Blackline Safety Corp

TSX:BLN

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to Blackline Safety's Fiscal Third Quarter Results Conference Call. This conference is being recorded. I would now like to turn the conference over to Scott Boston, Vice President of Finance. Please go ahead.

[Scott Boston, executive]

Welcome, and thank you for joining us. Today, we will be discussing our fiscal results for the third quarter ended July 31, 2023, which were issued before market opened this morning. With me today is Cody Slater, CEO and Chair of Blackline Safety Corp. as well as our CFO, Shane Grennan. I will turn the call over to Cody in just a moment for an overview of our third quarter. Following that, Shane will discuss the financial highlights of the quarter in greater detail. Cody will then close with our outlook and some additional commentary before we take questions. I'd like to remind everyone that an archive of this webcast will be made available on the Investors section of our website. I would like to note that some of the information discussed in this call is based on information as of today and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in the earnings news release as well as in the company's SEDAR filings. During this call, there will be a discussion of IFRS results, non-GAAP financial measures, non-GAAP ratios and supplementary financial measures. A reconciliation between IFRS results and non-GAAP financial measures is available on the company's earnings news release and MD&A, both of which can be found on our website, blacklinesafety.com and on SEDAR. All dollar amounts are reported in Canadian dollars, unless otherwise noted. With that, I will now hand the call over to Mr. Slater.

[Cody Slater, executive]

Thank you, Scott. Good morning, everyone, and welcome to Blackline Safety's Third Quarter 2023 Conference Call. I'm pleased to share today Blackline's third fiscal quarter results, our 26th consecutive quarter of year-over-year revenue growth. These results demonstrate the successful execution of our plan to deliver positive adjusted EBITDA through revenue growth, margin expansion and cost discipline. Presale revenue grew 34% over the prior year while incurring 18% lower operating costs. Blackline also achieved the highest ever gross margin for the company at $13.4 million, which was driven by product margins of 29%, their highest in over 2 years and continued strong service margins of 75%. We also exceeded our target for the key metric of net dollar retention, reaching 125% 1 quarter ahead of schedule. This drove our annual recurring revenue, or ARR, to $47 million, up 43% year-over-year. Our growth, combined with our continued cost discipline, led to an improvement of $7.7 million in adjusted EBITDA compared with the prior year quarter. The past year has seen Blackline improve every single financial metric as we continue to deliver value to our growing list of customers through a unique and innovative product, data and communication services. With our improving margins, growing ARR and decreasing cash burn, we exited the quarter in the strongest financial position ever with total liquidity of $25.6 million in our cash, short-term investments and operating facility and $50 million available on our resecuritization facility. As we continue to win market share, we saw 26% hardware revenue growth year-over-year, taking business from our competitors and expanding the connected safety market to our industry-leading products and services. In Europe, we saw growth in the water, wastewater and utility sectors, which led to a 55% revenue increase for that region. Other significant global wins include several orders across the Middle East totaling $1.3 million in total contract value and a deal with $3.2 million to protect 1,000 workers for a large energy company in the U.S. Permian Basin. We continue to see strong customer interest in the G6, especially with our soon-to-be released enhanced feature levels, launching as Protect and Protect Plus. These feature sets are driving customer adoption as well as higher service revenue. As expected, we have recently started to see the first large opportunities emerge as we demonstrate these enhanced functionalities, illustrating again how data and communication are central to the way that Blackline differentiates its fully connected solution. I will now turn the call over to our CFO, Shane Grennan, to discuss our fiscal third quarter results and financial position in more detail.

[Shane Grennan, executive]

