ORBCOMM Inc. (ORBC) Q4 2020 Earnings Call Transcript

ORBCOMM Inc. (NASDAQ: ORBC) Q4 2020 earnings call dated Feb. 24, 2021

Corporate Participants:

Aly Bonilla — Vice President, Investor Relations

Marc J. Eisenberg — Chief Executive Officer

Constantine Milcos — Executive Vice President and Chief Financial Officer

Analysts:

Richard Prentiss — Raymond James — Analyst

Michael Walkley — Canaccord Genuity — Analyst

Anthony Stoss — Craig-Hallum Capital Group LLC — Analyst

Michael Latimore — Northland Capital Markets — Analyst

Chris Quilty — Quilty Analytics — Analyst

Scott Searle — ROTH Capital Partners — Analyst

Adrian Doria Medina — ADM Capital Management — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen, and welcome to ORBCOMM’s Fourth Quarter 2020 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 a.m. Eastern Time today through March 10, 2021. 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 Bonilla — Vice President, Investor Relations

Good morning, and thank you for joining us. Today, I’m joined by Marc Eisenberg, ORBCOMM’s Chief Executive Officer; and Dean Milcos, ORBCOMM’s Chief Financial Officer. On today’s call, Marc will provide some highlights on the quarter and give a strategic update on the business. Dean will then review the Company’s quarterly and full-year financial results and outlook. Following our prepared remarks, we will open the line for your questions.

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

Furthermore, the financial information we will discuss includes non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures is included in our press release.

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

Marc J. Eisenberg — Chief Executive Officer

Thanks, Aly, and good morning, everyone. We finished 2020 strong with Q4 coming in at the high ends of our guidance for both revenue and adjusted EBITDA margin. Net subscriber additions bounced back to about 55,000, bringing the total in 2020 to over 170,000. While the pandemic caused significant disruption, we showed our resilience. We made major strides in the integration of our 12 acquisitions by moving to a single ERP platform, going live on our two customer-facing web platforms and rationalizing our product portfolio. In addition, we expanded our agreement with Inmarsat, extending our partnership expected to last through at least 2035. We began rolling out many of our newest products, some of which have already begun to hit the market. And just last quarter, we significantly improved our capital structure with a new debt facility that dramatically reduces our interest payments. Clearly, it was a busy year, and we’re emerging from this pandemic as a stronger, more agile Company with good momentum and strong financial results.

Earlier this morning, we issued a press release announcing our financial results for the fourth quarter and full-year ending December 31, 2020. Total revenue for the fourth quarter was $63.8 million, up sequentially from Q3 as hardware sales continued to recover. Higher service and product gross margins, combined with effective cost management, led to Q4 adjusted EBITDA of $14.9 million, or a 23.3% margin. As a reminder, we guided revenue between $60 million and $64 million, and adjusted EBITDA margin between 22.5% and 23.5%. The combination of being at the high ends of both revenue and adjusted EBITDA margin led to the increased levels of adjusted EBITDA in dollars.

The improvements in revenue and adjusted EBITDA also contributed to another strong quarter of cash flow generation. In Q4, operating cash flow was $9 million, which brought the full-year cash flow total to over $48 million, a new record for the Company. This, not only demonstrates the resilience of our business to withstand a difficult macro environment, but should also support further cash flow generation over time due to the scalability of our model as our business focuses on future growth. Beyond the record cash flows I mentioned earlier, we have completed our debt refinancing, which is a major milestone for the Company, providing us with greater financial flexibility, converting about $20 million a year in interest expense to $8 million in interest expense and approximately $12 million in principal reduction. This refinancing enables ORBCOMM over the next five years to significantly cut debt levels by nearly half and reduce our net debt leverage to negligible levels.

Let’s move on to our future growth initiatives. As a reminder, from last quarter, with the integration mostly behind us, we’ve now transitioned to the next phase of ORBCOMM’s evolution, which is centered around innovation for long-term growth. We call this our 10 and 20 initiative, which includes three key areas: launching new innovative products; adding new channels to market; and developing incremental offerings. Our 10 and 20 initiative is focused on achieving our long-term annual targets of 10% organic revenue growth and 20% adjusted EBITDA growth. Many of these efforts are underway and starting to yield results.

Starting with product innovation. We launched our two next-generation dual-mode telematics devices in Q4 targeted for a wide variety of IoT applications. The first is our satellite-as-an-accessory that we discussed last quarter, which provides customers a cost-effective way to add dual-mode connectivity to almost any ORBCOMM telematics or third-party device. The second is a full dual-mode telematics device, which has embedded cellular and satellite connectivity, primarily geared for fleet management, vessel monitoring and better utilization of construction and utility equipment. This device also uses ORBCOMM’s new global SIM to enable multiple cellular network connectivity options with one SKU, providing customers with reliable and cost-effective communication in most areas of the world. We currently have over 90 customers developing on these two products.

In addition, we’re launching multiple other products over the next couple of quarters, including our new video solution for the in-cab market, which has been well received by customers in field trials, who are seeing the benefit of advanced AI driver safety features to help decrease undesired behavior, such as hard stops, lane drift, tailgating and other traffic violations. We’re beginning field trials in Q1 for our cargo camera solution and expanded portfolio sensors, which enables visibility and control for remote monitoring of asset and cargo condition. We believe these products will drive market share and organic growth as they gain traction throughout the year and into the future.

Turning to new channels to market. We’re seeing increased activity with our inside sales team, which added over 100 new small- to medium-sized transportation customers last year. Our inside sales revenues quadrupled in 2020 with the staff increasing in size. We’re now expanding their focus to include small- and mid-sized fleets in the intermodal container and heavy equipment markets where we see good potential for growth.

