KVH Industries Inc (KVHI) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to this KVH Industries fourth quarter and year end 2003 earnings release. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Pat Spratt, Chief Financial Officer.

Please go ahead, sir.

Good morning. I'm Pat Spratt, Chief Financial Officer of KVH Industries. With me today is Martin Kits van Heyningen, our President and CEO. This call will address the fourth quarter and full-year earnings release that we issued earlier today. Copies of the release are available on our Web site, KVH.com, and from our investor relations department. This conference call is being simulcast on the Internet and will also be archived on our Web site for future reference.

Before we proceed, I need to inform you that this conference call will contain certain forward-looking statements that involve risks and uncertainties. For example, statements regarding financial and product development goals are forward-looking. The company's future results may differ materially from the projections described in today's discussion. Factors that might cause these differences include, but are not limited to, those mentioned in today's call and the risk factors described in our prospective supplement, filed with the SEC on February 10th, 2004.

The company's SEC filings are available directly from us, from the SEC, or through the investor information sector of our Web site. Now, I'd like to turn the call over to Martin to begin today's discussion of results.

Martin?

Thanks, Pat. In early January, we provided a preliminary indication of the results for the quarter and the year, so we don't have any big surprises for you today, but we will be filling in the details on our financial news, our principal business areas, and our strategies for 2004 and beyond.

I'm going to begin with a recap of our quarterly and yearly operations in our key business areas, and then Pat will elaborate on the financial results for the quarter and for the year, and after that, we'll take your questions.

Over the course of 2003, we achieved a number of technical, strategic and business milestones. We strengthened our position in both of our key markets, mobile satellite communications and defense guidance and navigation, and we entered two exciting new market segments and introduced five major new products.

Revenues were up 19% last year, and yet most of the benefit from those new product introductions, including our new TracVision A5, will actually be felt during 2004. KVH has invested an enormous amount of money and energy into developing these new products, and we're about to see the benefits of those investments.

Q4 marks the first full quarter of TracVision A5 sales, as we shipped approximately 1,700 units that generated more than $3 million in sales, nearly 30% of our total satellite revenue for the quarter. By any measure, this is the single-most successful product launch in KVH's history. We have an enormous opportunity ahead of us. We're the first to market with an automotive satellite TV system. Of course, we will have potential competitors who will be following us into this market, and we need to capitalize on our lead and pursue this opportunity aggressively.

The company needs to be on a strong financial footing in order to aggressively pursue sales opportunities and partnerships that will be required for us to be successful in this market. Last week, we completed our follow-on equity offering, raising more than $48 million for the company. The capital we raised will equip us with the resources needed to pursue the opportunities ahead of us, as well as give our balance sheet the strength that potential automotive OEMs expect of their partners.

I'll begin the business discussion with our defense products. Due to the increasing interrelated use of our tactical navigation and fiber optic products, we've consolidated these two product lines under the umbrella of defense-related products. This new arrangement also mirrors the physical consolidation of these products in our Tinley Park, Illinois facility, and it represents the way the business is managed internally as well.

Going into the year, we'd given guidance that 2003 would be approximately flat for defense, after growing sharply for 2002, as a result of the buildup for the conflict in Afghanistan and then for the war in Iraq. For Q4, our defense product sales were $3.3 million, which is about a 50% decline from the same period last year, which had been a record quarter for defense revenues.

This decline was driven largely by the delay of an anticipated $2 million order from the existing U.S. military customer. We had expected to receive the contract during Q4, but as a result of a procurement issue, it was pushed back and we now and expect to receive it in Q1. If not for that one order, our results would have been in line with the expectations we had for the year.

Now, we've continued to expand the capabilities of our product. Our U.S. Army Standard M100 TACNAV vehicle nav system. In fact, several weeks ago, we successfully demonstrated a proof of concept M100 that was integrated with an L-band satellite communication system.

This demonstration, which was carried out for the U.S. Army, represents a major step toward increasing the versatility of the M100 on the battlefield. And by combining our nav system with a two-way satellite link, we can potentially offer the military the means to connect virtually any vehicle in the field to the common battlefield operational picture.

And one of the most important products we developed in 2003 was our TG-6000 Inertial Measurement Unit. This three-axis fiber-optic guidance package, suitable for a wide variety of applications, ranging from missiles and drones and helicopters to torpedoes, anything that moves in three dimensions. We're scheduled to ship our first production units to Raytheon later in Q1 of this year, in support of the new Mark 54 torpedo program.

In addition to this order, we're actively pursuing multi-year procurement opportunities for other weapons programs. We're also teamed with L-3 Communications for some upcoming programs that could have major revenue potential going forward. Now, along with the TG-6000, we continue to see strong interest in our new DSP-3000, another new product we developed last year, the fiber optic gyro. This interest is from potential military and commercial customers. As customer testing concludes and production requirements are defined, I expect that these two products will experience strong growth in the latter half of this year and into 2005.

Now, despite the short-term disappointment in the defense revenue, I believe our military business continues to show great potential and will resume solid growth this year. We've got good visibility of potential orders, and while the short-term prospects are hard to time, we have a family of products that are in demand and solve the issues faced by the U.S. military and its allies.

We expect that defense sales will be 20% to 25% of our sales going forward, and for that to happen, defense needs to match the rapid growth of our satellite business, and we believe we have the product line to do exactly that.

And now I'm going to move on to the satellite communications part of our business. Throughout 2003, we continued to execute well in our satellite business. We expanded our distribution network, we brought our exciting TracVision A5 to market, and showed continued strong growth in our existing marine and RV markets, and this success is reflected in our results.

In Q4, sales of our satellite communication products increased 106% over the fourth quarter of 2002 and 47% for the year as a whole. The RV market has continued to show growing strength in 2003, and increased sales. We've now been working aggressively with many of our OEM partners for more than a year, and as a result, a larger number of vehicles are leaving the factories already equipped with our TracVision antennas.

We're seeing similar strength in the marine market, both due to economic conditions are improving, as well as our new product offerings during the last year. Our TracVision G8, which we developed last year, began shipping at the end of September. It's selling very well in the big boat market and has in fact surpassed our initial sales expectations during the quarter.

In Q1 of 2003, we introduced our TracPhone F55, and that was our second satellite communications system that was compatible with Inmarsat's new Fleet satellite telephone and high-speed Internet service. The F55 brought the service to mid-sized yachts around the globe, while our existing F77 was suitable for mega-yachts and large commercial vessels. Just last week at the Miami Boat Show, we unveiled the new TracPhone F33. It's one of the most compact Fleet-compatible systems available. So, now, KVH is able to offer a full line of matching satellite TV and satellite communications solutions for virtually every size vessel, ranging from 40-foot weekend cruisers to mega-yachts and supertankers.