Thank you, Cody and good morning all. As Cody mentioned, we achieved our 26th consecutive quarter of year-over-year revenue growth of 34%, generating total revenue of $24.8 million. This includes $11.3 million in product revenue, which increased 26% year-over-year. The increase in the current year reflects the past investments in the company's expanded sales network and global sales team, we continued strong demand generation and sales development activities. Our gross margin of $3.3 million more than doubled in the third quarter, thanks to the growth in revenue and an increase in gross margin percentage to 29% from 17% in the prior year period. Park margin increased sequentially for the third consecutive quarter as we began the rollout of a secondary pricing increase and saw benefits from increased throughput from our expanded production facility where we have enhanced capacity and process automation. Service revenue during the quarter increased 41% to $13.6 million, our second consecutive quarter with greater than 40% growth in this segment. Software services were a major contributor to this growth, up 41% year-over-year, which also drove ARR growth of 43% to $47 million. Newly activated devices contributed to year-over-year growth of $1.4 million in the quarter and net service increases within our existing customer base contributed $2.4 million. This resulted in net dollar retention of 125%, achieving our Q4 FY 2022 target one quarter ahead of schedule. Our pricing increase, combined with customer device count expansions and the efforts of our client success team to increase the penetration of high-value services, including Blackline's safety operations center, personnel monitoring, QA voice and Push-to-Talk, all contributed to this remarkable number. Our rental business also continues to generate robust growth with revenue increasing 35% from the prior year to $1.1 billion. Rental revenue was slightly down from the second quarter of 2023, with Q3 being a slower season for rental projects. We expect to continue our strong year-on-year growth in the rental business in the fourth quarter as well as fiscal 2024, with the mental team having expanded to cover Europe and the Middle East regions where there's huge demand for our connected area and wearable monitors for 3- to 9-month projects. Our service gross margin percentage continued to be strong at 75%, generating over $10 million of gross margin for the quarter. We expect to see incremental margin improvements in Q4 and fiscal 2024 as we increase our penetration of value-add data and communication services for our customers. Our total gross margin percentage came in at 54%, yielding $13.4 million, setting another quarterly record for total gross margin. The growth in total gross margin is due to revenue mix, cost optimization efforts across our business and the rollout of our pricing increase. In terms of our geographic growth mix, we are pleased with our performance at each one of our key geographic markets improved from the year ago comparable periods. Our European market represented our largest growth region, improving 55% from last year's Q3 as our sales team secured several major wins in this region. The U.S. continues to be our largest market and demonstrated strong growth at 35% from the year ago comparable period as we leveraged our established sales network in the region. Additionally, our Canadian and rest of world markets were able to see year-over-year increases of 19% and 5%, respectively, as we continue to have excellent product wins and strong renewals across these regions. Shifting now to operating expenses. Our core expenses for the quarter were $20.1 million, which was down $4.5 million or 18% compared to our expenses of $24.6 million in the prior year quarter. Excluding impacts of foreign exchange, this was the sixth consecutive quarter where Blackline has achieved its total expenses as a percentage of revenue. General and administrative expenses decreased 8% from the prior year quarter to $5.7 million, which represented 23% of revenue compared to 33% in the prior year. This increase was primarily due to reduced legal and consulting costs as we continue to focus on our fixed cost base. Sales and marketing expenses decreased 3% from the prior year quarter to $9.3 million, which represented 38% of revenue compared to 52% in the prior year period. The decrease was a result of lower headcount contractor expenses compared to the prior year. I would like to underscore that even with this decrease, these go-to-market teams drove revenue growth of 34% for the quarter. Product research and development costs decreased 43% from the prior year quarter to $4.3 million and decreased as a percentage of revenue to 17% from 40% to the prior year period. Salaries, recruitment expenses and consulting and contractor costs associated with the G6 were all down with the core development work for that product having been completed. Our development teams are now focused on the next generation of our core products and services, and we look forward to the impact these innovations will make as these products begin to launch in late 2024. Moving on to capital expenditures. These totaled $1.4 million for the quarter, primarily for additions of revenue-generating sensor cartridges being used by customers and rental equipment to support the continued growth of that service line. Inventory totaled $16.6 million at quarter end compared to $18.7 million at the end of the fourth quarter as we work to improve our inventory turnover while our sales continue to grow. We see inventory continuing to be a source of cash for us over the next several quarters. Our G7 lease program had a total of $38.2 million in future contracted cash flows at July 31, 2023, up from $36 million on October 31, 2022. During the quarter, we received proceeds from our lease securitization facility with CWB Maxium of $2.6 million and made scheduled repayments of $0.8 million. We expect to see similar advances in repayments in the fourth quarter based on third quarter lease contracts. We continue to have over CAD 150 million equivalent of availability on the facility as of the end of this quarter as we continue to use the facility to optimize our working capital. At quarter end, we had total cash and short-term investments on hand of $17.6 million, with $8 million of availability on our senior secured operating facility with ATB Financial and CAD 50 million equivalent of availability under the new securitization facility, which CWB Maxium. We remain confident that we have the resources required to execute our business strategy of achieving sustainable growth, innovation and disciplined cost management so that Blackline can generate positive free cash flow in fiscal 2024. I will hand it back to Cory to discuss our outlook and provide closing remarks. Cody?

