting $4 million toward this plan seems like the right thing to do. You know, I think going forward, if we can continue to you know grow this business. There's a high single-digit service for certain -- service growth, and significantly higher in hardware. I don't think that small investment just puts a whole lot more risk in play at all.

Unknown speaker

Great. That's very helpful. And then, as far as the cadence, I may have missed this earlier, but the $13 million on the large contract, would you give us some sense of the cadence there through the year? And then, the 100,000 units that you're -- the larger contracts that you expect to close in a relatively -- relatively soon. Any color in terms of the stage you're in in terms of sort of closing those would be helpful.

Thanks.

Dean Milcos -- Chief Financial Officer

Yeah. Sure. So, we're expecting the first -- trying to think of the exact math -- 28,000 to close within the next, let's say, a week. Although, I think it's closer because we've got some shows that we're going toward.

And then, just over 30,000 we're kind of just starting to work through the documents on that as well. So, you know, that would be in the next, I don't know, 45 days because we have to start shipping a portion of that in Q4. And there's some sensitivity there because it's replacing a large 3G deployment that dies at the end of next year. So, all 30-some odd thousand of those need to be deployed in 2020.

Otherwise, it's going to drastically affect their operations. And then, after that, there's 15 or 21s, but I think, there's going to be a number of press releases, hopefully, in November. 

Marc Eisenberg -- Chief Executive Officer

And on the Carrier cadence, I think it'll be pretty even throughout next year in the $4 million to $5 million a quarter for this quarter next year.

Unknown speaker

Great. Thank you very much.

Operator

Our next question comes from Chris Quilty with Quilty Analytics. Please go ahead. 

Chris Quilty -- Quilty Analytics -- Analyst

Hi, guys. Quick question for Dean. I can't type and do the math at the same time, but if we looked at your 2020 guidance, backed out the AT&T subs, and also, made the adjustment for the subscription, does that -- are you at high single-digit growth? Or does that really imply something almost at a low double-digit? 

Dean Milcos -- Chief Financial Officer

Are you talking about a year or a quarter?

Chris Quilty -- Quilty Analytics -- Analyst

Oh, no, for the full-year 2020.

Dean Milcos -- Chief Financial Officer

Well, your service revenue, we're looking at blended probably in the 6% range for the full-year year over year. 

Chris Quilty -- Quilty Analytics -- Analyst

And does that adjust for the impact of the AT&T subs going off and the 12 million subscription? 

Dean Milcos -- Chief Financial Officer

That that gets a full impact, all in with the AT&T subscription altogether.

Chris Quilty -- Quilty Analytics -- Analyst

Gotcha. OK.

Marc Eisenberg -- Chief Executive Officer

So, you're taking about a -- I'm sorry Chris. You're taking about a $3 million step backwards, and then, the 12 million subscription, even though it should be generating two or $2.5 million on an annual basis. You're only getting, let's say, six months on average for the -- as they roll out over the course of the year, not on the first day. So, now, you're taking about 1 million step forward. 

Chris Quilty -- Quilty Analytics -- Analyst

Gotcha. OK. Math makes sense. So, the other question on the planning side of things.

You've obviously, got the issue with the North American transportation. What are you doing to try to assess some of the global markets and understanding the trends going on there with their growth?

Marc Eisenberg -- Chief Executive Officer

Yeah. I mean we're certainly watching the -- closer than ever the various industry trends, getting our hands on as much research as we possibly can. And even this U.S. transportation thing, as we kind of monitor the data.

I don't know if 2019 is a huge glut in transportation or whether it's just an over-expansion in 2018. You know, I think the comp numbers are worse than the industry is. If you were to average 2018 and 2019, as bad as 2019 is, and divide it by two, you'd still be at a pretty good run rate. So, we're kind of hoping that balances out like a Reefer does, historically.