Just this week, we announced a project with Zachry, a large construction firm in North America to monitor about 500 of their heavy equipment assets. Historically, ORBCOMM sold heavy equipment exclusively through OEMs. Zachry is the first large opportunity sold directly into private fleets.

Our third area of focus centers around enhanced customer offerings. One of our latest service offerings is our subscription model, which bundles hardware and service costs into a single monthly rate. We started offering the subscription model to transportation fleet customers last year and have seen demand increase over the last few quarters. We’re pleased to have won a number of new subscription opportunities in Q4, including IWX Motor Freight, a great double-play opportunity to monitor their reefer and dry assets; and TLD Logistics, who selected our in-cab solution to improve their fleet’s ELD compliance and driver safety. We believe the subscription model offering is proving to be attractive to a variety of customers.

Moving on to an overview of market conditions. We’re seeing momentum as the global economy shows continued signs of recovery from the pandemic. The transportation market continues to improve with new builds and freight volumes rising. According to ACT Research and FTR Transportation Intelligence, new OEM orders in Q4 increased 98% for trailers and 144% for trucks, compared to the prior year. Keep in mind, after customers place orders for new trucks and trailers, we typically see new purchase orders for our products three to six months later. The container market continues to perform well with shipping line companies benefiting as a result of increased intermodal cargo demand.

In heavy equipment, OEM builds are down year-over-year, but signs point to a modest recovery in 2021. In Q4, we shipped over 76,000 devices to customers across vertical markets, including 30,000 in transportation, nearly — an additional 30,000 in our satellite business and 15,000 to refrigerated container customers. As markets continue to recover, the number of devices we ship should also improve.

Looking at our transportation business. We closed a number of opportunities in Q4, including Booth Transport, Grassmid Transport, McColl’s Transport, Dollar General, Convenience Transportation, Ramler Trucking, XTL Transport, Innovate T-Mo’s Freight [Phonetic], On Time Transport, EG Gray Transportation, Conagra Brands, Freon Logistics, Lackner-Rodriguez Enterprises and Capital Distributing. Many of these wins are double and triple plays that involve multiple asset classes and enable our customers to have complete visibility and control over their operations through our single unified platform.

We’re also making progress on converting many 3G-enabled devices for customers in preparation for the sunsetting of 3G wireless service expected to start shutting down at the end of this year. Some of ORBCOMM’s customers in the process of upgrading include Hub Group, Prime, Knight-Swift and C&S Wholesale. This effort involves upgrading existing assets with ORBCOMM’s latest LTE asset tracking products, providing customers an advanced IoT solution for many years to come. We expect to swap out as many as 60,000 devices in 2021 and anticipate many of which will leverage our subscription model offering, contributing to higher recurring service revenues.

In Q4, we’re pleased to have been selected as the prime for a single award, multi-year contract for up to $45.6 million with the U.S. Army. Through this contract, ORBCOMM is providing cellular, satellite and dual-mode devices and connectivity for the government’s next-generation transponder program to support their mission-critical logistics and asset management efforts for government assets. This is an exciting win for ORBCOMM, and we look forward to providing our advanced IoT technology to the US Government over the next four years.

I wanted to take a moment to talk about the global component shortages that you’ve probably been hearing about and the impact on ORBCOMM. We experienced a number of component shortages over the last year, but as a Company, we typically inventory a number of long lead items. So, prior to Q1 2021, it’s resulted in little financial impact. As you probably noticed, our inventory is now down to three-year lows as we’ve worked through this long lead inventory. Our engineers have designed around many hard-to-obtain components and today, we are predominantly focused on LTE chipsets. Many of ORBCOMM’s cellular-based products come in a North American and global version. The global version operates across most of the world’s cellular frequency bands. The North American version has been far more difficult to source, and we’ve been able to field our global version to domestic customers without interruption or change in performance.

In some cases, we need to get further approvals from regulators and cellular carriers to sell these alternate SKUs across various geographies, which takes time, but should be concluded towards the end of Q1 or the beginning of Q2. As a result, we anticipate approximately $2 million to $3 million of product revenue that was expected in the first quarter, but due to the uncertainty of timing, could now slip into the second quarter. That being said, we’ll most likely achieve analyst consensus for Q1 revenue anyway. Overall, we are extremely pleased with the work from our production team navigating through a difficult environment, and we are confident that we have dealt with this shortage better than most.

Summing up, we are pleased with our financial performance and the momentum we’re seeing as we begin 2021. We’ve made significant strides in our integration efforts, expanded partnership agreements and achieved record operating cash flows despite a challenging macro environment. With market showing signs of recovery, new product launches scheduled and a strong pipeline of opportunities, we are well positioned to execute on our 10 and 20 initiative and build a strong foundation for 2021 and beyond.

With that, I’ll turn the call over to Dean to take you through the financials.

Constantine Milcos — Executive Vice President and Chief Financial Officer

Thank you, Marc, and good morning, everyone. I’m pleased that we continue to make progress on multiple key initiatives with our financial performance in Q4 coming in at the high end of our guidance range.

Total revenue for Q4 was $63.8 million, up about 3.5% sequentially from Q3. Product sales in the fourth quarter were $24.7 million, a 12% sequential improvement as customers continue to ramp up business from the pandemic lows in Q2. In total, we shipped over 76,000 devices in Q4, which is approaching our pre-pandemic quarterly average and with 10,000 more devices than we shipped in Q3.

