KVH Industries Inc (KVHI) 2004 Q1 法說會逐字稿

Good day everyone, and welcome to the KVH Industries first quarter 2004 earnings release. Today's call is being recorded. At this time, for opening remarks and introductions I would like to turn the call over to Mr. Patrick Spratt, Chief Financial Officer. Please go ahead, sir.

Thank you. And good morning. I am 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 first quarter 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 Website 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 annual report on Form 10-K, filed with the SEC on March 15th, 2004. The company's SEC filings are available directly from us, from the SEC, or through the investor information section 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. It's only been eight weeks since our last conference call, so I'll just bring you up to date on our progress through the remainder of the first quarter. I'll begin with a recap of our quarterly operations, and our key business areas. And then, Pat will elaborate on the financial results for the quarter. Then after that, as always, we'll take your questions.

So we're off to a strong start this year, as excellent growth and our satellite communications business helped us post record revenues of $18 million. That's up 37 percent from the first quarter of 2003. And breaking our previous record for quarterly revenues by more than $2 million. We also executed a $1.75 million sequential improvement on the bottom line, as we return to profitability with earnings of one cent per share, up from a loss of 14 cents per share in the fourth quarter of 2003. Our mobile satellite communications business was the engine for KVH's revenue growth in the first quarter. Our efforts to strengthen our leadership position in the marine and land markets drove satellite revenues to a record high of $13.9 million. And that's up 81 percent from the first quarter of 2003. Signs of an ongoing economic recovery in the US and sustained strength in our European market, are positive indicators for continued growth.

As the economy has strengthened, satellite TV has become a very popular discretionary item for boats and RV's. In the marine market, our revenues were up 64 percent from the first quarter of last year. This growth was driven in part by new product introductions including our new state of the art TracVision G8 and our new high data rate Trackphone systems. We're also seeing extremely positive results from our efforts to sell full systems which enable our customers to purchase a complete entertainment and communications package for their vessel from a single manufacturer. At the marine dealer level, we're also seeing a trend in which communication equipment is becoming a larger percentage of the retailer sales. So while marine equipment sales overall are on the rise, satellite systems like ours are becoming an increasingly important part of our retailers livelihood. And as a result, giving us greater attention from these retailers. I believe this is also helping our rapid growth in this market.

Now while our marine sales grew over 60 percent in Q1, our satellite sales for vehicles were even more impressive. We achieved 101 percent growth in land vehicle satellite sales during Q1 compared to the same period last year. This includes both automotive and RV. So the majority of the growth in Q1, came from the RV market. A number of factors played a role in this RV expansion. First, after being mired in a slump for several years, the RV industry is showing clear signs that it's 2003 recovery, maybe carrying over in 2004, according to recreational vehicle industry association. The RV industry is booming as younger consumers recognize the advantages of RVing over other forms of vacation, especially in today's travel climate.

Now with the leading market share in this segment, this trend directly benefits KVH. We have a wide range of track vision products that offer access to entertainment that consumers want to take with them on the road. In addition to the general strength of the market, we continue to enhance our overall position. Earlier this month, we announced that another leading RV manufacturer coachman is now offering our TracVision antennas as optional equipment on its new high end diesel coaches, adding to the long list of OEMs that buy our products.

We also made solid progress in launching the TracVision A5 in to the automotive market. In our last conference call, we outlined the key milestones for 2004, that we felt we needed to achieve for the TracVision A5 to be successful and meet our sales expectations for the year. These included supporting our existing dealers, and ensuring their successful sell through of their initial products inventory. Developing a marketing relationship with a satellite service provider, establishing initial accounts with key van and SUV conversion manufacturers. And expanding our distribution network during the second half of the year. I'm pleased to say that during Q1, we already made significant progress towards achieving these milestones. And going forward, we'll be reporting our progress in these areas, which we believe are important for our product launch, and our overall success. Consistent with our historical practice, we won't be breaking out sales by individual products, but we will continue to break down revenues between our land and marine markets.

As expected, during the first quarter, we mainly supported the sell through of the TracVision A5 inventory, already in the automotive sales channel. Retail sales sell through in Q1, appears to have been higher than in Q4, although our net new sales through retailers were significantly lower than those in Q4, which included the initial channel fill. However, our sales, channel check, and informal dealer surveys, now show only limited inventory in the retail channel. And we expect to see increasing orders from the dealer network starting this quarter.

