KVH Industries Inc (KVHI) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to the KVH Industries third-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.

Good morning and thank you for joining us. I am Pat Spratt, Chief Financial Officer of KVH Industries. And with me today is Martin Kits van Heyningen, our President and CEO. This call will address the third quarter earnings release that we issued earlier this morning. Copies of the release are available on our website, KVH.com and are also available 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.

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 risk factors described in our quarterly report on form 10-Q filed with the SEC on August 6, 2004. The Company's SEC filings are directly available from us, from the SEC or from the investor information section of our website.

Now I would like to turn the call over to Martin to begin today's discussion of results. Martin.

Thanks, Pat. I will start with a recap of our quarterly operations and our key business areas and discuss some of our plans going forward. I will turn the call back over to Pat to go over the financial results for the quarter, and after that we will take your questions.

Overall the progress we made in Q3 was an important step on our path towards profitability and helped reinforce the value and efficacy of our long-term strategy. We set aggressive objectives in many areas, including cost control, operational efficiency and asset management and despite only modest top-line growth; we met or exceeded virtually all of our goals for the quarter. Satellite sales were up, TracVision A5 bookings and activations increased significantly. The auto industry showed tremendous interest in the A5 and we've made great strides towards potential A5 sales to automakers.

Our defense business began a rebound from several down quarters and we are building strong backlog for Q4 and beyond. Looking at the numbers, satellite revenue was up 12 percent year-over-year. Defense related revenues were up 60 percent from last quarter. Though still down year-over-year. The result was a small total increase with the Company's overall revenue at 13.8 million. Despite only modest revenue growth, the new measures we put in place to improve our operational model showed an immediate benefit in Q3.

Even with our extensive new A5 ad campaign which started this quarter we are able to reduce our operating loss from last quarter to a net loss of 11 cents a share. In our satellite communications business sales increased 12 percent year-over-year to 10.3 million. Year-to-date our total satellite revenues were up 40 percent to 36.6 million over the same period last year.

Marine sales, both here and in Europe continue to be strong on the year-over-year basis. Sales were up 19 percent for product sales over last year, although sequentially marine sales were down from the second quarter. This was due both to the normal seasonality in the marine market, as well as the succession of hurricanes that hit Florida and the southeastern U.S. We believe that these storms, the four storms that passed through the region in August and September had a negative impact on our overall satellite revenues for the quarter. Typically, Florida alone represents more than 25 percent of our North American marine product sales and more than 10 percent of our sales to the RV and automotive market.

Because of the storms, business throughout the region was disrupted. For example, Tweeter, our largest single retailer for the TracVision A5 lost more than 190 store days of retail sales during the quarter due to weather-related closings. Fortunately, we don't anticipate any long-term issues with sales to the region although there may be some lingering impacts early in the quarter.

Sales in the land marketplace including RV and automotive sales were up approximately 3 percent year-over-year, while satellite TV sales to RV market were down year-over-year from the third-quarter 2003, sales for the TracVision A5 to the automotive market were up strongly, both year-over-year and sequentially from Q2. The A5 clearly continues to gain traction. Our national ad campaign kicked off in August, along with regional radio and billboard advertising in the Tampa and Dallas test markets. These ads, together with our new, lower retail price is helping to raise awareness of the A5 and are driving consumers and sales to our dealers.

The A5 sales trend in Q3 has improved considerably over the first six months of the year with continuing increases in new bookings and activations. We've continued our concerted efforts to get automakers excited about the A5 and the momentum seems to be building. We've already had discussions with 12 of the major automotive OEMs. DirecTV is participating in some of these discussions, enabling us to offer packets of hardware and programming that will be attractive to the automakers.

These OEMs are showing interest in the existing A5 as well as in our plans for an embedded version of the antenna. Our near-term objective is for the TracVision A5 to be offered as a dealer installed option and in the longer term for a variant of the A5 to become a factory installed option. We are also very proud of the fact that KVH is one of the finalists of this year's automotive newest PACE award. This achievement is a tremendous credibility builder within the automotive market. The PACE awards have been dubbed the Academy Awards of automotive innovation. And they help set the standard for innovation and excellence within the automotive industry. Being named the PACE award finalist raises our profile as a clear recognition of the innovation and benefits that the A5 brings to consumers, car dealers and automobile manufacturers.

The A5 is clearly gaining traction in both the retail sales and with potential OEM partners thanks to our ongoing advertising, industry recognition, as well as the lower price. We're also gaining momentum in our defense business which had a solid recovery from the prior quarter. This was driven in part by near record quarterly fiber optic sales, total defense revenue is about $3 million and while this was down 20 percent from the third-quarter last year, it represents a 60 percent increase over Q2 of this year. Year-to-date defense revenues were down 35 percent compared with the first nine months of 2003, which have been very strong due to the war in Iraq.