It's pretty consistent 30,000 and 40,000 Reefers that get shipped in a year, and then, boom last year it goes to 70,000. And this year, it goes back down to 20 but you look at '17 and '20, and you're like, oh, 45,000 average that shouldn't be so bad. So, we're hoping that next year you just kind of go back to a normal run rate but we're certainly not guiding to that. You know, we are guiding to these new opportunities, some of the three-view trade outs, plus this Carrier contract easily gets you to our guidance.

Chris Quilty -- Quilty Analytics -- Analyst

Gotcha. And Marc, one thing that wasn't totally clear with the new expected orders and rollouts. You know, is the percentage of in-cab going up or staying steady as we move forward? And you know, what becomes of the impact on the ARPU?

Marc Eisenberg -- Chief Executive Officer

Yeah. So, in-caps gone up. But you know we were thinking in-cab would be about 4,500 units this quarter. And the transportation had an effect on it but not a massive effect.

We did 3,900. So, let's say we were 15% off from our expectations based on the macro environment out there. But you know 3,900 is still in effect. And I think, it has -- I think incrementally, it's a big deal.

But I think, in terms of measuring ARPUs across 2.6 million units, you're dealing with pennies there. But incrementally as these things get installed 4,000 units at $40 ARPUs, that's a pretty big effect from a relatively small amount of that.

Chris Quilty -- Quilty Analytics -- Analyst

Gotcha. And just specifically, on customers that are adopting subscription-type plans. Is that fair to assume that they're all -- those are all customers doing in-cab type solutions?

Marc Eisenberg -- Chief Executive Officer

Oh, no. The first one is that that we talked about on the calls actually, this refrigerated container group. That's the first one. The second large one is monitoring in intermodal containers.

So, I think the first deployments, just because of necessity, and timing, and getting some of these things on [Inaudible] moving are actually the significant -- significantly large group. I don't think the -- getting $12 million fielded this year is going to be difficult. You know, these first two deals gets 85% of the way there. 

Chris Quilty -- Quilty Analytics -- Analyst

Gotcha. And final question, Dean. It sounds like you still have a pretty high level of new product development. I didn't hear you specifically talk about the R&D side of things.

Is it fair to assume that we're looking at fairly steady on a go-forward into 2020?

Dean Milcos -- Chief Financial Officer

Yeah, I think it'll be pretty steady. We've been running around $3.8 million a quarter on product development, and we're pretty much looking to keep that number consistent for the next year.

Chris Quilty -- Quilty Analytics -- Analyst

Gotcha. All right, thank you, gentlemen.

Dean Milcos -- Chief Financial Officer

Sure.

Operator

Our next question comes from Mike Malouf with Craig-Hallum. Please go ahead.

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

Great, thanks guys. I just have a quick question. When we sort of look at the guidance of 24% to 26% margins. Can you just give us a sense of what are the major impact that would sort of cause you to be at more at the lower end? And then, what maybe we could be looking forward to get you to the higher end? Just some color on that would be helpful.

Thanks.

Marc Eisenberg -- Chief Executive Officer

So, I would hope that we wouldn't end below the range because the trending above there now. 

Dean Milcos -- Chief Financial Officer

Yeah. 

Marc Eisenberg -- Chief Executive Officer

So, in the incremental sales of higher margins, but I'm guessing, Dean, it's the larger opportunities that could close that lower margins potentially.

Dean Milcos -- Chief Financial Officer

Yeah. Larger opportunities and a subscription model, which Spitzer model would generate a higher EBITDA margin, maybe some less EBITDA dollars next year because of the pushing out of some of the revenue, but it depends on the large deals and what the margin is on those deals, and also, how much subscription model revenue we do next year. 

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

OK. And then, these new contracts, especially the one that you're sort of looking for closure next week. Are those in your guidance numbers right now or are they incremental?

Marc Eisenberg -- Chief Executive Officer

They're in our guidance numbers, but in our guidance numbers as a subscription model. So in 2020, it's in our guidance number as roughly -- it's a 7-year deal, so roughly 20% of the total contract value. And that deal by the way, also, 6,000 or 7,000 of those units would be shipped in Q4. So there, you would get the subscription model of the -- of that -- for the entire 2020.