Q4 service revenues were $39.1 million, with recurring service revenues of $36.8 million, up sequentially $400,000 from Q3. In Q4, we added over 55,000 net subscribers, bringing our total billable subscriber count to 2.23 million at the end of December 2020. This is a roughly 4% increase over the number of subscribers we ended with in 2019, and we look forward to turning to higher subscriber growth as customer demand for IoT solutions continues to increase.

Turning to gross profit margin. The Company realized a margin of 53% in the fourth quarter, a 70 basis point improvement over the prior year period, driven by a higher mix of service revenue and also higher product gross margin. Product margin in Q4 was 29.8%, an improvement of 60 basis points over the prior year period and 80 basis points sequentially. The margin improvement was primarily driven by reduced standard product cost and other interest expenses. Q4 service margin was 67.6%, down 60 basis points from the prior year period, but up 20 basis points sequentially from Q3.

Operating expenses in Q4 were $31.8 million, a decrease of $1.1 million, compared to the same period in 2019. The year-over-year improvement was primarily driven by lower travel, entertainment and labor cost, as well as lower product development cost.

We recognized nearly $1.3 million of bad debt expense in Q4 and anticipate returning to normalized levels in the back half of this year, which is historically closer to $600,000 a quarter.

Sequentially higher revenues and reduced operating expenses led to adjusted EBITDA in Q4 of $14.9 million, a 23.3% margin, which was at the high-end of our guidance range and up sequentially $500,000.

Turning to our cash flow statement. Cash flows from operations was $9 million in Q4, marking our 10th consecutive quarter of positive operating cash flow despite unusually high interest payments of $14 million made in the quarter as we retired the senior notes and paid the first month on the new debt.

Capex for the quarter was $3.9 million, a decrease of $900,000, compared to Q4 of 2019.

As Marc mentioned earlier, we’re excited to have completed the debt refinancing in December. This transaction consisted of replacing our outstanding high-yield senior notes with a new $200 million, five-year term loan and a $50 million revolving credit facility, of which $20 million was drawn in December. The new arrangement results in a number of benefits to ORBCOMM. First, we reduced our total debt balance by $30 million. Second, we’re able to reduce the interest rate from 8% to a starting level of 3.75%, saving about $12 million in annual interest expense in 2021. More specifically, our interest rate was composed of LIBOR plus 3.25% with a 50 basis point floor and the spread can go lower as our net leverage ratio improves. Most importantly, we shifted our debt service payments from paying $20 million in annual interest to making similar payments that split between interest and principal, further deleveraging our balance sheet and positioning ORBCOMM for greater financial flexibility in the future.

Looking at the balance sheet. The Company ended 2020 with $40.4 million of cash, a sequential decrease of about $36 million from the end of Q3, but that doesn’t really tell the story. Let me walk you through the main cash drivers in the quarter. In October, we paid $10 million of semiannual interest expense and also paid down $3 million of our senior notes. In December, we paid nearly $9 million related to the call premium on the remaining senior notes, $3 million in debt refinancing fees, $3 million of interest accrued to the call rate and another $700,000 interest with the new term loan and revolver for the month.

And to finalize the cash outflows, we spent just under $4 million in the fourth quarter for capex. Partially offsetting these outflows was a really strong approximately $24 million of cash generation from operations. After all the noise associated with the debt refinancing, this was a pretty awesome quarter in terms of operating cash flow generation.

Now, let’s turn to our full-year results. Total revenue in 2020 was $248 million, compared to $272 million in 2019. As we mentioned previously, the global pandemic largely impacted our product revenues in the second and third quarters as many of our customer deployments were delayed. As a result, product sales in 2020 were just under $91 million and service revenues in 2020 remained stable at $158 million.

In 2020, we laid out a cost reduction plan of $4 million spread across cost of service, cost of product and operating expenses, all of which was incremental to the $2 million in cost savings realized in 2019. I’m pleased to report that we doubled our $4 million savings goal in 2020. A number of our customers who are negatively affected by the pandemic or the oil and gas industry slowdown led us to unusually high levels of bad debt this past year.

In 2021, we expect bad debt to moderate and likely offset the expected increases from 2020’s low level of travel expense. As a result of the cost reduction initiatives, coupled with improvements in gross margin, full-year 2020 adjusted EBITDA was $55 million, a 22.1% margin. I’d like to remind everyone that Q1 of 2019 included a $2 million favorable net benefit associated with the inthinc earnout. If we exclude this favorable net benefit, then adjusted EBITDA margin in 2020 remained relatively consistent with the 2019 normalized basis.

Turning to the cash flow statement. We generated a new Company record for cash flow from operations of over $48 million in 2020. This is a significant $18 million improvement over 2019, even in a challenging year with reduced product revenues. This strong cash flow performance clearly shows the resilience of ORBCOMM’s business and high-margin recurring service revenues. Keep in mind, we’re anticipating a significant reduction in interest expense in 2021.

Let’s move on to our outlook. We continue to see some level of business disruption from the uncertain macro environment. Even though we have visibility into a significant number of purchase orders, the pandemic, as well as the global component supply shortage makes it difficult to forecast the timing of revenues. Therefore, we continue to provide quarterly guidance, and at this point, we’ll not provide a full-year outlook.

With that noted, we’re seeing customer demand for IoT products and solutions at high levels but component shortages around the world could affect our revenues in Q1 between $2 million to $3 million. As a result, we expect total revenues in Q1 to be between $61 million and $65 million. Keep in mind, Q1 is seasonally our lowest revenue quarter of the year.