In the automotive marketplace, Q4 was the first fill quarter of TracVision A5 sales. The strong initial response from our dealers to our low-profile satellite TV system supports our belief that consumers want live satellite TV in the car. During Q4, we shipped approximately 1,700 A5 systems into the channel, and while initial production delays during the quarter slowed us down somewhat, this still represents the single best product launch in KVH history. From virtually zero, the TracVision A5 generated more than $3 million in revenue, and represented nearly 30% of our total satellite sales for the quarter.

We've addressed the issues that slowed our progress in Q4, and we're now fully capable of producing TracVision A5 units to meet the immediate demand. And because we did not complete our backlog shipments until mid-December, retailers didn't begin selling through the product through the initial inventories in earnest until late in the quarter.

Retailers are now seeing solid sales and interest among their customers as they continue to sell through their initial inventory. We anticipate strengthening reorders moving through Q1 as retailers prepare for Q2. We don't anticipate adding a large number of retailers during Q1. Rather, we'll be supporting the ones we've just signed up to make sure that they are trained, they have demo units available, and they're fully capable of installing the units.

Obviously, we don't have any history with this product, or this market, and while we don't endorse analysts' estimates, I can say that we are comfortable with the majority view for expected TracVision A5 annual shipments, which is approximately 10,000 units in 2004.

I'd now like to give you some details on how we intend to achieve this and the factories that are critical to our success in developing this market during 2004. Our first objective was to establish the retail network, and we've done that. Approximately 800 retail locations, representing 300 discrete accounts are now selling the TracVision A5 nationwide. We're working very closely with these retailers to carry out sales and technical training, provide co-oped marketing assistance and directing consumers to those locations.

Now, later in Q1, we'll announce the availability of a non-roof rack mounting option for the TracVision A5. Not only will this make it easier to install aboard SUVs and minivans that don't have a roof rack, but also allow us to support the touring motor coach market. And by the end of Q2, we expect to be online with some of the specialty vehicle manufacturers that build custom vans and limousines, and they'll also be using this non-roof rack mounting option.

Although our initial focus is on the establishment of the retail network, we also plan to pursue OEM opportunities and car dealership sales in parallel. We'll be putting a new TracVision A5 demo vehicle into the field shortly to help support this effort. This new SUV will be equipped not only with the roof rack mounted TracVision A5, but also a second unit that will be built directly into the roof.

This dual installation will enable us to demonstrate not only the ease of installation of the existing aftermarket A5, but also show OEMs the potential for integrating the A5 within the vehicle itself.

We're pursuing other avenues to expand our penetration of the automotive market. We're currently in discussions with a major consumer electronics manufacturer and a tier one supplier about the potential for private labeling and/or licensing our A5 antenna technology for sales to automotive OEMs. Now, this type of arrangement would allow us to tap into a major manufacturing, distribution and marketing resource and dramatically expand our ability to bring the A5 and live satellite TV to the mass market for the automotive customers.

Now, in the aftermarket, our immediate priority is to get word out to consumers and to raise awareness that satellite TV for cars exists. Our goal is to make TracVision A5 synonymous with live satellite TV in the car. As the only company in the world currently offering this service and this technology, we have an excellent opportunity to do just that.

As first to market, we've got the opportunity to define the market on our terms, and we intend to seize every advantage that people know that TV in the car is a reality now, thanks to KVH and the TracVision A5. And one of the first steps to do that is a comprehensive advertising and PR campaign that's now underway. The first print ads are beginning to appear in lifestyle-oriented magazines, appealing directly to those market segments that are now buying the A5.

In addition to an expanding series of print ads, we're also preparing radio spots, now through (ph) advertising on billboards, and a variety of media placements and articles promoting the excitement of live satellite TV in the car. And over the last several months, we've also discovered that the single most effective means of selling the A5 has been to let people experience it for themselves.

Once someone's in a car, changing channels and seeing the digital quality picture, they realize how exciting this technology can be. We've just launched a new demo program with our dealers to help bring this experience to consumers across the country. Right now, any dealer can purchase a reduced-price A5 for the express purpose of putting it on a demonstration vehicle for the next 12 months, and dealers who are equipped with demo units receive premium placement and are clearly identified on our Web site, and that feature is actually live now on KVH.com.

Likewise, our PR team is directing local and regional media to those dealers to get news coverage for the A5, as well as to generate publicity for and traffic to these dealers. In addition to supporting our retail dealers, we also intend to enhance the sales opportunities through car dealerships, new car dealerships.

A number of our A5 retailers also serve as expediters for car dealers. For example, Freeman's Car Audio in North and South Carolina. You'll get about 10 retail locations, but also provide car audio and video installation support for more than 170 car dealerships in the region.

They help sell TracVision A5 through dealerships. Other expediters have taken the initiative to install TracVision A5 and a video system at their expense on a vehicle at the dealer's location. They've told us that the A5-equipped vehicle has sold much faster than a comparable new vehicle that doesn't have satellite TV.

Purchasing the A5 through a car dealership offers a number of advantages for the consumer. First is convenience. The vehicle is already equipped with the A5 when the buyer picks it up and takes ownership of the vehicle, eliminating the need to go to another location for installation, and the second is cost. The price of the A5 is then included in the price of the vehicle and in the financing for the vehicle itself.

Due to the success of this expediter-dealer partnership, we're now investigating how to use that model on a national scale, either through regional expediters or directly through KVH. In the near term, our number one marketing priority is to establish a close partnership with at least one of the satellite service partners, either EchoStar or DirecTV, and while we have a good working relationship with both companies today, we feel it's critical to the success of the TracVision A5 to work more closely with the service providers in order to build awareness and stimulate demand.

This is something that we'll be working on during the coming months. As you can see, we're aggressively pursuing the opportunities that are ahead of us. And what does all this mean in terms of sales patterns by quarter? As we're only a few months into the product launch, we don't have any history about seasonality. But, leaving that aside, we expect the general pattern of orders to follow that of a typical retail product launch, and here are some of the milestones we expect to see.

There will be an order pattern of initial channel fill, which has already occurred during Q4, retail sell through and reorders, which are taking place now in Q1. We plan on adding additional dealers and generating more channel fill in Q2, hopefully launching the satellite service marketing push after that, bringing van conversion OEMs and limo companies online in Q2 or Q3, and a major national chain towards the end of the year in Q4, which would then generate more channel fill, and compounding sell through by creating more product awareness.

Now, naturally, this will grow during the course of the year with sell-through rates increasing with each quarter. We don't expect the split to be 50-50 during each half of the year. We expect shipments to be weighted more like a third in the first half to two-thirds in the second half of the year, which is consistent with creating a new product category and driving consumer awareness.

As more people see this product, whether it's in the dealer showroom or in a demo vehicle or in their neighbor's SUV, the more units we're going to sell. I believe that 2004 will be an extremely positive year for KVH with anticipated revenue growth of 30% to 50%. We expect to return to profitability in Q1 and strengthen profitability throughout the year. We're expecting a strong Q1 in our core RV and marine satellite business, and we expect to layer the TracVision A5 on top of the strong and profitable base business.