And then, because those are the environmental control unit. And then, the other units which are more like your standard Reefer units will start to get deployed in the second half of the year. So, let's say, if you average that maybe you're going to get two-thirds of the year's subscription there. But there is, when you look at our Q4 guidance.

You know, when you first look at it, you like, oh, hardware looks kind of low, what's going on there? But we think 15% of our hardware for this quarter for Q4, up to 15% moved to a subscription model.

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

OK. And then, just a quick housekeeping. Roughly or maybe exactly, what are the number of shares that you have outstanding at this point? Because the Q is not out yet. I'm kind trying to get a -- I know you've been buying back some stock too so -- 

Dean Milcos -- Chief Financial Officer

Yeah, shares outstanding. I don't -- I'm sorry, I don't really have that handy. I know it's going to be roughly 1 million less than last quarter based on the weighted average, but I'll get back to you with the exact number.

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

OK, great. Thanks, guys.

Operator

Our next question comes from David Gearhart with First Analysis. Please go ahead.

David Gearhart -- First Analysis -- Analyst

Hi, good morning. Thank you for taking my questions. Marc, you had mentioned in your prepared remarks on some of the projects that ORBCOMM is working on, and you had mentioned video, video is obviously a hot market, just wondering if you could provide some more detail on the video product that's going to be released next year, fully proprietary, how much lift can we expect on the [Inaudible] subscription model. And is it -- are you anticipating it being subsidized with the fully bundled model as well?

Marc Eisenberg -- Chief Executive Officer

Sure. So, there's two video products. So, and I mentioned them in two different parts. One of them is the video model that's in the cab that is monitoring driver and roads, and there is a partnership that we're working with one of the big video providers out there.

I don't think we've given their name yet but and absolutely. I mean, we would finance that just like anything else and that one is coming sooner. It's already being piloted at the Think group, and there is already a large analytics products that we're -- project that we're working on using video. So, that is the earlier of the two.

The second one that we talked about toward the middle of the year is different, that's using video in cargo. So, in other words, using some sort of photography or video to monitor your cargo shipments so that you're not just monitoring full or empty. You're kind of monitoring what percent full or some additional security features. And that's the one that's toward the middle of the year and it's going to be built into the -- completely built into the GT-1200.

So, we would finance it just like we would finance a GT-1200.

David Gearhart -- First Analysis -- Analyst

Got it. Thank you so much. That's it from me.

Marc Eisenberg -- Chief Executive Officer

Sure.

Operator

[Operator Instructions] Our next question comes from Scott Searle with Roth Capital. Please go ahead.

Scott Searle -- ROTH Capital Partners -- Analyst

Hey, good morning. Thanks for taking my question. Just a couple of cleanups here. On the legacy hardware front, can you give us an idea of what you still have within your existing inventory? What sort of risk there is, if any, to write-offs? And I have a couple of follow-ups.

Marc Eisenberg -- Chief Executive Officer

I think, Dean takes reserve based on any inventory on a quarterly basis. So, that's something that we monitor constantly.

Dean Milcos -- Chief Financial Officer

Yes -- no, so, we're constantly monitoring slow-moving inventory. So, there is no real risk there with the inventory obsolescence. As far as the older SKUs, I don't think there is much left of any significance to work-through.

Marc Eisenberg -- Chief Executive Officer

Believe it or not, the 20% of the old inventory that we sold this quarter, the overwhelming majority of that is old the inventory that we're still building. So, we're not really telling you an old inventory story there. What we're really telling you is, hey, some of our customers haven't moved on to our new products. So, in terms of the lift in margin, you're basically getting 80% of it.

A huge portion of that 20% are people that still haven't moved to the GT-1200, and it's still moving GT-1100 because of some ancillary features or like an example, Walmart still uses the GT-1100 because it's the only one that dual-mode and has the satellite on it. The GT-1200 product with satellite has not been released to the market yet so they continue to buy the old product or JB Hunt does that. It's not really a function of old inventory.