We anticipate adjusted EBITDA margin in Q1 to be between 21.5% and 22.5%. Q1 margin is particularly lower considering the higher seasonal cost to start each year. Assuming the middle of the adjusted EBITDA range, this will be a 370 basis point improvement over Q1 2020, when we normalize for last year’s $1.9 million accelerated deferred service revenue. While we intend to provide more specific second quarter guidance during next earnings call, we anticipate significant comp increases in that quarter.

In closing, we’re pleased with our Q4 performance with total revenues, adjusted EBITDA and cash flow generation exceeding expectations. We’ve reduced operating expenses, achieved record cash flows and taken major strides to improve our capital structure and significantly reduced annual interest expense. We closed the year on a strong note and have great momentum entering 2021 and look forward to executing and achieving our 10 and 20 initiative.

This concludes our remarks for the call, and we’ll now take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And the first question will come from Ric Prentiss with Raymond James. Please go ahead.

Richard Prentiss — Raymond James — Analyst

Thanks. Good morning, guys. Hope you are continuing to be well.

Constantine Milcos — Executive Vice President and Chief Financial Officer

Good morning.

Marc J. Eisenberg — Chief Executive Officer

Hey, Ric.

Richard Prentiss — Raymond James — Analyst

Hey. First question I’ve got, the Army contract sounds pretty interesting. Can you walk us through maybe a little bit of the pacing of what you think how that might play out, what kind of margins that could bring? And is it just products or is there services?

Marc J. Eisenberg — Chief Executive Officer

Well, it’s products and connectivity. So, it’s product plus the associated airtime. So, that includes cellular, satellite and dual-mode airtime plus the product. I don’t know that we can comment on the exact margins, but they’re not far off from normal margins. It’s — we’re already starting to ship limited amounts of product. But there is some development that we’re in the process of completing for the US Army, including a web interface that allows them to change the settings onboard these units, even though the web platform, that customer-facing web platform we’re integrating into a US Army interface. So there’s a little bit of work to be done. We’re starting to sell hundreds of units, and we anticipate it will be thousands of units by the back half of the year.

Richard Prentiss — Raymond James — Analyst

Okay. Nice contract. And you mentioned the inventory situation you’re managing through. Is there any difference in kind of the product margins by using the global chips instead of the North American chips?

Marc J. Eisenberg — Chief Executive Officer

Yeah. It’s like $1 or $2. It’s not drastically different. I mean, maybe it will cost us across the entire business 0.25 point in margin or something, but you got to keep the customers happy. And this 3G replacement is significant. We’ve got a year to get it done. So, we’ve got to get those products out there.

Richard Prentiss — Raymond James — Analyst

Sunset is sunset, yeah. The — obviously, a large part of the story here is the free cash flow story. You’ve laid out a lot of what you’ve done on the debt side. Help us understand where you see capex heading, both for the subscription model, but also the total capex?

Marc J. Eisenberg — Chief Executive Officer

Sure. Dean, you want to take that one?

Constantine Milcos — Executive Vice President and Chief Financial Officer

Yeah, yeah, sure. Ric, we think capex excluding subscription will be pretty stable with 2020, maybe about $18.5 million. And right now, we’re expecting subscription model investment to be somewhere between $7 million and $9 million. But it depends on how quick the customer uptake is on the customer side.

Richard Prentiss — Raymond James — Analyst

Okay. And you mentioned, obviously, the refinancings, the spread can come down as the leverage comes down. How do you think about leverage heading down? At some point, does leverage get like too low and you want to stay somewhat levered?

Constantine Milcos — Executive Vice President and Chief Financial Officer

Yeah. Right now, our net leverage ratio is about 3.2. And when the ratio comes down below 3, we lose another 25 basis points on the spread with our term loan. But at the end of five years, we do expect to pay down this remaining balance right now by about half. And that would get us down to some negligible level of net leverage ratio. And it’s just something that we have to keep monitoring. I think being in the 1 range, Ric, is kind of appropriate for a data solution company that we’re driving towards, but it’s something we manage every year.

Richard Prentiss — Raymond James — Analyst

And does that allow some flexibility for stock buybacks too as you monitor what’s happening? Obviously, the stock has had a nice recovery from the COVID depths. But is stock buyback something also is opportune in the long-term?

Constantine Milcos — Executive Vice President and Chief Financial Officer

In the long-term, it just gives us a lot of financial flexibility, whether it’s stock buyback, like we did two years ago, or whether it’s a larger investment somewhere. It just gives us the financial flexibility to do those types of things in the future.

Richard Prentiss — Raymond James — Analyst

I guess, that tees up my last question. Sorry for shooting a couple of rapid fire ones. But, obviously, M&A, you teeded up for me there. Marc, what are you thinking about the marketplace? Do you need any acquisitions? People love seeing the execution you’re doing, but how should we think about large M&A? And when you might have the appetite again?

Marc J. Eisenberg — Chief Executive Officer

So we were trying to achieve the record, Ric, The Guinness Book of World Record from converting analysts in Q2 from do you have enough cash to what are you going to do with all your damn cash? So, I don’t know if we’ve got there. There’s no M&A on the books this year for 2021. We’ve just been through a very difficult integration. We got it done. And the Company is behaving exactly the way we would hope it would. And, I mean, you could see it’s become easier for us to forecast with less SKUs at the ends of these quarters across less platforms. And we’re really focused on these multiple new products that we really want to kind of ace out there with customers, and I don’t know that we can ingest something on the M&A side and pull off this 10% and 20% plan in 2021 and do it well. So, we’re not really considering M&A this year. In the out years, maybe, but just not this year.

Richard Prentiss — Raymond James — Analyst

That’s a good plan. Execute and deliver. So, I appreciate it. Stay well, guys.