As the A5 margins improve, we should see an increasing contribution to our bottom line during the year, and likewise, the expected recovery and growth of our defense business should make significant contributions to our overall results.

I'd now like to turn the call over to Pat, who will provide you details about the numbers.

Pat?

Thank you, Martin. From a financial standpoint, the fourth quarter was one of good progress and a few short-term challenges. The progress included continued strong revenue growth across the entire satellite business. TracVision A5 brought a cost reduction as we exited the quarter, operating expense control and good management of the balance sheet with respect to the quality of receivables and turns of inventory.

The challenges were the very low level of defense revenue and the negligible gross margin for the TracVision A5 in the quarter. Even with these challenges, the fundamentals of the company are strong. The issues we faced in Q4 should have only short-term impact on the company's financial progress, and we should be back on the profit improvement track in 2004.

Q4 revenues, at $15.7 million, were up 21% over last year. The military order delay and the high product cost of the TracVision A5 led to a net loss of $1.6 million, or 14 cents per share. For the year, revenues were $56.7 million, up 19% over 2002. Due to the weak bottom line results for the fourth quarter, we recorded a loss of 13 cents for the year.

Satellite communications grew 106%, to $12 million, driven by our marine and recreational vehicle products, and by the first full quarter of TracVision A5 shipments. Full-year satellite revenues were up 47% to $38.1 million. Consolidated defense revenue for the tactical navigation and fiber optic product line declined 50% year over year to $3.3 million. The mix was 74% TACNAV, and 26% fiber optic products.

We had expected a year over year decline, but not to this extent. Looking back, Q4 2002 was our highest level ever for defense sales, driven by the buildup for the conflict in Iraq. The tough year over year comparison, plus the recent delay of a large order, made the fourth quarter much more challenging. Annual defense revenue was down 14% at $16.2 million. Defense-related backlog at year end was approximately $1.5 million.

Legacy products declined 40% to $400,000. Full-year sales of these products declined 16%, consistent with the long-term trend. Now to the (inaudible). Gross margin was 29%, down from 46% last year. We had anticipated a decline in gross margin, both sequentially and year over year, due to the high initial cost of the TracVision A5, as well as a lower percentage of high-margin military products in our projected sales.

The actual decline was much greater, primarily because of the delay of the order for TACNAV products that have very positive margins, and to an extent because the A5 total product cost per unit shipped was higher than planned. As we exited December, we achieved the first step reduction in the product cost of the A5.

Today, the gross margin per unit is approximately 20%. We expect to maintain this through the second quarter. As we enter Q3, we expect to improve - excuse me - we expect to improve the margin to our near-term target of approximately 40% as we implement additional component design improvements.

For the year, company gross margin was 40%, down four points from 2002. The same factors that drove the fourth quarter results affected the full year. Product mix was a very big factor. In 2002, defense sales were 50% of the company total for Q4, and 40% for the full year. In 2003, defense sales were just over 20% of the company total for Q4 and under 30% for the year.

Operating expenses, at $6.2 million, were down $250,000 sequentially and up only 10% year over year. As a percentage of sales, operating expenses declined three points year over year, to 40%. For the year, operating expenses increased 9% to $24.4 million, but declined as a percentage of sales to 43%.

We continued to operate at a stable level of R&D investment, which represented a reduction as a percentage of sales. In Q4, R&D was 13% of sales. For the full year, we managed to reduce R&D as a percentage of sales by 3.5 points. We are nearing our target as a percent of sales for ongoing investment. The strength of our technology is fundamental to our future success, and we intend to maintain a healthy level of R&D.

Fourth quarter sales and marketing increased to $3.1 million, up 20% from last year. As a percentage of sales, this was about 19.5%, equal to the fourth quarter of 2002. Annual sales and marketing expense was $11.2 million. We intend to increase sales and marketing in line with revenue growth for the next several quarters.

Within this, we will shift more emphasis to the TracVision A5 to extend market awareness and support our channel partners. Q4 administration expense was $1.1 million, down 7% from the same period last year. Admin was up 28% for the full year, including, as announced in November, the cost recorded in Q3 to settle the pending litigation. Our objective going forward is to gradually decrease administration expenses as a percent of sales.

Turning to the balance sheet, cash at quarter end was $2.8 million, down $4.7 million sequentially. Contributing factors included an increase in accounts receivable and a reduction in accounts payable. Although the number of days outstanding for receivables increased by two, to 65, the quality of our receivables continues to be good, and we remain committed to bringing DSO to the low 60s over the course of 2004.

Capital expenditures for the quarter were $480,000, bringing the full year to $2.9 million. A large portion of this reflects the new A5 production capability. This included tooling, text (ph) fixtures, precision measurement equipment and some facility fit-up.

During January, we did draw $2 million from our line of credit. This was repaid following the closing of our recent equity offering. Inventory utilization continues to be a strong contributor to the operating strength of the company. Inventory actually decreased $100,000 sequentially to $6.3 million, while sales increased 16%.

Inventory turns on an annualized basis were seven. The turns for our satellite communications products were even higher, at approximately 10. Though the course of 2004, our objective is to maintain total turns at seven or better. Looking ahead to expectations for revenue growth in 2004, we see the potential for 30% to 50%.

We foresee solid growth for marine and RV products, a full year of TracVision A5 sales, with a weight toward the second half, and a return to growth in our defense business. It's important to note that the defense revenue pattern will likely be similar to 2002, when more than 60% of the revenue was in the second half.

Our Q1 expectations include the TACNAV order that was delayed from Q4. On the bottom line, we expect to be above breakeven in the first quarter, and to show steady improvement throughout the year.

For the first half of the year, a relatively low mix of defense revenue and modest product margin for the A5 will be factors. In summary, although we were disappointed in the fourth quarter bottom line results, we are pleased that we achieved several strategic milestones during the year. We sustained strong top-line growth throughout 2003, and we had solid improvements in the core operations of the company.

I am confident KVH is positioned to take advantage of the market opportunities ahead, and that we will achieve our financial objectives.

Now we'd like to take your questions. We ask each participant to limit the number of initial questions so that everyone in the queue has a turn. You are encouraged to re-enter the queue for additional questions.

Sarah, could you please open the call for questions?

Absolutely. (OPERATOR INSTRUCTIONS).

We'll take our first question from Rich Valera with Needham & Company.

Thank you. Martin, you mentioned a tier one partner you were partnering with for the A5. Was that a consumer electronics manufacturer, and could you describe that relationship in a little more detail, and what you're looking to accomplish there?

Well, I don't want to be specific, obviously, about who it is, but in terms of the type of companies that we are talking to, they're companies that are either a big name brand, household name, in consumer electronics, or they're a tier one supplier, already delivering these types of products into the automotive market. In other words, screens and those types of things.