We also recently introduced our new roof mount system which permits the A5 to be attached to the roof of the vehicle directly, even if it doesn't have a roof rack. In addition to providing flexibility for automotive installations this new mounting design has enabled us to begin offering the A5 to the RV and bus market. This is a natural evolution for our satellite TV antenna technology. And allows us to take a step towards our goal of applying our hybrid face array antenna across all of our satellite markets. Sag Parkway (ph), the country's leading after market distributor of RV accessories is now offering the A5 through its national network of retailers. While we remain solidly focused on the automotive market for the TracVision A5, we do expect to see incremental A5 sales through the RV channels going forward.

We've also started selling the A5 to several of the countries leading vehicle conversion manufacturers. I expect that we'll have announcements later this quarter, regarding sales agreements with one or more of these conversion companies, as they incorporate the A5 as a factory option, or perhaps a standard equipment on some models. Our sales for these manufacturers have an added benefit, above and beyond the sales of the A5, the converted vans, SUV's. And these conversion companies are also very closely linked to the auto manufacturers who build the baseline vans and SUVs that they use. Our sales into this market, and the relationships we're building with these conversion companies, could help focus the attention of the auto manufacturers, regarding their own potential use of the TracVision A5 as a standard factory option on new cars.

On the marketing and advertising front, we've added two more promotional vehicles that are now touring the country providing regional sales, training, PR and marketing support for KVH, and our A5 dealers. Hence the A5 continue to run in targeted lifestyle and enthusiastic magazine, and our overall add, and promotional campaign is expanding, achieving broad consumer awareness of the TracVision A5 remains a critical step in reaching our sales target. We're currently finalizing plans for broader advertising campaigns in both key sales regions, as well as an array of national publications.

Now these efforts, combined with the continued support of our existing and new dealers, as well as the expansion of the A5 beyond after market consumer vehicles should help strengthen the A5 sales throughout the year. While we're disappointed that the initial adoption ramp has not been faster, we remain confident that the track vision A5 will prove to be a truly ground breaking new product. And that satellite television and cars will eventually become commonplace. KVH is positioning itself to be the number one player in this new market for both the short and long-term.

In our defense business, revenue was $3.5 million. That's up about 200,000 sequentially from Q4, but it's down 27 percent from the first quarter of 2003. The recovery of our defense sales has been somewhat slower than initially expected, as we did not receive the $2 million TACNAV product order originally expected in the fourth quarter of 2003. Information we've recently received indicates that this order is not part of a broader needs assessment. And while this could turn in to a much large program, it is moved in to a new review cycle by the military. As a result, it's not entirely clear when or even if this order will be pleased. And therefore, we've elected to remove it from our near term sales forecast. If it does come in, we'll treat it as an upside surprise, during whichever quarter it occurs. Since this order was for a standard product, we've already started selling these units to other customers.

In our fiber optic area, the shipment of our first production model of the TG 6000 Inertial Measurement unit in Q1 represented the successful execution of one of or major strategic goals, which is to offer more highly integrated, higher value system, as opposed to selling single access sub assemblies.

Using our DSP gyro technology, this new compact three access fiber optic guidance packet, supports a wide variety of applications ranging from missiles and drones to helicopters and torpedoes.

So in conclusion, 2004 started out on a very positive note for KVH. I'm extremely pleased that our land mobile sales are up over 100 percent even before sales of the A5 really kick in. And that overall sales are up 37 percent without the benefit of a substantial military order. We achieved our first objective of returning to profitability. And we're now focusing on strengthening that profitability throughout the year. Our land and marine satellite business shall remain strong, and receive additional support by expanding TracVision A5 sales throughout the year. TracVision A5 margins are on track and are expected to continue to improve, increasing the A5's contribution to our bottom line this year. While the anticipated recovery in the growth of our defense business is starting a bit more slowly than expected, we're still confident it will make a positive contribution to our overall results during the course of the year.

Now I'd like to turn the call back over to Pat for the financial details. Pat?

Thank you, Martin. The first quarter was highlighted by continued solid growth - excuse me - achievement of record quarterly revenue, and strong improvement on the bottom line as we experience a significant turnaround for the fourth - from the fourth quarter of 2003. Excuse me. We focused our attention during the quarter, on supporting growth of revenue, while also delivering a meaningful improvement in margins. I'm losing my voice. I apologize to everyone.