Scott Searle -- ROTH Capital Partners -- Analyst

Gotcha. And just a couple of quick questions on the sun-setting front. Marc, if you could provide a little bit of color in terms of your existing subscriber base. How many of those customers are 3G? So, the transition opportunity there, what you see in the broader market? Like, how big is that market when you're talking to some of your customer base to go out there and continue to upsell and steel some share? What's built into the model in effect for next year, when you're talking about your mid-go into high-single-digit kind of growth? What are you thinking about on that front, in terms of conversion and success? And when do you start to see Europe coming into play?

Marc Eisenberg -- Chief Executive Officer

Yeah, I was just going to ask you. Did you want me to talk about 3G or do you want me to talk about North American 3G? Because we're a minimum of three years or four years from considering in Europe. Europe's still field 2G. So, we're not really looking at Europe.

We were doing the rough math on North American 3G for ORBCOMM across all of our different product lines. And clearly, the overwhelming majority was the Maersk steel, right? That's roughly 400,000 units that are 3G, but that one seems to be a little bit part of AT&T's problem than mine at this point. But separate from that, there are somewhere between 100,000 and 150,000 3G units out there in our $2.6 million base. And there is one customer that has 25% of those 3G units and we will announce what the solution is with that one customer, and within -- before we announce on our next earnings call.

Scott Searle -- ROTH Capital Partners -- Analyst

Gotcha. And, Marc, just in terms of what's embedded into your guidance there, you're assuming that you keep a relatively large portion of that existing base, but you're not assuming big share gains in terms of the rest of the market converting. Is that correct?

Marc Eisenberg -- Chief Executive Officer

Yeah, well, I think from a hardware perspective, I mean, there is no two ways about it, even though there is some potential risk there on service, there is no risk there on hardware. I mean, let's say, god forbid, you only closed 60% to 70% of your base. It's still a massive hardware opportunity, right? So, it is certainly, I mean, whatever you're experiencing now, next year, all of these hardware, kind of, headwinds in Q3 and Q4, those are certainly going to be tailwinds. But just to be clear, I mean, if you look at that guidance at the bottom end of the range, if you can sell just flat to what we did this year.

And keep in mind, there weren't a lot of those big lumpy deals this year, and then, you were to do nothing but execute on our relationship with Carrier, not just relationship with Carrier, our relationship with Carrier just on the first deal. If you were to execute just on that, you're up 10%. So, I'm hoping we're giving you a feel, you know, 10% there, lots of new opportunities that we're announcing, that we're in the process of closing, plus this 3G, we're hoping you're feeling that the 10% to 15% is conservative.

Scott Searle -- ROTH Capital Partners -- Analyst

Gotcha. And lastly, if I could just on subscription front. Not to beat a dead horse too much, but a couple of questions. Just, Marc, the sales cycle, it seems like it would compress under this.

I was wondering if you could kind of put some numbers around what you're seeing from or your expectation from a sales cycle standpoint as you shift into the subscription model. And Dean, just want to clarify on the gross margin front for services that it should be in the same line or improving even with the conversion to the subscription model. And it sounds like overall, when you normalize for AT&T and Maersk that you're growing in high single-digits over the course of the year. Is that the normalized growth rate that we should be looking for in services as we get out beyond 2020 into 2021? Thanks.

Marc Eisenberg -- Chief Executive Officer

So, what was the first question again? The -- I'm sorry, Scott, what was the first question again and I'm going to let Dean handle the second one. The first one is the sales cycle, right? The sales cycle around -- the subscription model. Well, let me give you an idea. This customer that on the Reefer front, we had a handshake and we were selected over a year ago.

And from that point, it becomes 50% about development and 50% around their budgeting cycle, and once we kind of came through with this model it closed very quickly. So, on the large opportunities in terms of the development that these guys need or folks like them to get the product out there. I mean, that's obviously, still in play but that waiting the extra, in some cases, six months or in some cases, the capex doesn't get approved and you wait a year. In some cases, that is a little bit more out the window.

So, I think we're going to do really well with it.