And while we certainly haven't made the decision that we're going to go the licensing route, we are seriously considering it, and it might be something, one more alternative for us to be able to penetrate this market, because, as you know, for a smaller company to be a direct supplier is difficult. But to partner with a tier one supplier might be an easier route. And we're taking a serious look at whether that's a good way for us to move forward in the automotive. And this would strictly be at the OEM level, not in the aftermarket.

Great, and with respect to partnerships with the satellite TV providers, I know you can't discuss the specifics of any deal there, but could you talk about any possible obstacles that are in the way of that, or things that you might expect to have to do in terms of just show a certain level of sales, or what else you might have to do to sort of entice them to engage in that sort of a partnership?

Well, I think that the sort of critical milestones are that we need to convince them that this is a big opportunity for them. And I think if you look at it from their perspective, forgetting KVH's interest - but if you look at it from a service provider perspective, what we're opening for them is basically an entirely new market. If you look at the penetration rates of video screens in SUVs now, it's approaching 30%, coming off the dealership. And other products that have gotten to that penetration rate have gone all the way and become a standard option.

So it's not far-fetched to say, hey, within five years, 10 years, whatever, every car on the road is going to have a TV screen in it. Then from a service provider, guy who's investing in satellites, what we say to them is, you could own that market. This could be an entirely new market that can be opened up, the same way that XM and Sirius have opened up the market for satellite radio, really just in the automotive market. So they're broadcasting this energy today, and it's really just falling unused on the highway.

So what we have to do, our challenge is to make them see this opportunity from a strategic point of view and to see this as a real business opportunity, and that's our challenge.

Great, and just one quick follow up for Pat. Pat, can you give us a sense of how we should think about sales and marketing dollars in '04, either in absolute dollars or sort of in year over year growth, or as a percentage of sales, understanding that you'll be shifting dollars towards the A5.

Thanks.

Yes, Rich, as I said, we expect that sales and marketing will grow pretty much in line with revenue, certainly through the first three quarters of the year, anyway. We finished the fourth quarter of last year with sales and marketing about 19.5%, and I think a fair assumption would be that it will be at approximately that level, maybe 20% over the first three quarters of the year. Then it will probably drop down a little bit as we exit the year, and for the full year, it will probably be somewhere between 19% and 20% as a percentage of revenue.

That's very helpful. Great, thank you.

We'll now hear from Chris Quilty with Raymond James.

Good morning, gentlemen. A couple of questions on the defense side of the business. Just to clarify, Martin, you said there was a $2 million order that was pending, but the original SOCOM order, if I'm not mistaken, was actually more or less than $2 million. So, is this just a partial order under that larger umbrella?

This customer is actually not SOCOM, so this was actually for the main U.S. Army. So it was for Humvees, but not for the Special Forces. Actually, this would be the first order for our TACNAV for the main Army for Humvees. So it was an important order, but it wasn't for SOCOM.

So, you're right, all that SOCOM business separate, and it is in fact larger than what we're talking about here.

OK, and you've shipped what, probably about 15% or 20% of that SOCOM order?

Yes, I don't recall exactly. My guess is something around the order of between $4 and $6 million so far shipped for Special Forces Command. The overall requirement that they have in place for all their vehicles represents something closer to $30 million. So we're not anywhere close to saturation, even within just the Special Forces.

OK, and the holdup there has obviously been it's hard to get these installed and people trained while the troops are deployed?

Yes, the holdup specifically for the $2 million order was this was at a - these were vehicles that were headed to Iraq. They wanted to get them installed here stateside, because they couldn't get the procurement done quickly enough, so the vehicles left for Iraq, along with the people supporting that unit. So the paperwork actually had to go to Iraq, and the people there had to sign it.

It's now back in country, so we expect - as I indicated, we expect that in Q1 now, but that was the holdup during Q4. It was just the logistics of paperwork moving to Iraq and back.

OK, and so if you get the order here in the last half of the quarter, I suspect you'd be able to ship it?

Yes, yes. At their request, we expedited the production of it and we built it during Q4, so we would be able to respond very quickly.

OK, and the demonstration project you talked about of the TACNAV data link, now, is that something that is a capability independent of the FBCB2 and Blue Force Tracker, or is intended to demonstrate its ability to integrate with those systems?

The latter, so it demonstrates the ability to integrate with FBCB2 and the MTS, which is the Movement Tracking System that they're using. So it would work with those. So it would use a common software, common display, common mapping, so it would really just be extending the capabilities and kind of connecting products that they're already using.

They're already using TACNAV and they're already using FBCB2 and Blue Force Tracker and MTS. So it really just integrates them. And we've been successful in the past in connecting things that they already own, like the laser range finder, for example, to do far-target location, and making that part of our system and showing that on our display, and then being able to transmit that out the serial port and into the digital radio, or up to the satellite.

So, this is a good way to connect things that's already in their planning and inventory.

OK, and are these still projects you're undertaking in a vacuum, or do you have to work with those other hardware vendors in order to demonstrate these capabilities?

The latter. We're working with the other hardware vendors. They've supplied us with their bits so that we can do the demonstration, because it wouldn't be practical for us - for foreign military, we can demonstrate it using our own equipment, which is different from anything that's out there. But for the U.S. military, we really wanted to show that it works with stuff they're already buying, so we have worked with the other hardware providers.

OK, and I'll ask one question on the TracVision A5, and then I'll back out. The OEM-capable vision, integrated into the roof, that you demonstrated, is it any kind of a fundamentally different design, or do you basically just take the core antenna out of the current A5, get rid of all of the housing and build it into the roof?

It's the latter. It's basically the same unit. Obviously, there are some mechanical differences that allow it to be stronger, because you don't need the structure, as you've described it. But fundamentally, the antenna technology is the same.

OK, and is that - if we were to take a look at it, how visible would it be to an outside observer? I mean, obviously, you've done this sort of jury-rigged on your won.

Right. It's different for each vehicle, but in general, like a typical SUV, it wouldn't be visible from the exterior of the vehicle. So it would be in the space between the head liner and the roof. You would just see a plastic panel on top that allows the satellite signal through.

OK, very good. Thank you, gentlemen.

Thank you.

We'll now move to Adam Scotch (ph) with CRM Investing (ph).

Yes, a couple of questions. First off, could you say what you expect R&D expense for 2004 to be, as a percentage of revenues, or a dollar amount.

No, we didn't say precisely. What I said is that we are nearing our long-term target, and our long-term target is to be in the low double digits as a percent of revenue. In the fourth quarter of 2003, we were at 13%. For the year 2003, we were at 15%. We've been trending down for the last couple of years.

I would expect it'll trend down a little bit more from where we ended in the third quarter, over the course of the year - fourth quarter, I meant to say.