Marc J. Eisenberg — Chief Executive Officer

Thanks, Ric.

Constantine Milcos — Executive Vice President and Chief Financial Officer

Thanks, Ric.

Operator

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

Michael Walkley — Canaccord Genuity — Analyst

Great. Thanks for taking my questions. Hope everybody is healthy and well on the call. Hey, Marc, just wanted to follow-up on the 10% and 20% targets, realizing there’s some supply issues and uncertainty around the pandemic. But can you maybe talk about the 10% and 20% potential for even this calendar year just given some easier comps you start to lap? And then on top of that, you have all these new products coming into the model. How should we think about those impacting growth throughout the year? Thanks.

Marc J. Eisenberg — Chief Executive Officer

Yeah. I mean, we’re kind of riding into a little bit of perfect storm here, right? You’ve got very easy comps, especially in Q2, start — I shouldn’t say especially in Q2, starting in Q2. And you’ve got these 3G replacements and there’s a lot of exciting stuff. The reefer business is on fire. We’re seeing growth in the transportation macro industry that we really haven’t seen since the end of 2018. There’s a lot of stars aligning. And wow, I mean, I’d be disappointed if we didn’t grow 10% this year, I’d be really disappointed. And then with all the work that we did around cost reduction and the efficiencies in getting this integration done, I think pretty easily you’re getting 2 points in adjusted EBITDA growth for every 1 point of revenue growth. So, we’re comfortable there.

If I had to take the over-under on the 10% and 20%, gee, I’d take the over. But I am focused on — I think we’ve got a pretty good handle on the component issue based on our global variance and other stuff. And we’re not kind of reliant on third parties to reengineer. We do it in-house. We submit for our own regulatory approvals. There’s a lot of bench strength here that we can kind of fix our own problems. So we’re confident. So if I make a bet, I’d say, it’s this year, yeah.

Michael Walkley — Canaccord Genuity — Analyst

Great. That’s helpful. And, Marc, maybe a way to flesh it out another way on the 10% growth side. A lot of tailwinds you talked about on just organic growth. So how should we think about just the organic growth of the business? And then maybe if you layer on top of that, I know there’s different timing when new products hit. But if you just look at new products separate, what could that maybe add to growth based on what you’re hearing from field trials and your anticipated timing when they might hit the model?

Marc J. Eisenberg — Chief Executive Officer

Yeah. I think it could be 4% to 5% of these new products is — unfortunately, in our industry, it’s like that 5-50-500 rule, customer tries 5, they move to 50 before they get to 500. And that takes a couple of months to get them converted. The good news is, once you get them on those new products, our churn is like 7% a year. So, it’s a little bit of a long cycle in terms of selling it. But there’s a massive tail once you do. So I would say it’s there.

And understand, I think when we talk about the 10% and 20%, we’re converting, Dean said $7 million and $9 million of product at cost into the subscription model. So, $7 million and $9 million at cost is, what, $12 million or $13 million at retail. And then $12 million or $13 million at retail is something like 4% right there, right, that we’re compensating for. So, 10% and 20% isn’t really 10% and 20%, is it? It’s 13% and 20%.

Michael Walkley — Canaccord Genuity — Analyst

Great. Thanks. Last question for me, and I’ll pass the line. Just a couple of clarifications. Dean, I think you mentioned Q1 without the supply shortages you could have done, was it $2 million to $3 million? Can you just clarify that?

And then also just on operating expenses going forward, it was better than expected on the execution, at least relative to my model in Q4. Is that a good run rate for Q1? Or are there some things, I think you mentioned some higher salaries or something, that come back into the model in Q1 implied in your guidance? Thank you.

Constantine Milcos — Executive Vice President and Chief Financial Officer

Sure. Yeah. We mentioned on the call, it was $2 million to $3 million of potential push because the components are maybe not available to do the full bill for the March purchase orders. But we’re still chasing those components and seeing what we can do.

On the operating expenses, we do expect SG&A to be relatively flat from 2020 to 2021. So, I don’t really expect any growth in SG&A for the full-year. And maybe cost of product development has a small increase from last year, something in the 5% to 6% range. But operating expenses are going to be relatively consistent in 2021.

Michael Walkley — Canaccord Genuity — Analyst

Great. Well, congrats on the strong execution. And I look forward to another good year for you guys. Thanks.

Constantine Milcos — Executive Vice President and Chief Financial Officer

Thanks, Mike.

Operator

And the next question will come from Anthony Stoss with Craig-Hallum. Please go ahead.

Anthony Stoss — Craig-Hallum Capital Group LLC — Analyst

Good morning, Marc and Dean. My congrats as well on the continued strong execution and getting the integration behind you. Marc, I wanted to focus in on the dual-mode products you’re talking about. I think you mentioned there is 90 customers that are in process of designing that in. How important are these products for new customers? Maybe if you can give us the mix of existing versus potential new customers within that 90 tally? And then, presumably with the satellite functionality that this would imply likely larger customers. Any detail you can share related to that? And then I did have a follow-up.

Marc J. Eisenberg — Chief Executive Officer

Yeah. So the 90 kind of follows that 5-50-500 rule, right? So, it’s small amount of units right now as these guys get their development done. The dual-mode is — there is two separate and distinct customers for it. Number one is our reseller network and basically, us selling satellite connectivity and a modem or a telematics box to a third-party seller. Typically, these are international folks. And we see a really good market for that. But probably the largest user of this dual-mode service is going to be ORBCOMM itself. And that’s literally our transportation customers coming off a 3G sunset saying, gee, I’m never going to deal with that again, let me get a dual-mode deployment through our channel. And we’ve closed some super exciting deals here already. None that we’re able to talk to on this call, but thousands of them.