As we indicated in our second-quarter conference call, U.S. military's changing priorities because of Iraq have made short-term sales projections difficult. Nevertheless, we've been focused on building a strong backlog of military navigation and fiber-optic product orders for the coming quarters to ensure that we maintain a steady revenue stream in this business area. We've made a very good start at achieving this goal during Q3 as we received a number of new orders for both our TACNAV military nav products and our fiber optic gyro systems from the U.S. military. In fact our current backlog for defense products is about 6.6 million. That's up from only 2.7 million at the end of Q2. We expect further significant TACNAV orders from foreign military customers as well during the coming weeks and that should help continue to build our overall defense backlog.

We also expanded our fiber-optic productline during the quarter with the introduction of our new DSP 4000 fiber optic gyro. This ruggedized system is ideal for stabilizing high shock gun turrets on armored vehicles. Along with our DSP 3000 FOG and our TG 6000 Inertial Measurement Unit, we now have a robust, streamlined product family based on our patented digital signal processing technology.

In addition to new products and improved bookings, for product sales we also received significant engineering funding from the U.S. military to enhance the capabilities of our existing products, as well as to continue the development of new products. In July the U.S. Special Operations Command awarded KVH a $1 million engineering contract to enhance the ability of our TACNAV M 100 product to connect with the U.S. Army's digital battlefield system. When this development effort is completed in mid 2005, we'll have significantly increased the M 100's capabilities. At the same time we will have expanded the potential sales opportunities for our TACNAV beyond the Special Forces and into the regular U.S. Army.

More recently, we were awarded a $750,000 contract to continue our development of our photonic fiber technology. These efforts have already resulted in the creation and demonstration of what we believe is the world's first in fiber modulator. This rugged optical modulator can serve with a component within a new miniaturized fiber optic gyro that can withstand significant shock and vibration, such as what is required for use within guided munitions.

This new funding enables us to continue development of this exciting new technology. Our next goal is to build a prototype within a fiber optic gyro to pursue the commercialization of this technology. This type of externally funded engineering enables us to reduce our net engineering expenses while continuing to invest in new technology. Taken together, these new product contracts and engineering awards are evidence of a growing base business and continued demand for our defense products.

So in conclusion, we are continuing to build a strong foundation for more consistent performance in the coming quarters. Our gross margin improvement needs to continue. We need to build revenue in both defense and our core satellite sectors, and I believe we are on the right path and our long-term strategy remains sound. During Q3 we saw good trendlines in our key business areas. Our operating model showed significant improvement, and we are committed to restoring the Company to profitability and continuing our growth.

Our Q3 results showed progress towards this goal and have us on track to continue to reduce our loss further in Q4 and to return to profitability in 2005. Now I would like to turn the call over to Pat who will provide you with the details on the numbers.

Thank you, Martin. At the end of the second quarter we made adjustments to our operational procedures in an effort to improve predictability and to set the basis for returning to profitability and sustaining profitable performance over the long term. Changes we made include, we're taking a more prudent approach to building the infrastructure to support growth, and thus restraining expansion of operations until we get clearer visibility for new business trends. We had been doing a good job of controlling overall spending, but this new approach takes that a step further.

Also, we are only basing our defense business growth expectations for the near-term on orders in hand. We will not make projections that depend on additional orders to ship in the same quarter. Our efforts generated more meaningful benefit, some meaningful benefit in the third quarter. Even with lower-than-expected top line growth we still managed to drive a substantial sequential improvement on the bottom line, and we exceeded our objectives in some other key operational areas.

Although Martin has already provided the top line results for the Company, I would like to add one observation. The very modest level of growth for our land satellite products was largely the results of ongoing inventory adjustments by one of our largest RV customers. This customer has been aggressively reworking its structure to increase its inventory turns. As this process has moved forward, they have raised the bar a few times for their own objectives. As a result, their purchases for the last two quarters have been at relatively low levels, yet year-to-date their purchases from us and sell through to consumers are still well above 2003. Although these changes have dampened our land satellite sales to this customer in recent quarters, we expect positive long-term benefit due to a shortened cycle between in consumer demand and our shipments into the market.

Defense related backlog at the end of September was $6.1 million, more than double the level at the end of Q2. This backlog includes funded engineering projects and tactical navigation and fiber optic gyro systems. As of yesterday, that same backlog had increased to $6.6 million. The majority of this is scheduled for shipment in 2005. As a result, while new bookings are looking up, we won't see as significant a benefit in the fourth quarter as we had hoped for since our customers' requested delivery dates are generally beyond 2004.