OK, and you commented on what you kind of have for gross margin goal for the A5 throughout the year, and that's to improve - how do you kind of look at gross margin for the year, based on your plans? I mean, do you sort of get back up to the 45% range when all is said and done, by the end of the year, in terms of a run rate?

I don't know if we'll get quite up to the mid 40s by the end of the year. In 2003, as a matter of fact, we had a trend line where in the first half of the year, we were at mid 40s and then it trailed off a little bit in the third quarter because of a low mix of military, and then fell off quite a bit in the fourth quarter.

In 2004, we're anticipating that we will begin to get the gross margin back up to much more acceptable levels. I would say that the second half will be stronger than the first half, but for the year, I would say a fair assumption at this point would be that our gross margin for the full year will probably be about comparable with where it was in 2003, which was right around 40%.

Forty percent, OK.

As we go through the year.

OK, that's helpful. So, if I kind of take - to be conservative, if I kind of take the low end of your revenue growth range, which I think would imply sort of a $73 million in revenues, correct me if I'm wrong, for the year, and I kind of run those numbers through, I get an EPS number that's five to 10 cents for the year, which seems low. So, can you help me out in terms of what I'm missing here, in terms of why I'm getting five to 10 cents and people out there have 45 to 50 cents?

Well, I'd rather not get into that level of detail on this call. If you'd like, you're certainly welcome to give me a call later on, and I'll be happy to talk through your assumptions with you.

The other thing is, you had mentioned something about the military business being sort of 20% to 25%, I think, in '04, and the growth, I guess, for the military and the non-A5 satellite would be comparable. Did I hear that correctly, or is that ...

What I was saying is that internally our strategic goal is to make military be 20% to 25% of our revenues indefinitely, and in order for us to maintain that percentage, we need to grow the military business rapidly. That was my point. And I didn't want people to get the mistaken impression that because Q4 was low for defense that we were expecting it to become a smaller percentage of our business going forward. In fact, we expect it to be a constant percentage.

So that was the point I was trying to make.

OK, I've got you. And then just in terms of the unit progression for A4 - A5, rather, you said kind of roughly a third in the first half to I guess two-thirds in the second half, and obviously the Q4 being seasonally, I would assume, the strongest. Does that imply that on a sequential basis for kind of Q1, maybe Q2, but certainly Q1, that the number of units that you ship probably ticks down a little bit while you kind of fill the rest of the channel?

Well, I don't want to comment on it specifically by quarter, but what I will say is that if you look at Q4, I think that was indicative of a very successful product launch. It means that the dealers were excited about it. They invested and they bought into it. But I don't think you should look at that as an indication, as a data point for predicting quarterly unit sales.

So I think you're thinking about it the right way, and I think if you listen to the guidance that we've given in terms of how we see the market developing, and the steps we're going to take, and the milestones, I think that's how we had planned to get to the annual number.

Right, OK, fair enough. And the demo unit that you sell to the dealers, was that a significant amount, or is that just a rounding error in terms of the total number of units that you could ship so far?

I don't think it's going to be significant in terms of units, or have a significant margin impact. It's still well above our cost, for example. It's just an effort to get dealers to have a unit on a car that they can actually take people for a drive in. I would like it to be a big number, but we don't expect it to be a huge number.

If you were also asking what the impact was in the fourth quarter, it was a rounding error.

Sorry, I was mentioning going forward.

We're going to need to move on to the next caller in the queue.

We'll now here from James McIlree with Unterberg Towbin.

Thank you. Could you talk about your pricing assumptions for the A5 throughout the year?

Sure, that's easy, we don't have any. We're not assuming any price changes during the course of the year. So we are assuming that our sell price to the dealer is roughly what it is today, which in round numbers is close to $2,000. And we do expect to see some margin compression as the year advances on the retail price. We have a very unusually high dealer margin today, which is intentional. It's the Geoff Moore crossing the chasms strategy of incentivizing the retail partners to promote and pioneer a new technology. So they're making very good margins now, but we expect that as the product matures and as they become more familiar with it, this will drop quickly to sort of a $2,995 retail price point. But we don't anticipate changing our margins during the course of the year.

Or the price that you're selling to the dealers.

That's what I meant to say. Sorry. Yes, the price that we're selling to the dealers.

OK, great, and is there anything about contractual relationships that you have with them now that would prevent them from lowering the price today? I mean, who has that authority or ability to lower the price to the consumer?

Well, we can't tell them what price they can sell it for, so they're perfectly free to do that, anyway. We do have some guidelines for minimum advertised price in terms of co-op and things that are tied to maintaining a minimum advertised price. And those are policies that we set.

OK, great. And the 30% to 50% revenue growth for the year, would that be also for each of the quarters during the year, or is that second half loaded also?

I think it's a fairly broad range, and to just indirectly answer your question, I think that the range is fairly broad, as you know, we've got these different market segments between military, marine, RV, and now automotive, and even fiber optic within the military.

So, there's going to be - from quarter to quarter, there's going to be a difference in terms of how each one of those performs, so what we're giving is on an annual, which is sort of a blended rate. So I think it would be safe to assume that you wouldn't see a perfect progression of 30% to 50% in every single one of our market segments in every single quarter.

But, having said that, we're not - the entire plan is definitely not backend loaded in terms of we expect to see strong growth starting this quarter.

I would agree with that, Kim (ph), and I would say one way you might want to think about the 30% to 50% is, roughly speaking, it's possible that each quarter could be within that range, but with more strength in the back half of the year than in the front half of the year.

OK, great, and when is the last - kind of like the last day that you can know from the Army on this $2 million order? When's like the last day that you can know and still get that shipped for revenue this quarter?

That would be Tuesday, the 30th. We need one day - we can ship it out on the 31st, but we need one day at least to get the decast (ph) inspector. So it's built.

The product was built and waiting to be shipped.

OK, thank you.

(OPERATOR INSTRUCTIONS). We'll now move to Ted Cooper (ph) with Pilgrim Group.

Yes, guys, good morning. You've mentioned pioneering the market with XMSR and Sirius, and there they have a razor and a blade. What I'm a little bit concerned about and I was wondering if you could address, being at the Miami Boat Show last week, there was a company out of King Controls that was selling units for the marine market that were roughly half the price of yours, and I'm just wondering what barriers to entry you have on people coming in with cheap knockoffs.

Thank you.

In the marine market, especially, we have a very strong market position based on product quality and performance, and it's really a combination of center technology, tracking technology, as well as high-quality products that are designed for the marine environment. So we've always had competitors, and these typically come from the low end, as you've described, and those kind of companies, and they're around us, is nothing new. And certainly in the RV market as well we have low end competitors that sell products cheaper than ours that don't work as well. But, yet, every year our market share goes up, not down, even at the OEM level.

But it's a good point, though. We are constantly comparing ourselves to competitors, or potential competitors, making sure that our price points deliver significant differential value to consumers. But if you look at our track record in the marine market over the last five years, and the RV market, we've had a compound annual growth rate of more than 40% in terms of revenue, just in those markets. And in Q4, marine and RV sales were up 50% over a year earlier.