And I think the trick in dual-mode is, how do we turn it from 2% of our deployments to some larger number, 20%, 30%, 40% of our deployments. That’s really the game changer there because then ORBCOMM has a competitive advantage that really no one can touch certainly at the price points that we’re at. And be just better service, right? So, I think it’s exciting. It’s a game changer. These price points that we’re talking about for these products from a hardware perspective, I don’t think customers have ever seen anything like this, and it will definitely affect the elasticity of the market.

Anthony Stoss — Craig-Hallum Capital Group LLC — Analyst

Got it. And then, Marc, following up on, I guess, Dean commented that he doesn’t expect SG&A to necessarily go up this year. After having doubled the sales force in 2020, are you comfortable that that’s the right level to take you forward for the next couple of years?

And then lastly, if you wouldn’t mind taking a shot. Your sub growth continues to be quite strong. Any guesses where you think you exit calendar 2021 in terms of number of subs?

Marc J. Eisenberg — Chief Executive Officer

So he said we doubled the inside sales staff, not the sales staff.

Anthony Stoss — Craig-Hallum Capital Group LLC — Analyst

Yeah. Correct. Right.

Marc J. Eisenberg — Chief Executive Officer

So the inside sales staff, when we say double it, I think we went from like three to six, which is why you’re not seeing massive increases in SG&A. And most of our sales historically have been through these large customers or OEMs that don’t require a large staff or internationally, we mostly sell through a reseller network, where they’re typically the ones that are adding staff. So, again, that’s why we’ve got this incredibly scalable model. So that’s kind of the way we’re looking at it.

What was your next — I’m sorry, your…

Anthony Stoss — Craig-Hallum Capital Group LLC — Analyst

Just to venture a guess for 2021, yeah, subs.

Marc J. Eisenberg — Chief Executive Officer

On 2021, yeah. So my guess is, in the first quarter, it should be at least as good as Q4, probably a little better in terms of subs. We’re about two-thirds the way into the quarter, and we’re probably looking at like a 40 number right now with a whole month to go. So we’re trending just a little bit better. I looked at it this morning. But it should creep back closer to the 60,000s and 70,000s, which is where we used to — kind of where we used to live, right, before the pandemic and then at some point, hopefully, it starts creeping forward, 6% or 7% a year so that we can achieve our 10% and 20% plan. Keep in mind, new products and new SKUs are also going to end up meaning more subs.

Anthony Stoss — Craig-Hallum Capital Group LLC — Analyst

Thanks for the color. Best of luck, guys.

Marc J. Eisenberg — Chief Executive Officer

Thanks.

Constantine Milcos — Executive Vice President and Chief Financial Officer

Thank you.

Operator

And our next question will come from Mike Latimore with Northland Capital Markets. Please go ahead.

Michael Latimore — Northland Capital Markets — Analyst

Great. Thanks. Yeah. Congratulations on the year. On the — I guess, Marc, you touched on this about sub commentary for the year. What about ARPU? How do you think ARPU sort of trends throughout the year, I guess?

Marc J. Eisenberg — Chief Executive Officer

ARPU should remain relatively constant. I think what we’re focused on is mix when it comes to ARPU. And mix means two things in my book. It means subscription versus selling the hardware upfront generates far higher ARPUs, but as you heard me say, it’s on 3% or 4% of the business. So it moves nickels, but not dimes or quarters. And I think also mix, we’re selling a little bit higher percentages of in-cab versus the basic trailer. And as that stuff kind of steps up, that can affect ARPUs as well. But if you’re expecting like massive moves in ARPUs, it’s really hard to move a base of 2.2 million subs. Every year, let’s say, you’re adding 250,000, 300,000 subs on 2.2 million, it’s hard to budge, right? Which is why you do so well in the middle of the pandemic, right?

Michael Latimore — Northland Capital Markets — Analyst

Yeah, definitely. Good. Okay. Great. And then if you get to your 10% goal for the year, I guess, can you achieve that while there is still a supply constraint out there? Or do you need the supply constraint to abate to get to 10%, you think?

Marc J. Eisenberg — Chief Executive Officer

I’m knocking on wood here, Mike. I think we got the supply thing covered. That being said, I don’t know what the next mole is that we’re going to have to whack.

Michael Latimore — Northland Capital Markets — Analyst

Sure.

Marc J. Eisenberg — Chief Executive Officer

The ones that we’re looking at right now, the last one being this LTE modem, we’re going to get a redesigned modem from u-blox by the end of the month, that’s the North American version that we’ve been referring to. And we haven’t been struggling so badly with our other modem supplier, Quectel. So, we’re going to have enough for our Q2 demand. So, I don’t know what the next mole is that we’re going to have to whack, but it does feel good to have 400 engineers running around so that when you do run yourself into a problem that they can dig your way out.

Michael Latimore — Northland Capital Markets — Analyst

Right. Right. And, I guess, just last question on the 4G upgrade opportunity. I guess, one, did you say that you’re expecting about 60,000 units to upgrade this year? And then two, is that sort of the entire 3G base then? Or — because they obviously need to be off by year-end?

Marc J. Eisenberg — Chief Executive Officer

Yeah. So they need to be out for year-end, if they’re on T-Mo. And then you got a little more time, if it’s the other vendors. So T-Mo is predominantly on our reefer fleet, which is why you heard us spit out a lot of reefer names.

Michael Latimore — Northland Capital Markets — Analyst

Okay.