[Cody Slater, executive]

Thank you, Shane. We want to reiterate our goal to achieve positive and quarterly adjusted EBITDA in Q4 of this year and for the full year of fiscal 2024. I would also underscore that we have the liquidity and resources to take us to free cash flow in fiscal 2024. It is clear from everything we have discussed today that Blackline is a different dramatically stronger company than it was a year ago. We've grown to be one of the most significant players in our industry and proven that our business model can successfully take our company true to profitability and beyond and demonstrated that we have the resources to do so. Everything we have done to date has positioned us to become the dominant player in the multibillion-dollar gas detection and connected safety markets. It is now time to focus on the true opportunity this presents to both our top and bottom line, driving value for our shareholders over the coming years. I want to thank the Blackline team across the globe for their commitment to our purpose and for the incredible results they have collectively delivered to date. I speak for all Blackline employees when I say that we are grateful to our customers for their continued trust in Blackine to protect their people around the world. Thank you for your attention this morning, and I'll now turn it over to the operator for questions.

[Operator]

[Operator Instructions] The first question comes from John Shao with National Bank.

[John Shao, analyst]

So Cody, could you give us an update on the G6 and whether it is still on track for delivery in Q4?

[Cody Slater, executive]

Sure, John. As we mentioned in the call, I think that the last number of couple quarters between [indiscernible] an updated version of the capabilities statistics for we call Project and PROTECT so to protect. Both of these are really designed to give enhanced feature set to customers we're looking for really getting more value over the data. Both are completed through their development and beginning the launch right now in the field, along with the accessories that are also necessary to that, such as the large-scale multichargers that the PROTECT as it uses a lot more data. We'll have a week long battery life rather than a year long battery life, so you need to have a [indiscernible] charging. All that's coming to -- it's all that's completed and coming into market right now. We're seeing the pipeline start to build on that as part of this overall spread in our pipelines right now.

[John Shao, analyst]

Okay. A related question on Hardware is that could you comment on your overall hardware sales pipeline? How is it going to impact your Q4 product revenue?

[Cody Slater, executive]

Sure. I think one thing most people have got where Q4 is always our strongest hardware quarter. It's the seasonality in some aspects. And it's just the fact that the company is growing at the rate we are last quarter, Q4 is always going to be strongest quarter. We're seeing a pipeline right now that supports us continuing that supports us seeing strictly across the whole product range. I'd point to a couple of the markets. The -- we call our best in the world market, which was a little soft in growth last quarter is going to be very strong in Q4. We saw at the beginning of a very churn of real strong growth in Europe in Q3, that's continuing into Q4. Strong pipeline across the ports and crossarms [indiscernible] refer all of our regions right now.

[John Shao, analyst]

Okay. Got it. Last question is on modeling. In terms of your total operating expense for Q4, should we expect the total cost to be relatively flat compared to Q3.

[Cody Slater, executive]

John, that's correct. Yes, that would be a fair assessment.

[Operator]

And the next question comes from Rogan Anantharajah with ATB Capital Markets.

[Rogan Anantharajah, analyst]

Just had a question on customer behavior. Have you guys noticed that customer behavior has changed over time and are customers being a little bit more cautious, which could lead to longer lead times.

[Cody Slater, executive]

You know over the next phase [indiscernible] it a little bit of the opposite that the penetration, the depth of experience we have in the different vertical markets now just at strength so that the customer what we see is less desire for customers to treat us as a bit of an unknown. We're in the markets. We're being used by their competitors or people in their same industry or a lot of our expansion is inside our current customer base itself. So really, I think the shifts -- is we're seeing a shift in the market. You've certainly we've seen shifts in last year and strengthening in the oil and gas space with the strengthening of VW pricing, which maintains its strength right now. And penetration into some new verticals is starting well. We mentioned that a little bit in one of our press releases recently about the fire in hazmat world. So I think as we become more of the industry standard for connected worker, which we really are in the context of the world of gas detection, I think the -- it's a bit of the ops you see a little -- we see shorter development times to bring a lead to what we call a net level, and we see that continuing in the future.

[Rogan Anantharajah, analyst]

Perfect. And I just had another question on just your net dollar retention. Last quarter, you revised your target up to 120 and then now you guys are at 125. So do you guys have a new target? Or do you see where NDR could potentially go?

[Cody Slater, executive]

We're really pleased because I think that's a huge number to look at, 125, those are industry-leading kind of numbers in any world. I think internally, what we really like about that is just how much it reflects on the customers and how much customers value the services we provide for. And that's what that is really driving that. And that strong customer retention that grow in that all customers adopt new units and as they adopt new services, the core real growth is reaching 125 because that's faster than we thought and I think you'll see similar numbers going forward, but not the civil level of growth going forward.