We accomplished that. Our objective now is to continue improvement on both the top and bottom line. We are confident in our ability to achieve these financial goals. Q1 revenues at $18 million were up 37 percent over the first quarter last year. And we reported a profit of once cent per share. This bottom results represents sequential $1.75 million positive swing. And is evidence of the strength of our core business. Satellite communications grew 81 percent to $13.9 million. This was on the heels of growth in excess of 100 percent in the fourth quarter 2003. Marine sales were up roughly 64 percent. And sales of our land based satellites systems including the TracVision A5 were up 101 percent. There is evidence of strength in every sector in which we compete. Although defense revenue for the practical navigation and fiber optic product lines declined 27 percent year over year, to $3.5 billion. They were higher than the fourth quarter of 2003. We were subject to the lumpiness of the defense business again. And we were also able to capitalize, however, on new programs that develop during the quarter. TACNAV based applications made up a little more than 75 percent of the quarterly sales.

Defense related backlogs at quarter end, was essentially unchanged from last quarter, at about $1.5 million. Legacy products declined five percent, to about $570,000. On the cost side, gross margin was 39 percent down from 45 percent in Q1 last year, but up 10 points sequentially from Q4 2003. Product mix continues to be a challenging factor, as sales of our higher margin defense products only represented 20 percent of our total sales in Q1 this year, whereas, they were 37 percent of totals in the first quarter last year. However, we are neutralizing some of this impact by advancing product costs reduction programs across all of our core markets. We approach this from many angles, lower cost materials, simpler processes, greater efficiency in the layout of facilities, and product line consolidation.

The TracVision A5 is one example of specific product focus. In Q1, we achieved our direct gross margin target of approximately 20 percent. This result was totally cost reduction initiatives.

At a more general level, company productivity gives an excellent profile of our overall progress. Unit production of satellite products increased 96 percent year-over-year, while manufacturing headcount only increased 45 percent, and total company headcount increased just 25 percent.

Turning to operating expenses, they were at $6.8 million, and were up 18 percent year-over-year. As a percentage of sales, operating expenses declined six points year-over-year to 38 percent. Research and development investment declined 14 percent to $1.8 million from the same period last year. In Q1, R&D represented only 10 percent of sales. This was six points lower than one year ago, and 14 points lower than two years ago. Our technology is the foundation of company. Going forward, we intend to maintain the level of R&D investment as a percentage of revenue at approximately the current level.

First quarter sales and marketing expenses increased the $3.8 million, up 47 percent from last year. This increase was largely driven by the 81 percent year-over-year increase in satellite sales. And in part, due to the ramp of investments to support the TracVision A5. We intend to continue to increase sales and marketing investments as necessary to ensure the successful expansion of TracVision A5 sales within each of our target markets.

Q4 administration expense was $1.1 million up 14 percent from the same period last year. Turning to the balance sheet, cash at quarter end was $47 million. For the quarter, cash used in operations was 3.4 million. And we also spend $658,000 for capital expenditures.

Accounts receivable increased by $2.9 million. This was a bit more than the sequential increase in sales from the resulting days sales out standing or DSO increased to 71 up six compared to December of 2003. The month of March represented a higher than normal percentage of quarterly sales, as we responded to very strong demand and gathered momentum over the course of the quarter. Inventory increased by almost $2 million sequentially to $8.3 million. The majority of this increase is raw material to support anticipated demand in the second quarter. We have begun to use the TACNAV finished goods inventory that we built in Q4, to support other new sales opportunities going forward. Inventory turns on an annualized basis were just over six, lower than the level in Q4 2003 but still a very good result.

We are focused on growing revenue in all of our strategic product areas, and improving operating margins along with that growth. We will invest, as necessary, to take advantage of near term opportunities that arise and to position the company for growth over the next several years.

In summary, we are very pleased by the strength of our satellite communications business, and we remain confident that our new defense sales opportunities will develop over the course of the year. We are also pleased that we achieved our first quarter objective of returning to profitability. We will continue to focus our energy on improving the foundation for sustained profitability.

Now we'd like to take your questions. The Q&A period will be approximately 30 minutes. We ask each participant to limit the number of initial questions so that everyone in the queue has a term. You are encouraged to reenter the queue for additional questions.

Operator, please open the call for questions.

Today's question-and-answer session will be conducted electronically. If you would like to ask a question, you may signal us by pressing the star key followed by the digit one on your touch-tone telephone. For those of you joining us today using a speakerphone, please release the mute function so your signal will reach your equipment. Once again, that is star one if you have a question. And we'll move first to Rich Valera with Needham and Company.