Marc J. Eisenberg — Chief Executive Officer

So, I think the whole issue is about 100,000. And the biggest one out there is Hub. Hub has been dealt with, and we’ve already started fielding their units, maybe to the tune of about a-third in 2020 and then two-thirds in 2021, maybe some sneaks into 2022 because they’re on AT&T. The next biggest one is Prime. And Prime is like one of the larger companies that some people haven’t heard of, but believe it or not, they’re the largest reefer fleet in the nation. And they started upgrading at about 150 a week and will continue doing that all year. So two customers almost get you to half. And then you’ve got a bunch of other guys. I think we’ve got this.

There really isn’t a wonderful second option that delivers the kind of value that we do and the kind of return that we do, that’s so embedded with these customers and integrated with these customers. I mean, there is — you look at some of these guys like Prime, there’s 10 years of work together, developing a product together that works for them.

Michael Latimore — Northland Capital Markets — Analyst

Got it. Great. All right. Thanks a lot. Good luck this year.

Constantine Milcos — Executive Vice President and Chief Financial Officer

Thanks.

Operator

And the next question will come from Chris Quilty with Quilty Analytics. Please go ahead.

Chris Quilty — Quilty Analytics — Analyst

Thanks. A follow-up for Dean. I hate beaten on the SG&A, but I just wanted to clarify, I didn’t catch the number. The incremental bad debt expense this year, I think, was around $8 million. Is that correct? And if I understand your SG&A guidance, bad debt goes down by $8 million back to normal, but the spending on marketing and travel and entertainment goes up to offset and you end up flat. Is that correct?

Constantine Milcos — Executive Vice President and Chief Financial Officer

Yeah. Let me just clarify for you, Chris. Bad debt was $2.4 million in 2019, and it went up to $6.1 million in 2020. So it was an increase of $3.7 million. And we expect that $3.7 million to drop off and get back down to that normalized level of about $2.4 million a year. On the flip side, we did see travel come down about $3 million and expect that to incrementally go back up. But I don’t know if it ever gets back to the pre-pandemic levels.

And then just note, on SG&A, just to clarify, we did have a reduced headcount for the year. We’re down about 50 employees from the end of 2019 to the end of 2020. So, some of those employees might get backfilled, but that is also a big driver of the SG&A staying down to the low levels that we’re seeing today.

Chris Quilty — Quilty Analytics — Analyst

Got you. And product margins, still good to model those around the 30% level?

Constantine Milcos — Executive Vice President and Chief Financial Officer

Yeah, yes, I think that’s the level we’re at now. Yeah.

Chris Quilty — Quilty Analytics — Analyst

All right. And AIS revenues in the quarter? And any updates on your small boat Class B initiatives and what you’re seeing there?

Constantine Milcos — Executive Vice President and Chief Financial Officer

So AIS revenues were $2.7 million. I’ll let Marc take that. Yeah.

Marc J. Eisenberg — Chief Executive Officer

I’m sorry, let me take the revenues.

Constantine Milcos — Executive Vice President and Chief Financial Officer

Yeah. The revenue was $2.7 million, consistent with Q3. But I’ll let Marc take the small boat initiative.

Marc J. Eisenberg — Chief Executive Officer

So, the thermal testing is beginning on the first spacecraft. And it’s set up for a June SpaceX launch, but it is the space business. So, I don’t — maybe Q2, maybe Q3.

Chris Quilty — Quilty Analytics — Analyst

Understood. And any other movements you’re seeing in that AIS market in terms of either your strategy once you have the new satellites online or competitive changes?

Marc J. Eisenberg — Chief Executive Officer

Well, there’s definitely three competitors out there, right? And the good news is there’s only three guys out there. But the offerings are definitely similar. I think the thing that’s really going to give us legs going forward is the Hali product, which is something super cool from a product perspective as opposed to a spacecraft perspective. And then the second thing that could launch us back to growing the AIS business would be launching those satellites and getting those Class B vessels under X [Phonetic]?

Chris Quilty — Quilty Analytics — Analyst

Got it. And final question. Any updates on Brazil, which has been problematic? Are you seeing a recovery in that market?

Marc J. Eisenberg — Chief Executive Officer

Brazil is kind of back to normal levels. So, I think it’s a struggle in Brazil in terms of the economy, but trucks are still moving, right? So, Brazil is certainly up Q4 from Q3.

Chris Quilty — Quilty Analytics — Analyst

Very good. Thank you very much, gentlemen.

Constantine Milcos — Executive Vice President and Chief Financial Officer

Thanks, Chris.

Operator

[Operator Instructions] The 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 questions. Hey, Marc, a couple of cleanup items. I guess, I’m not sure, did you give an AIS number for the quarter?

And then to dive in again on component availability and the impact on product gross margins, it sounds like you’re comfortable at that 30% range for the year, which I think has been your target level. But specifically, as we’re looking in the first quarter here, are you expecting any impact or pressure on gross margins? Because it still seems like there’s an availability issue or potentially, right, that $2 million to $3 million that could get pushed in this quarter and maybe throw on top of that as well. The guidance of $61 million to $65 million. What are you factoring in of that $2 million to $3 million kind of for the midpoint of the range? Is that some of that $2 million to $3 million comes into the quarter, none of that comes into the quarter? How should we be thinking about that, call it, $2 million to $3 million at risk at the current time versus the current guidance?

Marc J. Eisenberg — Chief Executive Officer

Sure. AIS was, someone had just asked, it was flat to last quarter.

Scott Searle — ROTH Capital Partners — Analyst

Okay.