So, rather than being squeezed by competitors, our margins are increasing, our market share is increasing, and our revenues are up 50% last quarter.

Thank you.

We now move to Marshall Levin (ph) with Ils (ph) Fund Management.

Yes, wanted to see if you could give us a little more clarity on what ability you have to improve your margins, particularly on the A5. Is this through deals with suppliers, is it through manufacturing efforts?

As Pat pointed out in his presentation, we're already halfway to our target. And the Q4 margin was really - we had indicated going into Q4, back in September, that this was going to be the case. There was an intentional strategy where we want to bring the product to market quickly, and didn't want to wait for certain tooling items to be completed.

So, there were machine parts, for example, rather than cast parts or stand parts that we used that were more expensive. So simply the passage of time dropped the price because the tool parts came online. So that's half of it. But there are also some changes that we're doing to add some parts that are injection-molded, rather than metal parts or machine parts, and that'll be the second major tranche of cost reductions. And those will be completed by the end of Q2, and we'll be in production, as Pat indicated, by Q3.

OK, and can you remind us what the target mission is?

It's 40%, 40% by the end of Q2 and entering production in Q3 with those margins.

And that assumes what level of production to get to 40%?

It really doesn't assume any production rate. In other words, obviously some, but we're talking a minimum of a couple thousand units. So these are changes that are not volume driven. These are changes that were design and vendor drive, if that answers your question.

Well, sort of. So these assumptions, your assumed level of profitability here doesn't assume any overhead or fixed charges?

Yes, that's correct. When we're talking here about the gross margin, we're really talking about the variable parts and labor of the product, sort of the prime margin, if you will.

OK, everything fixed ...

Everything's built in the same factory, so we were just commenting on the A5 itself.

Just the A5, OK.

Currently, we're building about 25,000 units a year for the other markets, the marine and the RV, in the same factory. So that overhead is spread out over all the markets.

That's interesting. Is all the overhead allocated to the SG&A, or is some of it in cost of goods sold?

Well, the manufacturing overhead is in cost of goods sold.

OK, got it. Thank you.

SG Cowen's Tom Watts has our next question.

Just coming back to some of the production issues that occurred in Q4, I noticed that that came to the supplier. Are you changing any of your inventory practices at all in terms of production, or are you building more inventory finished goods to handle that. Also, on the production front, what sort of capacity do you have on the existing line, and what sort of levels would you need to add a second line?

Let me answer those in the order that you asked them. The direction issue was a supply part. It was actually a flat metal plate that attaches to the back of the antenna. It's a very simple part that is machined. The vendor had started stamping it and ended up putting in a slight dimple in the part that made it unusable - on the back of the antenna - so that part had to be manufactured by him, because it didn't pass our incoming inspection. It wasn't built to print. And that set us back about four weeks.

So, I wouldn't say we've changed our inventory practices. I mean, those types of things can and do happen in manufacturing. We do have what we call safety stocks, or con bon (ph) levels at our factory to try and buffer against those types of things. In that particular instance, we were in a startup situation and we didn't have any safety stock because we actually were in a backorder situation because we were just getting started. So that's why it hit us in Q4.

OK. And in terms of the ...

Capacity, we currently have a capacity to do 25,000 units per year, and we have recently acquired a second set of robotic assembly equipment for the antennas, which is now in house, and that will double that. So it would be more than enough to handle our expected sales for '04.

OK, and finally, earlier you had mentioned the possibility of licensing your technology for the OEM market. You mentioned you also demonstrated an OEM-appropriate product. What factors will drive your decision whether to try to produce for OEM or license it, and how quickly could you get it in - particularly if you take, on either path, how quickly do you think you could actually get into an OEM installation.

I think the direct path would be faster from a technology point of view. In other words, we wouldn't have to be dealing with a third party and licensing and putting all those arrangements in place. From a market penetration point of view, it might be faster and easier for a major tier one supplier to get an agreement from a car company than it would from a new supplier like KVH.

So that's really the tradeoff that we're making, and also of course there are business decisions and margin tradeoffs that we need to think through very carefully.

Sure, and Delphi has demonstrated a product that they say will be in GM cars in the '07 model year. Do you view that as certain, and are you focusing on OEMs more that Daimler, Chrysler and Ford have, than someone like Visteon? How important do you view the Delphi announcement?

Well, what I've heard from them and what they've put out in writing was that they may have - that this was a technology that they may have in four to five years. And that's - I don't believe that GM and Delphi have been exclusive in any way, and so we're certainly not limiting our discussions to companies other than GM.

OK, thanks very much.

Steve Levenson with Advest has our next question.

Good morning, Martin and Pat.

Hey, Steve.

In terms of OEM arrangements, if you did sign somebody up, do you have a guesstimate on how long it would take before it would actually begin to show up in vehicles?

I think it would depend on whether - sometimes an OEM arrangement can take the form of a dealer-installed option to get started, and that can actually happen relatively quickly. But, as you know, through a factory-installed, built into the car, would take years, not months. So the fastest that we've ever seen that done, I think I've mentioned before, was actually with the video screens, and that took about 18 months from the time the product was available on the aftermarket to the time the first car rolled off the factory with a screen in it.

So that would be my expectation for the sort of best case.

OK, secondly, could you give us a breakdown, please, on inventory, between work in process, raw materials and finished goods?

I don't have that data right in front of me, Steve, and that will all be included in our 10-K filing, obviously, which will certainly be before the middle of March. I just don't have the data in front of me, but there's nothing materially different than what we've shown in the past in terms of the mix of inventory.

OK, lastly ...

Other than - excuse me - other than for the one piece of inventory that we mentioned before, where we have already built the TACNAV products for that one large U.S. Army order.

But obviously you're just waiting for documentation on that before you can ship it.

Right, that was in finished goods at the end of the year.

The satellite inventories at year end were very low, as is our practice to ship everything we can, so we didn't have any big inventories for finished goods for satellite products.

OK, and lastly, we do some dealer surveys and monitor some of the pricing. We did notice that Tweeter is offering the product on the Web site now at $3,000. Does that fall within your guidelines that you mentioned before?

Yes, it's unclear whether that's Internet-only pricing, but I think, as I mentioned in answer to another question, I think during the course of this year, even though our price hasn't changed, and will not change, we expect retailers will gravitate toward the $2,995 price point, which is a good focal point in terms of focal point pricing for a consumer. So, we expect to see more of that during the course of the year.

If I can get one last - question relates to share count. I don't know if you've done a computation. Can you give us a little guidance on what you expect the share count to be in the first quarter, given you've just completed the offering?

Well, yes. It will be a weighted average number for the quarter, because we did the equity offering that just closed within the past week. On a fully diluted basis, I would expect that the total number of shares will be somewhere between 14.5 and 15 million shares.