[Operator]

And the next question comes from Jason Zandberg with PI Financial.

[Jalson Zandberg, analyst]

First of all, I just wanted to get your comment on, you had a very strong sales quarter for -- in Europe. I just wanted to get some color, if I could, on those strong sales during the third quarter.

[Cody Slater, executive]

Sure. I think what you're seeing really is just the work that's been done over the last year in Europe with some shifting in our sales structure and our approach to markets there. And we see that as really the tip of the iceberg there for Europe. They've done a good job of getting themselves into the position where we're now seeing visibility in our European pipeline that shows that in -- you can see that kind of growth going forward. Still not in water waste waters, definitely good strength in addition from current customer base. And yes, just a pretty broad. The European market is a little different to us and there's less oil and gas penetration within the market in Europe, but a broader industrial base and we're seeing a real strength there across the moral product space. And we will start seeing that in the rental in Europe as well, too, and the rentals in the rest of the world in the Middle Eastern market as we put some investments into that. So current not all of what you're seeing is the results of the work the team over there has done, the alignment here with the teams here globally to be into the traffic very long on.

[Jalson Zandberg, analyst]

Okay. No, that's great. And my second question just relates to your ARR was a nice jump this quarter to $47 million, quite lapressive given where you've been trending. This is definitely a step-up step change. Just wondered sort of what's your outlook on your annual recurring revenue from this point forward? Do you expect it -- first of all, what was the reason for the jump? And then second of all, what is your expectation on the growth of this number moving forward?

[Shane Grennan, executive]

Jason, it's Shane here. So yes, we did have a very good improvement this quarter we're 11% sequentially from our third quarter through -- from our second quarter to our third quarter. Reasons for that were an expansion within the existing customer base that we have moving on to more high-level service plans that we're looking there as well as a new device sales taking place within the previous period, those service plans coming online in the third quarter. Going forward, it's certainly great to have an 11% increase sequentially, probably something that's maybe more modest from a modeling perspective on a go-forward basis. But yes, it's fantastic to have that $47 million number of 43% from where we were at this time last year.

[Operator]

The next question comes from David Kwan with TD Securities.

[David Kwan, analyst]

I just wanted to get back on to the G6 here. Obviously, you had a bunch of customers that were looking for more T- satellite like features and the G6 that you guys have been working on and accelerate the product road map. So can you can give us a better sense on how we should think about the ramp in the G6 understanding that you're kind of launching at right now? And to what extent there might be some pent-up demand or whether we're still going to need this going to be somewhat similar to the G7 launch. Customers are going to want to go through POCs and stuff like that and then maybe see more of a ramp in a couple of quarters?

[Cody Slater, executive]

Yes. I think it'd be a little bit of a mix between the 2, I'd say a bit more of the latter, but we have customers who've been waiting for some of those enhanced feature sets, particularly the higher level of data and visibility of workforce that we can provide. So we're going to start to see a ramp in shipments in Q4. And -- but I think the real pipeline build is as we get those new Protect and Project Plus features really into the market will be in 3 major trade shows at the end of this quarter. Our biggest really is in the working of the year in both Germany -- up in Germany, Middle East and North America, that will be a core focus of that. And I think that will really start to build the gap we're really looking forward to next year for Q1 and Q2 going forward.

[David Kwan, analyst]

That's helpful. And maybe a couple of questions for Shane. Just on the receivables, that's continued to trend upwards. I think it's up almost over double year-over-year versus roughly a 1/3 increase in the revenue. Can you provide some color as to what's kind of going on there? Like it clearly seems like customers are taking longer to pay. So how much of a concern is that? And I also noticed, I guess, the loss allowance, it's still relatively small, but that jumped significantly since the end of last year. So looking for some color on that.

[Shane Grennan, executive]

Sure, David. Yes. We were at overall $35 million at the end of that end of July, that was $30 million compared to April. Obviously, you've referenced the greatly increasing revenue numbers over the periods that we've had. From a day sales standing perspective, we are hired about July quarter end as compared to, say, our April quarter end. A lot of that is to do with the timing of sales and when they happen with any particular fiscal quarter in our July quarter, we had larger preponderance of our sales taking place within the last month of the period, which means that those will be recovered and through cash receipts in the fourth quarter as opposed to being received in the quarter were up from a provision for potential bad debt perspective. We calculate that in accordance and that there's no unusual items within there that's from an outstanding or concerning point of view from my perspective. So overall, it is a larger number at the end of July, but it has been actively managed in terms of our cash receipts on a continuous basis.