Thank you.

Hi, Rich.

Hi. With respect to the A5, I guess it sounds like you didn't want to break out specific numbers there, but can you comment on the full year guidance you had issued before of 10,000 units roughly, and a third of that coming in the first half?

Yes, I think that we're still generally comfortable with those numbers that are out there. I think that the only disappointment we had in Q1 is that the pace of new orders that we're getting was lower than we would have liked to see. But the overseeing and the sell through seems to be that we're gaining traction. You know, the product is performing incredibly well. Consumers love it, the dealers like it. So I think we're getting traction. I think, if anything, the ramp might have been a little slower in Q1. But overall, we're still comfortable with that as the general target. But again, you know, there's a whole list of things that we have to do which we're trying to focus people on in terms of marketing agreement, getting these OEMs in place. And all of that is built in to our, what we feel has to be done in order to achieve those numbers. But we're very confident that, you know, right now we're making progress on those milestones that we feel tied to the annual guidance number.

Great. And last quarter, you had said that signing up additional expeditors was a priority. Can you talk about any progress you've made there. And how significant a part of the distribution channel, do you see them going forward?

I think it's our best sales opportunity in the sense that it appears to be easiest sale. In other words, as I mentioned before, it's a very successful way to sell a product. The challenge is that the new car dealers are receptive to it, and they enjoy selling it, but their first priority is to sell vehicles. So we have to tie their performance in selling vehicles to our goal of putting A5s on the dealership show room floor. And we are making progress in that. And I think that that is going to be a very successful sales channel for us. It might take a little bit longer to develop than developing a retailer, because once you make the sale to our retail chain, they make the decision to put it in all of their stores.

So where this is more of a selling to individual dealers on a one-by-one basis, and then, educating their sales force on the show room floor.

So you do expect to sign up additional expedited. It doesn't sound like you've signed up a lot here in the first quarter, but - is that fair?

I think that's fair. And what we're doing is that the expeditors that we have signed up is that we're now traveling with them, and setting up the dealers and our sales people are going to show rooms and seeing that they actually have A5s on the show room floor for the first time, which is great progress. Unfortunately, the sales people also were not educated as to what that thing that the owner had bought that was on the floor. So we have to get that education process into the dealership now. And that's the next step. So we made progress, again, in the A5 in to the show room which is good. And now, we have to educate the sales force on the floor.

Great. Just one final question, and I'll yield the floor, Pat, are you still expecting defense at 20 to 25 percent of overall sales for the year?

At this point, the answer is yes, Rich. As we said, we were off to a little bit slow start early in the year, although we did see a bit of a sequential increase in sales overall. So, you know, based on the profile of programs that we see ahead of us, that we have a good - you know our expectations are still very positive that we're going to close those. I would say that it's still a reasonable expectation to be in that range.

OK. Thank you.

Our next question will come from Tom Watts with SC Cowen.

Hey Martin and Pat.

Hi, Tom.

In terms of - you did very well on the gross margin front. Going forward, throughout the year, I think previously we've been looking for sequential improvements in gross margins with an average for the year about 40 percent. Could we see that bounce around more depending on product mix? And particularly, could comment on what's - on TracVision as you ramp up production there, start producing more. Would that bring our gross margins down at all?

Well I would hope that we're not going to see gross margins bounce around a lot. But as, you know, you've seen in the past and we've experienced in the past, if we get substantial swings in the defense portions of business, especially, we do, then have some wider swings on gross margins.

But right now, as we look forward, the guidance that we discussed on the call back in February, you know, we're still comfortable at this point with that type of guidance that we provided. That we were looking at gross margin for the year at roughly comparable to 2003 which was approximately 40 percent. And although gross margins will probably move a little bit quarter-to-quarter, I still believe that over the course of the year the gross margin will, you know, if you looked at it over the length of the year, it will show improvement from beginning to end. It may not be, you know, exactly linear all the way through, and that will be a function of mix.

As far as the A5, you know, as we indicated on the last call, as well, right now, we're on track to achieve the next step improvement in the A5 margins as we enter the third quarter. And that should bring us to approximately the 40 percent number, which is our near term target. So certainly, in the very near term, the immediate term, the more A5 volume we have, the more it will depress our gross, or at least cause our gross margins to be a little bit less than they might have been otherwise.

However, as we enter the second half of the year, you know, we should see it comparable with our other land based products.