OK, thank you very much.

But, again, that would have to be weighted times - that would be if we did the offering at the very beginning of the quarter, but it will be weighted. So it'll be something less than that, most likely, when we calculate the final numbers.

So somewhere between 13 and 14, probably?

Yes, I just haven't done that calculation. Let's do it this way. We entered the quarter, our share count in direct number of shares was 11,555,000. If that were fully diluted, it probably would have been close to 12 million. We issued 2.75 million shares with the equity offering that closed just around the 10th of February. So you could do the calculations just on a weighted average for the quarter. But, again, like I said, most likely between 14.5 and 15 million somewhere.

OK, thank you very much.

Thank you.

Our next question will come from JP Mark with Farmhouse Equity Research.

Hi, just a quick question on the current sensor. Can you tell us where that currently stands?

Nothing to report there. We haven't been focusing on that at all in the last quarter. We've really been focusing the fiber optic R&D efforts on the Raytheon IMU program. In fact, we've taken some resources to work on that more aggressively, because we see that as a bigger opportunity in the short term.

If you actually did get some revenues from the current sensor, that would fall under the defense category now, is that right?

Yes, you're right, it would, although that's a problem with trying to put things into neat buckets. Our fiber optic does have a commercial piece, but since the majority of it is defense, we are lumping it in with our defense now.

Thank you very much.

OK.

We'll now hear from Steve Krueger with Foresight Investing.

Hi, Martin, I had tried to withdraw my question. It's been answered.

We now move to Neal Miller with Fidelity Investments.

Yes, hi.

Hi, Neal.

Three questions. One would be the cash flow expectations associated with your guidance, any comments there?

Yes, if you're assign about the full year, Neal, I would expect that if you look at the full year cash, net cash probably won't change much. It'll probably be down a little bit in the first half of the year, and then should be back up in the second half of the year. But it should be a relatively flat cash position if we compare year-end 2003. This is obviously we've got the equity cash that was added to the balance sheet, but we will maintain our cash position if you look out to the end of the year.

And then the second is kind of a technical question. Does your shelf filing expire with your offering? I guess what I'm wondering about is I guess an additional 500,000 shares were sold, and I'm just kind of wondering though whether that kind of does it, or you'd have to come back or make another announcements to sell additional shares?

Well, with the offering there is the over-allotment that is available to the underwriters, which I think equals about 400,000 shares that they have until March 10th to decide whether they want to take that. But I would say that's the only item that would be out there. Highly unlikely that we would be doing anything else.

And that would consume what's out there on the shelf, Neal.

And the other was kind of the retail rhythm, and I guess the first phase was Tweeter, with the 800 doors or such, but I guess I was somewhat surprised that maybe the self analysis of that was that pretty much the pipeline selling had been done.

Yes, Neal, Tweeter is - we've got about 300 accounts. Tweeter is one of the 300. They've got I think close to 200 stores, but we're only counting about 130 or 140 of those in our total, which are the ones that are installing these types of products. So it's not that Tweeter is our only retail account. And to be clear, what I said is that during Q1, we wouldn't be adding significantly to more storefronts, but we do plan during Q2 and Q3, and especially towards the end of the year, to bring on one of the big national chains that would significantly increase the store count.

I was just saying that during Q1, we've got to do (ph) as we need, and we want to get them trained and supported, and we'll be moving on from there.

I guess where I'm coming from here is I'm wondering whether too much of the company's energy and attention is maybe going toward this product area, and I guess kind of what I thought I heard is there was perhaps a scale-back - i.e., your current capacity 2,500, and then you mention a robotic thing that would increase that to five, and then that seems to be a bit less than the original thought, which I thought was 10,000 units.

No, let me say it again. What we're building today for the other markets, the RV and marine, is about 25,000 units per year. That's what we're doing today, just on a normal run rate. We have a capacity in place to do approximately 25,000 A5s, and we have some additional robotic capability that with a second shift would push that to 50,000 this year, which is obviously in excess of the 10,000, which is the estimate that's out there and we feel comfortable with for calendar year '04.

Appreciate that clarification, because I think you said, and whatever, I'm winging it here, that it would double the capacity and 50,000 is - in other words, I thought it was 2,500 going to 5,000.

If I said hundred, I didn't mean to. I meant to say 25,000, not 2,500.

Good. Sorry, that could be my problem. Thanks a lot.

OK, thanks, Neal.

We'll now hear from Tim Green (ph) with Briar Patch Stock Market Letter.

Martin, how are you this morning?

Good, how are you?

Fine, thank you. Great progress over the year.

Thank you.

You've always had some dreams or some new ideas. I know you're really engrossed with the successful launching of the A5, but now that you have a big fat back pocket, what are your dreams that you're thinking of in addition to this?

That's a tough question. What have you done for me lately is always a difficult one?

No, I mean, you always have great ideas, and some of them come to pass.

I think right now we're - to be honest with you, we're just so focused on - we're finally at a stage where we have technology and we have a great product and we have a big opportunity in front of us, and we're really kind of all focused on how do we make this a success now. And it's a big part of this equity offering, too, is that we want to make sure that we had all the resources we needed to really make this thing successful, including looking at OEMs and licensing and smaller products, lower-cost products. Those are really our focus going forward.

I'm looking forward to continuing development on it. It's been fascinating to watch you all grow.

Thank you.

Now move to Russell Sarachek with Contre (ph) Capital.

Actually, it's been answered, but can you actually just follow up a little bit on pricing, because some of our dealer-installer surveys have found that - they've felt that basically if you guys came back or they came back on more competitive deals or got kind of below the $2,000 price point, there'd be a lot more activity. And I didn't really get a clear understanding of the situation, because you guys weren't too clear on that.

So, the other questions have been answered, but ...

The question that was asked about Tweeter was a $3,000 price point, not $2,000. So they were at $3,000 on their Web site, which is down from the $3,500, which is sort of the MSRP, if you will. And up until this point, people have been selling the product at list price. And as you know, in consumer electronics, that normally doesn't last very long. It's a very competitive business, and consumers don't always expect to pay list price.

Or at least they will when it's a brand-new product, but over time, what I was saying is that we expect that to gravitate to a price that's probably just under $3,000, like $2,995.

OK, thanks.

Now hear from Elsie Sephlian (ph) with Bear Stearns.

Hi, I just wanted to ask you where you guys stand on the Internet access through the A5.

Where we are on that is that the product that's shipping today has the data port built in to be compatible with our TracNet product, which is a product that's already in production for our RV and marine segment, and that's a service that KVH is providing. In other words, when you buy the hardware, you sign up through KVH.

What we're working on is a smaller, lower-cost version of the TracNet that would be suitable for the automotive market, and we expect to have something to announce in that area during the course of this year.

Great, thank you.

We'll now move to Tim Quentin (ph) with Berj (ph) and Company.