[David Kwan, analyst]

I appreciate that. Yes, I didn't know whether you just had a lot of sales late in the quarter. So it has increased over the last couple of quarters, and I think it's roughly about $5 million a quarter. So I don't know if you just in the last few quarters, you've been getting a bunch of sales towards the end of the quarter or if there's something else going on?

[Shane Grennan, executive]

It's [indiscernible] David, that our sales at the end of the quarter. Again, our revenues have continued to increase each through the year, Q2 and Q3 the time. But that is the test of where we're out as.

[David Kwan, analyst]

How should we look at that going forward then? Like do you -- should we expect a reversal and the DSOs crisply to come down? Is it hopefully as early as Q4, if not early next year?

[Shane Grennan, executive]

Yes, David, I would like that to come down to turn that more often on how the cash receipts coming a little bit faster, and that's something where we actively obviously work on. But I always say it is dependent on when sales fall within a particular period and when they can be voted within our general credit terms or not.

[David Kwan, analyst]

Yes. I just was wondering because typically, obviously with the Q4 being a seasonally stronger quarter than your seasons usually jumps, not surprisingly. I was just wondering whether, given the increases that we've seen in the receivables so far this year, like should we expect Q4 receivables to be increased, maybe not to the same extent as we've seen in prior years, but whether it increases a little bit or maybe stays flattish, we can work on the receivables that are already outstanding?

[Shane Grennan, executive]

I would think, and Cody made a reference pipeline for Q4 that's there. So it wouldn't be unexpected that it would be a Q4 larger receivables number that I would say is Q1, 2 and 3.

[David Kwan, analyst]

Okay. Last question, just on the inventory side, it was down a bit to helping offset that improvement or increase in the receivables. And I know you guys have made some changes there in terms of kind of delivery times and whatnot. Is this kind of a level that you feel comfortable based on the sales trajectory where based on inventory levels that you'd like to hold? Or could we see that number start to trend up again?

[Shane Grennan, executive]

Sure. Yes. So we ended -- our July quarter end of $16 million, $16.6 million in terms of inventory that was down from 18.7% at the end of the fiscal year. To answer your question, yes, we would like to see how we improve our turns again on that as we go into the fourth quarter. So we would like to see that be a source of cash again in our fourth quarter.

[Operator]

The next question comes from Gabriel Leung with Beacon Securities.

[Gabriel Leung, analyst]

Congrats on the progress. I just got a couple of questions. First, just going back to the EBITDA guidance going positive in Q4. With operating expenses being relatively flat expected over quarter-over-quarter and I guess, services revenue is relatively predictable it would imply a relatively big jeopardy hardware revenues to get to that EBITDA positive milestone next quarter. So I'm curious, what sort of visibility do you have into hitting those hardware revenue milestones this quarter? And is any of that predicated on some maybe some chunky orders that might have to wait until sort of the last week of the quarter to close out.

[Cody Slater, executive]

A couple of questions about the dates before talking about the pipeline that the other thing you'd want to see in Q4, we expect to see in Q4 is a continued expansion of our gross margins. You've seen that as the hardware is moved from 17% a year ago to 29% the service margins moved up into that 75% range. We see some increase in the service -- in the gross margins, particularly in the hardware in Q4, is our anticipation is based on volumes and product mix. You'll see a strengthening in the rental program as well, too. Shane noted that rental was actually down Q3 from Q2. That's a bit of a seasonality. But Q4 is a strong quarter. We have good visibility of that returning to very strong growth, continued strength in the whole service channel. And then when you look at the product side, we have good visibility with our pipeline in reaching the targets that we need to hit that EBITDA number. There's some decent sized orders in there. There's no one order that makes up 1/3 of the number or some massive portion of them, but there are large scale orders, obviously, within that. There's risk within those, whether they slide or bots or try out, but there's often ones that we're actively looking at going into the quarter. So let's we'll manage a strong view of the pipeline going forward that gives us confidence that we can reach those numbers. I think other chat question now becomes supply chain and the ability to ship everything that we have in coming on the orders, that's another challenge that we're actively managing as we look to what is always our largest quarter. Getting into details, there's always supply chain challenges, but we believe those are well managed for the quarter as well.