OK. And then just a second question on the A5, you mentioned having a product there for the RV market given your excellent distribution and OEM relationships in RVs. Are we going to - you also mentioned that you're working with the convergent companies, that I think, it was the high end primos (ph) and things like that ...

No. These conversions are, you know, what used to before mini vans came out, you know, van conversions, and SUV conversions. So these are - and some of these are sold back to the car companies or sold to the car company distribution. So they're converted vans and SUVs not RVs.

OK. And I mean do you see the RV market as a potential target for the A5? And could we even see, you know, both RV dealers and OEMs picking up the A5?

Yes. We're going to start selling in to that market. We've had demand for - initially we were thinking that the low profile wouldn't be a big advantage in the RV market because the RVs were so big, and they have air conditioners on top of the vehicles that are larger. So the main benefit of the A5 is the small size, and the low profile. But it turns out that we are getting demand from that market. So we are distributing through Stag Parkway, who is our best distributor for the RV market. So we will be selling in to that market moving forward.

Now the A5 is generally more expensive than the products we're selling in the RV market today. So I think it will be the high end of the RV market that will buy this product as opposed to the real value in to the market. But it - we'll see what the breakdown is.

But doesn't this - but doesn't the A5 give much better functionality while in motion than the other products?

It's our latest product but the - in terms of functionality it actually provides the same functionality as our high end RV products. The main difference is that it's much, much smaller and lower profile. But our other products like VL-3 are tracking antennas that work great while you're driving. And that's why we're selling so many of them in the RV market today.

OK. Thanks very much.

Yes.

Now, we'll year from Steve Levenson with Advest.

Good morning, Martin and Pat.

Hi, Steve.

Do you think you benefited from any seasonality in the marine markets?

I'm not - well normally Q2 is a bigger market - it's - the marine season peaks in the March-April timeframe in terms of, you know, maximum monthly sales, but Q2 is normally larger than Q1 for the marine market.

OK. Secondly, I know you didn't mention it, were you planning on mentioning the actual number of units of track vision A5s sold in A1?

No.

OK. Are you seeing anything from competitors, anything new actually out there? I know there's been some talk, but I haven't seen it. I don't know if you've seen anything out there competitors yet.

Our sense is the competitors are further away than both we thought, and I think that the market thinks. We've also seen some potential competitors remove products from their Web site, that they had announced CES. So my sense is that we have a bigger lead than we thought we did, but that's based on my own observations. And certainly no product has come to market yet. And even though some people were saying that they would be coming to market around the timeframe. The same companies have now removed that product from their Web site. So it seems like we're still the one and only.

OK. Thank you. On the inventory, we know you've got some build up in inventory there. Do you have sufficient parts to meet demand? Or do you have long lead time items that you think you'll still have to get? Or, you know, Pat mentioned that it was mostly in the raw materials line. Are you pretty well stocked for the next few quarters?

We have a lean manufacturing system. So even though the volume - in other words, we're - because satellite sales increased by 81 percent as a category and the land mobile increased by 100 percent, there's a larger volume of parts, raw material flowing through the floor. So our cycle time is very short, typically from the time a product starts to be built, to the time it's in a big box, is on the order of hours, not days or weeks or months. So that inventory will turn very quickly.

Yes, the - one of the things that I mentioned in the past, Steve is that, you know, our overall turns for the company in the first quarter on an annualize basis were just over six. We've been as high as seven as a company. They're a little bit lower in the first quarter, than they were in the prior quarter in some measure because of the, you know, the additional risk production that we did for this anticipated military order.

But also the raw material we have on hand is to, you know, support the very near term production requirements. There are satellite communications inventory turns, approximately 10 times a year, you know, which means that we're turning that inventory about every for to six weeks. And so we don't buy very much raw material in anticipation of long term demand. It's for what we see in the relatively near term.

OK. Last question, you did burn cash in this quarter, do you expect that you'll be cash flow positive next quarter, or when do you think that will come?

Again, I think, that this quarter, you know, maybe slightly or somewhat cash flow negative on the last call I mentioned that I expect that we'll begin to see that turn in the second half of the year. And that overall, for the course of the year, we will, you know, give or take a little bit, maybe right around cash flow neutral. And I still anticipate that that could be the case.

Thank you very much.

Thank you.

Moving on we'll hear from Chris Quilty with Raymond James and Associates.