Marc J. Eisenberg — Chief Executive Officer

In terms of the margins, I think we pretty clearly guided to the adjusted EBITDA margins, which are kind of in line with Q4, just maybe a point lower because expenses jump up in the first quarter, and they always have. So that’s what we’re predicting. But I don’t think that hardware margins are going to vary much from Q1 to Q4 and despite the component shortages that we battled in Q4, we still came in at, I think, 29.8%, which is kind of right at that 30% number. So, we are comfortable.

If the $2 million to $3 million comes in, you’re at closer to the $65 million number. If it doesn’t come in, you’re probably closer to the $63 million number. And if all $3 million doesn’t come in, maybe you’re at the low-end, but gee, we’re not planning to be at the low-end. But it is there. So that’s kind of how we’re looking at it.

Scott Searle — ROTH Capital Partners — Analyst

Okay. And then, Marc, just in terms of the new products and enhanced services kind of getting layered in sounds like the middle of this year and how you’re bundling both service and hardware components or at least hardware components. How are you — I mean, what are the indications of demand that you’re seeing on that front? So as we go forward and you think about getting back to your normalized sub growth, what percentage do you think are going to move in that direction? It seems like the $7 million to $9 million probably implies like 10% to 15% kind of conversion rate. Is that in the ballpark? How are you thinking about it? How is that stacking up against initial indications?

Marc J. Eisenberg — Chief Executive Officer

So we don’t really look at it as a percent of the entire hardware. We look at it as a higher percent of the solutions part of our business. Not every piece of hardware we sell would lend itself to a subscription model. When we’re selling a satellite modem, it’s not really — you don’t really sell a satellite modem and bundle in the airtime because the satellite modem is a component in someone else’s product, right? It’s like financing the Sirius receiver in your car and not the car. You know what I’m saying?

So, when we look at that 8 to 10, it’s a higher percent of the solutions business that we sell to. And then even within the solutions business, when you look at ORBCOMM’s super large customers like a Walmart or a J.B. Hunt, their cost of capital is lower than ours. So they don’t really need us to help them finance their product. So, once you kind of factor out the products that don’t really lend themselves to subscription and some of these larger customers, then we’re kind of factoring in like a 30% to 40%.

Scott Searle — ROTH Capital Partners — Analyst

Got you. Okay. And lastly, if I could, just to dive in, in terms of lack of annual guidance, it seems like you’re pretty comfortable with your component availability situation that you guys have done a good job in the fourth quarter, you have pretty good visibility in the first quarter here. You’ve got a nice demand profile kind of shaping up. Key markets that have been headwinds like oil and gas have bottomed out for you guys. Transportation is starting to come back. I guess, what is the hesitance in terms of providing that annual guidance? Is there something else that’s going on out there that’s causing you some concern? Or is it just a level of caution kind of given where we are basically in the COVID recovery cycle? Thanks.

Marc J. Eisenberg — Chief Executive Officer

Hey, to be clear, I’m on record for taking the over. But I think we’re just being cautious. And I think the way we’re kind of guiding to the year is still more aggressive than all our peers, right? I mean, there — a lot of guys that we deal with aren’t even giving first quarter guidance, and it’s February 24. So, I think we’ll continue to be conservative, but I don’t want you to think that we’re doing anything different than we normally do, Scott. We always kind of give that annual guidance on the next call. I know you haven’t been following us that long. But this is ORBCOMM part for the course.

Scott Searle — ROTH Capital Partners — Analyst

Great. Thanks, guys.

Marc J. Eisenberg — Chief Executive Officer

Thanks.

Operator

And the next question will be from Adrian Doria Medina with ADM Capital Management. Please go ahead.

Adrian Doria Medina — ADM Capital Management — Analyst

Hey, guys. Congratulations on a good quarter. So, I wanted to ask you and circle back to the 10%, 20% plan. So in order to achieve this goal, does that mean that you guys are going to incur higher capex? I know 2020 was about $20 million of capex. So, should we think about that for the run rate? Or should we think about, I guess, more normal levels, pre-COVID levels?

Marc J. Eisenberg — Chief Executive Officer

Definitely not getting back to pre-COVID levels. We only have very minimal amount of satellite capex being launched. But in terms of the run rate, Dean, do you want to take that one?

Constantine Milcos — Executive Vice President and Chief Financial Officer

Yeah. Yeah. So, I think when you mentioned the $20 million of capex in 2020, it was really two pieces. There was about $18.5 million of, what we call, project capex and $1 million of investments in the subscription model. I think the capex projects will stay consistent at about $18.5 million, but we are looking to do more of the subscription model and that investment will grow, and we are thinking that will be in the $8 million to $9 million range. So, all in, investments and cash flow will be in the $27 million range in 2021. I hope that clarifies your question.

Adrian Doria Medina — ADM Capital Management — Analyst

Yeah. So you’re saying that for 2021, we should think about close to $27 million. Is that right?

Constantine Milcos — Executive Vice President and Chief Financial Officer

For investing, yes. Again, so between capex and $8 million or $9 million for subscription model investment.

Adrian Doria Medina — ADM Capital Management — Analyst

All right. And should we think about that number going forward decreasing or staying at that level? This is for modeling purposes, more than anything.

Constantine Milcos — Executive Vice President and Chief Financial Officer

I think in the short-term, that capex project expense should be at that level. The subscription model, it really depends on the demand in the marketplace from customers for that model structure. But we do see that demand growing incrementally.

Adrian Doria Medina — ADM Capital Management — Analyst

All right. Perfect. All right. Thank you very much, guys.

Constantine Milcos — Executive Vice President and Chief Financial Officer

Sure.

Operator

Ladies and gentlemen, 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 first quarter results in late April. Have a good day.