[Gabriel Leung, analyst]

Got you. And secondly, just on G6 Cody, you mentioned you've obviously got a much clearer line of sight to some more material purchase orders on the G6 side now that the patios functionality are completed. And I'm curious whether you've seen any change in behavior from your traditional competitors in the space now that you are getting closer to potentially signing a large PO on the G6 side, whether you see any changes in specifically around pricing and whether you might have gone a bit more predatory in terms of the pricing with the immediate release of the -- or a launch of your products?

[Cody Slater, executive]

It's an interesting question. I think there's been a couple of situations we can say where we've seen competitors back to marketing their low-cost products, factor both at the low-cost pricing, but not targeting the kinds of customers that we're looking at Gabriel, the ones that are looking to buy the 6 are the ones that we're looking for that higher value and most are trending towards looking at our enhanced service level being after techs, which actually is a significant price increase over the original core launch of the G6. So we don't see that kind of predatory pricing doing any of the damaging our competitors' margins really doesn't hurt our market so as our customers.

[Gabriel Leung, analyst]

Thanks for the feedback and congrats on the progress.

[Operator]

And the next question comes from Raj Sharma with B. Riley.

[Rajiv Sharma, analyst]

Solid quarter, solid results, congratulations. I just wanted to understand a couple of things. Just the cadence of the securitization facility and the levels that you see up down during the quarter and also relevant to that, the percentage of the leased versus outright purchases, if you can give more color on that? And what level of the securitization facility do you see -- foresee the balance on it in the quarters and the year ahead.

[Shane Grennan, executive]

Raj, it's Shane here. So yes, our lease securitization is utilize now it's been extremely successful for us from a working capital and management perspective. The usage that we had during our second quarter -- from the third quarter perspective, the lease was probably a little lighter than some of the previous quarters that we've had compared to our second quarter and other quarters of the prior fiscal prior fiscal year. The uptake of these is, again, it's submarine in the period as to what capital allocation decision a customer wants to make in terms of their buy the devices and throughout your bundled plans or whether they wish to do it through a finance lease. From a look-forward perspective, the numbers that we have for Q3 would be good indicators for what Q4 and forward may be. But if I will just caution that it is dependent on the extent to which customers enter into finance lease through the period as to what we could finance. And with Canadian dollar equivalent of $50 million available for that facility, we've seen maxima at the end of July. We'll continue to actively utilize that facility on a go-forward basis for those customers that we will put through that securitization program, and we look forward to continuing to manage our working capital effectively through using that two way program.

[Rajiv Sharma, analyst]

I wanted to kind of understand the securitization facility. So the percentage of the lease is what of the total in products. And you also advances [Audio Gap].

[Shane Grennan, executive]

I'm sorry Raj, I think you broke up the last piece of your question.

[Rajiv Sharma, analyst]

I'm trying to understand the lease revenues versus total and how that plays in the use of the securitization facility and how that would play in with the -- and how should we kind of look at that modeling when you look at also the accounts receivables balances and when -- and what level of AR could we expect sort of in terms of DSOs over the years, how that plays with the securitization facility.

[Shane Grennan, executive]

Yes. Sure, Raj. So by way of indicator that the percentage that could go through lease could be low teens up to sometimes 30%, 30-plus percent within a quarter, depending on what the customer decision is. So from your modeling perspective, you can take an average of somewhere in there, look at what to say the product sales within the period is and then factor off of that in terms of what will be financed through that program. Our preference is to fully utilize where possible customers within North America, which is where the lease program is a securitization centered for those North American customers and to put as many as possible through that program to ADAS. So hopefully, that benefits in terms of your model planning.

[Rajiv Sharma, analyst]

Great. And then just moving on to the product gross margins, you are expecting the expense levels to stay constant here, the overall operating expense levels. And then the gross margins on the product side, did I hear from Cody that you expect significantly higher product gross margins in Q4?

[Shane Grennan, executive]

Yes. Because if you look at it throughout the year, we've gone up every quarter, quarter-on-quarter in those margins. Q4 is our highest volume quarter. There's also a price increase that took place in June that will impact this as well, too. So we've talked a lot about the price increase we did a little over a year ago of 15%. We did a price increase of 6% on -- in June of this year. So that's going to also help impact those margins. So yes, you should look to see the strengthening of the hardware margin, a slight strengthening on the service margin, I'd say as well because of that price increase and just the volumes at the end of the day.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Cody Slater for any closing remarks.

[Cody Slater, executive]

Thank you, operator. I'd just like to thank everybody for participating today, and wish you all a good day.

[Operator]

And this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.