Good morning, gentlemen. A question on the TracVision A5, you had mentioned that the dealer opportunity, dealer expediter is perhaps one of the easiest sales opportunities, and yet, the educational issue of getting customer awareness is still a big hindrance. To that end, how well do you feel you're progressing on those sort of relationships of DirecTV and EchoStar to promote the product? And is that the real key? Or is there some other measure in terms of the national advertising that you need to put in place?

I think - I didn't mention it in this call, but I did mention in the last one, that I think that you're exactly correct, that is the number one priority. And that's something that we have been working diligently. And - but I think that overall, what would have to happen is we have to create awareness. And, I think, that what happens, whenever you have a brand new product in a brand new market, it - everyone, I think under estimates how long it takes to for the average consumer to find out about it. So that's a process that is ongoing.

Now, I think, that typically what happens is that investors get excited about a product, and dealers get excited about a product. And then, consumers get excited about a product. And we're at the stage now where the dealers are very excited about the product. And we're just getting to the stage now, where consumers are finding out about it, and getting excited about it. So we're still at the very early stage of this whole program. But I think that the number one thing that has to happen is we need to establish a partnership with service provider.

And the number two thing we have to do is to create additional consumer awareness through our own advertising.

OK. And the second part of that you had talked in the past, about mid year, perhaps, in OEM relationship, any progress points there?

Right. The OEMs that I was talking about are these van and SUV conversion companies in terms of actually doing something quickly. In other words, these are manufacturers that are buying, for example, an SUV, and then adding a bigger engine, ruggedizing it, custom - or making a customer van, for example. And those are opportunities that are more near term in terms of production during this calendar year still as opposed to OEM at the Detroit level, which is a multi year sales effort.

Well how about OEM opportunities targeted with people who are - or companies that are selling screens and video systems or the - you know, the Delphi's of the world that are doing, you know, automotive products selling in to the OEMs.

Right. Yes, we are talking, as I mentioned in the last call as well, about licensing opportunities as well as OEM - potential OEM deals with the tier one suppliers. So - and that's progressing. We've made progress since the last time we spoke, but again, those are more longer term as opposed to short term sales opportunities.

OK. Switching gears over to the military side of the business, you indicated that, you know, you were undergoing a review cycle, was that a review cycle on this particular order? Or on, you know, I haven't seen anything defense wide on the DOD changing policies on sourcing, can you give us a little more detail?

Sure. This order that we are expecting was for an operational requirement that came out of our army personnel that were in Iraq. When the request came in, it was approximately a $2 million order, which had been signed off in country. And I think the - what happens is that internally within the army, they decided that rather than piece meal this, this might be something that they might like to deploy on a larger basis. And they were concerned about rushing in to buying something for 200 vehicles, when perhaps there's something a lot more vehicles should need.

So on the one hand, it might be good news. On the other hand, it means that nothing happened, as far as selling those 200 units worth or the $2 million worth for Q1.

So that actually good news. That's the first time you've gotten higher level awareness or commitment that I'm aware of.

Yes, it's a very high level. It's at the T3 level, the general level. And it was a positive comment. And they want to do a full briefing on the technology including potential integration with things like MTS that - which is the movement tracking system. So there's a lot of good news here, but I'm very reluctant after having talks for quarters in a row getting this order, which we had a very high visibility and very, very high confidence of (inaudible) we built the product. So at this point, we just want to say, you know, it didn't happen, so it's out of Q1. And there's no point in rolling that forward in to Q2 at three or four when we don't have good visibility.

OK. Does this have any implications on the SOCOM (ph) order, the vast majority of which still has yet to ship?

No. Completely unrelated.

Different command structure.

Yes, it has nothing to do with it. And there, they've already made the decision to the deploy the GMENS for the entire force. So their orders - so they've made this logical decision already. And we're getting incrementally funded during this year. And they have put in the budget formally for '05. So that we'll be seeing, you know, year annual budget - line item budgets for special forces command for the - our GMENs, which is our TACNAV product.

So - but they have made the decision to deploy that on every vehicle for the special forces.

And does that mean you're going to have to send people out in the field to install these things? Or are you just going to get them on the rotation cycle?

We have done both. So we will do whatever they like us to do.

OK. And final question here on the RV market, when do gas prices have an impact on that market or your aspect of it?

That's a good question. In the past, the gas prices have had an impact on the RV market, and they currently don't. I think that, you know, even though gas prices are high or at record high levels as a percentage of income they're actually not at a record level at all. So I don't think it's as big an issue for consumers as it is for the media, and that's my opinion.