Dean Milcos -- Chief Financial Officer

On service gross margin, the 68% that we're running at roughly right now, that should incrementally improve over time. And for next year, the year-over-year growth in service revenue, I think directionally, we're looking at 6%. Although, we're still working on the budget, partly because of this AT&T and Maersk contract that's going away. That's going to create some headwind next year.

But long-term, we should be growing service revenues in the high single-digits every year. That's the model that ORBCOMM has.

Scott Searle -- ROTH Capital Partners -- Analyst

Gotcha. Great, thank you.

Dean Milcos -- Chief Financial Officer

Sure.

Operator

Our next question comes from Mike Vermut with Newland. Please go ahead.

Mike Vermut -- Newland Capital -- Analyst

Hey, guys. Since you're all doing a great job in the environment, a few quick questions. When you look at the bundling, I guess, deals that we're going after now. Just go after the returns in the payback period on them? And then, I guess, if the life of the asset is longer-than-expected.

I assume the cash flow becomes pretty significant later on in the life?

Marc Eisenberg -- Chief Executive Officer

Yeah, I think that's right. When you see the payback. Do you mean the payback included in the high-margin service that's bundled in? You know when you recoup the cash that you put out there?

Mike Vermut -- Newland Capital -- Analyst

Exactly.

Marc Eisenberg -- Chief Executive Officer

I think it certainly varies deal by deal, but in the average example, you would probably start to just recoup your capital, keeping in mind the product it costs, somewhere around 40% to 45% through the life of the contract.

Mike Vermut -- Newland Capital -- Analyst

So, then it becomes significantly cash flow positive in the back half of the contract?

Dean Milcos -- Chief Financial Officer

Yes.

Marc Eisenberg -- Chief Executive Officer

Yeah. That's correct.

Mike Vermut -- Newland Capital -- Analyst

Excellent. So, would you be pushing -- I assume the returns are much better on this, and I assume you'd rather push the majority of your contracts in this direction over time?

Marc Eisenberg -- Chief Executive Officer

I think we walk a tight rope, right? And we don't want to come back to the market for capital. We think we're going to generate $25 million next year of cash, and we think putting $9 million to $10 million of that to work teams responsible. We're sitting with roughly $50 million of cash on our balance sheet, and -- but keep in mind, like we've said before, there is maybe 50% of our business that it's not like a good fit because of what we sell and how we sell it. And then, within transportation, there are folks out there who have a lower cost of capital.

Keep in mind, most of the good portion of the Fortune 500 do business with ORBCOMM, but I guess, if you're asking how much, what percent of our hardware could this grow to? You know, if things go well, as opposed to that 10%, maybe it can grow to 20% but I would doubt that it will grow beyond that.

Mike Vermut -- Newland Capital -- Analyst

Perfect. And then, stocks -- I don't know. Some are down $0.50 right now. I assume the buyback is still in place and was your plan to expedite that a little bit down here?

Marc Eisenberg -- Chief Executive Officer

Yeah. I would imagine so. I think maybe it's down $0.50 because there is a misunderstanding in terms of what we're saying. It's a little bit of a complex story of this quarter, but we'll buy stock when we think it's in the best interest of our shareholders.

Mike Vermut -- Newland Capital -- Analyst

Excellent. OK. I appreciate it, guys and good luck.

Dean Milcos -- Chief Financial Officer

Thanks.

Operator

[Operator sign-off]

Duration: 76 minutes

Call participants:

Michelle Ferris -- Senior Director of Corporate Communications

Marc Eisenberg -- Chief Executive Officer

Dean Milcos -- Chief Financial Officer

Rick Prentiss -- Raymond James -- Analyst

Mike Walkley -- Canaccord Genuity -- Analyst

Unknown speaker

Chris Quilty -- Quilty Analytics -- Analyst

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

David Gearhart -- First Analysis -- Analyst

Scott Searle -- ROTH Capital Partners -- Analyst

Mike Vermut -- Newland Capital -- Analyst

More ORBC analysis

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