My question was answered, thank you, regarding the capacity situation. I appreciate it.

Great. Thanks, Tim.

Move to Adam Scotch (ph), with a follow up.

Yes, just a quick follow up. Someone asked a question about competitive products, and I think it's MotoSat has their T Motion, or whatever it's called, which they claim is coming out in the second quarter of 2004. Do you guys - have you guys heard any scuttlebutt on that? What is sort of - as far as you can see, how is the product positioned, because I've been told that it's coming out at a lower price point, but haven't gotten much more in the way of details.

Yes, this is a company that we're competing with today in the RV market. They're focused on the RV market. They were in that market when we entered it. In terms of retail market share, they've got a very, very small market share. We estimate we've got about 75% market share in the RV. So it's a company we're familiar with, we've competed against them already, and we're not surprised that they would follow us into the automotive market.

But, as I said before, we certainly expect competition in every market that we're in, and our products were designed to be very, very competitive.

Is there anyone else out there who - I think there was a British company as well that was supposedly coming out with a product. Is there anything else out there that one might expect to see over the next 12 months?

Yes, that company is another competitor from the RV market called Winegard, and they've indicated that they like the MotoSat are going to follow us into the automotive space. So, again, this is another company that we're competing successfully with already in the RV space, and that to my knowledge - kind of what you've heard today is the entire universe of potential competitors.

OK, thank you.

Another follow up from Chris Quilty.

Thanks, guys. A quick question for you, back to defense. Did you give any breakdown on international versus domestic, and are there orders, potential orders, perhaps? It seems to have been quiet for the last couple quarters?

Yes, I don't have the exact percentage. Maybe Pat does. But let me say that historically the international market was actually larger than the U.S. market for us. So we actually got started working with the Saudis and the Canadians and Sweden, and since then we've really progressed. We're in a lot of countries in Europe and the Middle East. In the last couple years, because of the build-up of Iraq and Afghanistan, the U.S. has been a much larger percentage of our sales. But going forward, I expect that the international markets will again be significant for us.

That doesn't give you percentages, but I think it sort of tells you where we're headed.

OK, different area. Your RV growth, is it fair to assume that it will slow this year relative to last year's growth rate, because last year you benefited from the rollout with a number of OEMs?

That would be a fair assumption, but the reality has not shown that yet. In other words, we kind of thought the same thing you did, that once we're onboard the RV OEMs, that once you've added that, the growth rate, at least in percentage terms, would start to decline. But so far we haven't seen that, and it might be because we're just getting so many RVs on the road that have our antennas on them that people see what's coming off the factory and choose to buy that same brand in the aftermarket.

And we're also seeing OEMs adopt our antennas on a larger percentage of their vehicles. So even though we might have already signed up an OEM, they're moving from putting it instead of just an option to a standard, and in those platforms where it's an option, they're increasing the take rate. So we're still seeing strong growth in the RV market.

OK, and a couple quick questions on the A5. You mention that you're coming out with a roof rackless option for the limo and other market, and yet I've at least heard some indications that some limousine companies are already purchasing these. Do you know - is it possible for them to mount the current antenna without a roof rack, or would they have had to go back and put in one?

They could have done a custom install themselves, which might be difficult, whereas what we are giving them now is something that makes it quite easy to install. But you are correct, that I've heard as well that some limo companies are already installing them. So they're either doing it with a roof rack or they're doing a custom install where they're actually doing something unique, whereas this is something that will be easy.

And your version will be available when?

This quarter, next couple weeks.

OK, good. And, final question here, you mentioned a sort of comarketing agreement possibility with the satellite TV providers, DirecTV at this point. Can you give us a little bit of idea of what that might involve, and was I correct in my note taking where you said that probably something that's probably in the Q2 to Q3 timeframe?

Yes, I think that that's - the timeframe would be approximately correct. I really don't want to get into the details of what it might entail, but I do - I think I said earlier, and I'll say it again, that we see it as critical for our success to be partnered with one of the service providers. It's just like a cell phone manufacturer, trying to do it without a service provider is just difficult. So it's very important to us, and we're working on it very hard, but I really can't say what that kind of arrangement might look like at this junction.

OK, and I'll add one more A5 question. I don't know if you're doing the stupid little new customer response cards, where they fill out all the information and where they found out about it. Are you getting any data like that, and are most of the new customers citing some sort of media response, or are you seeing any that would indicate that the product is becoming self-referencing?

We have done surveys where we call consumers and ask. An answer to the last question, which is the most important, is would you recommend this product to your friends? We've had almost 100% of the people say that yes, they would recommend this product to their friends. So, up until now, since the ads are literally just hitting today, we believe that all of the sales have been through word of mouth. And getting back to the earlier question about the RV market, I think that might be what's happening there as well. And as we see more and more of the products on vehicles, it becomes sort of the cool thing to have. And once you see that your neighbor has one, you want one too.

Because what we've seen is that when people drive in a vehicle - if they're a passenger and they're scrolling through the program guide and looking at the way that this thing works, they get really excited about it and want to buy one, so I think it's definitely a word of mouth type of sale.

Great, thanks, gentlemen.

OK, thanks.

And we'll take another follow-up question from Adam Scotch (ph).

Hey guys, I just had one other question. Going through the prospectus, one of the things I noticed is that Joe Bookataub, your COO, seems to have resigned. But I didn't see a press release. I guess why did he resign, and why wasn't their a press release issued? It seems like a pretty major position to (inaudible) a company.

Yes, he resigned for personal health reasons, and what we've done is we've replaced - we've actually - I mentioned in my script we have moved the military production to our fiber optic facility, so we actually have two parallel positions now for manufacturing. He was in charge of manufacturing here, and as well as in Chicago, so he was running the manufacturing operation. And now where we have the two VPs, there's one in Chicago running the military products, and one here running all of the satellite products. And, as a matter of company policy, we never issue press releases when people resign - never have.

It was just kind of surprising, especially given you guys are in registration and so forth. And how long was he at the company for?

My guess is around two years?

He was about two to three years, somewhere in that range.

To my knowledge, he has not taken a position anywhere else.

So, I guess from here on out, if somebody at the company resigns, it's going to be in a filing, but it's not going to be in a press release?

That's correct. We've never put out a press release for a VP level position resigning.

We will be putting out a press release on the new hires, which have just come onboard. So you should look for that.

Yes, no, I mean, it's just sort of - it seems like both hires and departures are material to business. Not if it's some low-level person, but if it's the COO is top couple of people in the company, it seems like a pretty significant position.

Yes, he was really running the manufacturing, so we didn't deem it to be material.

OK, thanks.

And there are no further questions in the queue Mr. Kits van Heyningen, and to turn the conference back over to you.

OK, great. That's all we have here. If you have any other questions, please feel free to call Pat or myself. Thank you.

That concludes today's conference. We thank you for your participation. You may now disconnect.