Well how about - I'll put it this way, I mean obviously not all RVs are alike. When you look at the class A motor homes, where most of your units go, have just - do those same patterns of, you know, gas price sensitivity hold? Or do they tend to like the marine market, be immune?

I think you might be right? Also, these are going on diesel vehicles which had better fuel economy. And diesel prices are less expensive than gas prices. And also, it might impact how far they drive. But at the end of the day, if you're going on a week vacation or a two week vacation, if you look at your total cost, the cost of the fuel is not a major item in that whole program, as opposed to, you know, flying through to the Caribbean or something.

OK. Thank you very much, gentlemen.

Thank you, Chris.

We'll take our next question from JP Mark with Farmhouse Equity.

Hi, good morning.

Hi, JP.

I had a couple of quick questions about, first of all progress, any progress you can report with Dish?

We got that question earlier, and all I can say is we are working this issue diligently and it's our number one priority and I'm personally working on it.

OK.

But there's nothing that we have that we can discuss.

Second of all, I wondered about sales and marketing for the second half of the year. Can you talk a little bit about some of your plans for promoting the A5? And, you know, have you sort of - or you bought advertising or what are you thinking about there?

Well that's - I'm glad you asked that question. We - this is something that we're struggling with here, because there are number of constraints in terms of, obviously we need to chart this consumer awareness. On the other hand, we want to maintain profitability. But we've got a brand new product that has to be launched in to this market. And we've got a technology lead, and a marketing lead that we want to take advantage of.

So we're really evaluating whether we should be increasing our ad budgets for the second half of the year, in terms of a larger campaign. And what we've decided to do is to roll out a very significant campaign, but do it in certain regions, where sales of the product are already strong, and we know that there's big demand. And we'll treat that almost in the ad agency vernacular, they call that a vitality test, where you spend, a larger amount of money in say, three key cities. And then, you can extrapolate your sales results in to the broader market.

So we are doing that. And that will be starting in Q3. And this is over and above what we had been planning to do. So I'll let Pat comment on, you know, what the impact of that is. Because part of that money is being reallocated from some other ad programs that we had going on anyway.

In terms of the expense impact, it's one of those that we continue to analyze and assess. But I mentioned on the last call when we gave guidance for the year, that we expected that sales and marketing expenses as a percentage of revenue would probably remain in the 19 to 20 percent range for the first three quarters or so. And then, potentially come down a bit. But that within that, we'd be shifting a fair amount more money towards the TracVision A5.

As you, I'm sure, have noted that in the first quarter this year, we actually spent about 21 percent on sales and marketing, 21 percent of revenue. And so at this point, I would say it's probably reasonable to assume that we'll spend more than we had originally projected as a percent of revenue maybe closer to the 20 to 21 percent range or so going forward. But that we will do our best to compensate with a little bit lower percentages than we had been originally thinking on R&D and admin.

So net net I would say that the overall assumptions for operating expenses that we had provided before, I think, are still reasonable. You know, but that's something that we're going to manage as we go. And one that as, we said, you know, we're going to make sure that we position the TracVision A5 appropriately in the market, and that will be our first priority.

OK. Two other very quick questions. One are you seeing any repeat customers from, you know, people who have purchased your products for their boat and now, you know, are getting it for their car? You know, have you targeted those, you know, your current customers and are they buying the A5?

Yes. The answer is yes. We are selling and advertising in some of the yachting magazines where people are buying our products for the marine market. We're also seeing repeat customers within each category. In other words, as people turn their boats, they come back to KVH and buy the TracVision. And we even, within A5, we've actually had some people, just recently we got an e-mail from a guy who bought one for one vehicle, and just came back and like it so much bought one for his other vehicle. So we are seeing repeat customers, which I think, is a good testament to our product performance and quality and all of those good things.

OK. And finally, I just wondered if you could - if you are willing to break out marine and RV numbers, you know, for the quarter, specifically?

Let's say, marine and RV for the first quarter of 2004. Pardon?

(off-mic).

Yes. Marine was roughly 47 percent. And the land, which is RV and A5 combined was roughly 53 percent.

That was actually kind of just hit RV. All right, that's fine. Thank you very much.

OK.

Our next question comes from Marshall Levine (ph) with Sales Fund Management.

Hi, guys. Congratulations on the upside. I'm going to follow up where that last question ended. It would be very helpful to know what the percentage of your satellite sales was, that was just your RV product, since those seem to be really taking off.

Right. We're basically reporting our numbers in three broad categories now, which is defense, land, and marine. So those are the - even though we're growing quickly here, you have to keep in mind, we're still a relatively small company with only 18 million of revenues for the quarter. So, we feel like it's sufficient granularity at this stage of our development.

Well that's - I understand why you'd want to keep things at this level of granularity. But it's also not quite the way you've reported them in the past. You can't just give the RV percentage alone?

No.

OK. So getting away from that, can you help us understand where this enormous growth came from in the satellite business, going from 12 to 14 sequentially is really impressive.

Right. Well as we've said, the majority of that growth came from, you know, within the land mobile, we have given directional guidance which is that most of that growth came from the RV business. So - and - but the marine market, as a category grew 64 percent. So - and that was almost evenly split between US and Europe, both growing the in 60 percent range, approximately. So the marine market grew in the 60 percent, the land mobile market grew about 100 percent. Most of the growth came from the RV market. And that growth was spread across OEMs as well as our major retailers. Our major retailer partner, camping world had a very, very strong quarter. And they are selling and promoting our products very effectively.

OK. For the sake of comparison, can you give the marine and the land for the last quarter? Do you have that handy?

The last quarter for the fourth quarter?

Yes, for the fourth quarter.

In the fourth quarter of 2003, what we had disclosed was that the marine was roughly 35 percent, and the land was the difference.

OK. Two other quick points. One is your R&D percentage is going down, actually R&D is going down on an absolute basis. Are you just sort of holding off a little bit until sales pick up on these new products?

This whole reduction in R&D as a percentage of revenue over the last few years has been by design. The company peaked in 2001 with R&D at approximately 24 percent of revenue. And that was because of the major thrust in the investment in the TracVision A5 and some other technology.

We have, as a game plan, been bringing R&D down as a percentage of revenue, but fairly stable in terms of absolute dollars of investment. Our intention from here, and we wanted to bring it - we wanted to get it back in line with what we considered to be a long term sustainable model. And we believe that we're approximately there, at this point, as a percentage of revenue.

OK. Last thing, real quick is just to review the history of the A5. I know you won't give a specific number this quarter, but in the September quarter, you had orders of about 1150 in the December quarter, about 700, and that was the last data point we have. I'm just going by the number of units you shipped plus your backlog.

Yes, and again, we don't want to comment too much on individual product line shipments. And also, I think, that you shouldn't confuse shipments in to the channel with orders out of the channel. And that was another reason that we've elected to stop doing this, because this channel behaves differently in terms of the way the channel spills and sells through as opposed to some of our other markets, which has a lot smaller retailers who sort of buy one, sell one.

So - but we'll take the next question.

And gentlemen, we do have time for one last question, which will come from Michael Twilly (ph), with Global Partners.

Hey, guys. Just to kind of comment on ASPs. I know you guy have given some color on this, historically. I mean have you seen ASPs remaining around on 85 - do you need about 3500? Or have you seen that trending down?

I think the map pricing is still at 3500 which is sort of the minimum advertised price.

Right.

But normally, most retailers are including installation for that price. We've also seen some retailers get to the focal point price of 2995 which they've been quoting some customers.

OK. So ASPs have been going down there.

Per the street price. No, they've been consistent. That's been consistent since introduction.

OK. You guys also talked a lot about, you know, some initiatives. And I think JP hit on this a little bit with the sales and marketing line, so you guys were kind of looking to that to stay consistent around 19 to 20 percent.

Given that the receivables number picked up a lot, what would you like to see those day sales get to?

Well our target over the course of the year is to get them down in to the low 60s.

I mean what's sort of the reasoning behind that receivable build? I mean is it just a specific customer?

I mentioned on the - during the prepared remarks, that we had a, you know, building momentum over the course of the quarter had a higher than usual percentage of our sales in the month of March. And that DSO calculation is a very simple division of the receivables divided by the sales for the quarter. So it happened to skew the DSO number up high.

OK. All right. I don't have anything else.

Thank you.

And gentlemen, there are no further questions at this time. I will turn the call back over to Mr. Spratt for any additional or concluding remarks.

Well we want to thank everyone for participating on the call. And we will welcome your ongoing questions. And please don't hesitate to give us a call if you do have some. Thank you very much.

And that does conclude today's conference. We thank you for your participation. And have a great day.