On the cost side gross margin was 34 percent, down from 43 percent last year. However, this is a significant sequential improvement over the 15 percent gross margin we saw in the second quarter of this year. The Q2 2004 results included the $2.4 million impact of the inventory revaluation for the TracVision A5. Factors contributing to the improvement were product mix and cost reductions made to our manufacturing infrastructure. Higher margin defense products represented 22 percent of total sales in the third quarter, up from 13 percent in Q2.

TracVision A5 direct gross margin was in line with our expectations at approximately 20 percent. We anticipate that this product's gross margin will remain at roughly this level during the fourth quarter. Operating expenses at $6.5 million were down $600,000 on a sequential basis and up 1 percent year-over-year. As a percentage of sales, operating expenses were about 47 percent, down modestly both sequentially and compared to last year.

In addition to generating tightened control of expenses, we took a reduction in workforce during the quarter. Several organizations were affected. This action, coupled with normal attrition, resulted in a workforce reduction of about 10 percent since June. Third-quarter research and development expenses declined approximately $780,000 or 37 percent from last year to $1.4 million and represented approximately 10 percent of revenue. Sequentially, R&D was down $450,000. This decline in reported R&D is attributed to both the alignment of these investments with our ongoing financial and business objectives and an increase in customer-funded engineering during the quarter.

Third-quarter sales and marketing expenses increased to $4 million, up 36 percent from last year and about 3 percent sequentially. As a percentage of sales, they were 29 percent, up 7 percentage points from last year and 3 points above the second quarter. This increase is largely the result of the expanded national TracVision A5 advertising campaign, which was launched during the third quarter. This campaign continues into Q4.

Third-quarter administration expense was $1.2 million, down 12 percent from the same period last year and down $300,000 sequentially. Now the balance sheet. The third quarter cash balance was $46.9 million, down $200,000 sequentially. Accounts receivable decreased $1.5 million compared to the June level, and they are now at $7.8 million. Days sales outstanding or DSO was down 7 days to 51. This decline is the result of ongoing efforts to improve account aging and to some extent it reflects a more balanced sequence of orders throughout the quarter.

The reserve for doubtful accounts was increased by approximately $180,000 compared to June. The majority of this increase relates to a longtime European distributor that has recently experienced a cash-flow strain. The reserve reflects our current assessment of the risk but it does not cover the total outstanding balance. We will manage this closely and assess ongoing risk. Additions to the reserve in future periods could be necessary.

Inventory decrease to $8.5 million, a sequential decline of 2.5 million. The decrease in inventory resulted from actions we took to trim production levels for the very near-term and consume excess inventory over the course of the quarter. Inventory turns on an annualized basis were approximately 4, down from 5 in the second quarter. The higher-than-normal inventory at the start of the quarter contributed to the low turns result.

Looking ahead to the fourth quarter, we anticipate a sequential increase in revenue. But compared to the fourth quarter of last year, the percentage increase is expected to be at best, low single digits. The projection is based on the belief that there is some remaining overhang from the hurricanes in the Southeast and on the fact that the projection for tactical navigation sales is based only on in hand, shippable backlog. We expect a modest sequential improvement in gross margin; total operating expenses will likely show some increase sequentially in absolute dollars but should decline as a percentage of sales compared to the third quarter.

Cash is expected to decline during the quarter by approximately $2 million. Inventory should be flat to up modestly on a sequential basis while inventory turns should improve. We will continue to address the challenges that come with developing important new markets and dealing with shifts in the mix of business, whether they be driven directly by our customers or indirectly by the broader market and economic conditions. We are focused on achieving our objective of returning to and sustaining profitability to deliver positive shareholder return.

Now we would like to take your questions. Operator, could you please open the call for questions?

(OPERATOR INSTRUCTIONS) James McIlree with C.E. Unterberg, Towbin.

Could you talk a little bit about the A5 activations that you mentioned earlier, Martin? Are all of those being done through you, and if so, can you give us some indication about let's say a cumulative activation number for the A5?

They're not all going through us, but since we reached an agreement with DirecTV in the June/July timeframe, we've been getting more and more of those activations directly now. So now if you call DirecTV they actually are referring people directly to us. We help manage the activation. And we do that for economic reasons; in other words, we are compensated for the activation, which is part of our service revenue now so we get an activation fee, as well as to sort of smooth through the activation process so that the automotive customers aren't caught in the general group of customer service representatives at DirecTV.

That service revenue, we don't report it specifically but as a category all of our service revenue is up strongly. It is up more than 100 percent over last year, and that includes these activations as well as our Inmarsat air time for the marine market and our TracNet Internet air time. And that is starting to be a significant part of our revenue. I mentioned that our marine product sales were up 19 percent, but if you include the air time, a lot of that air time is marine, as well. More like 23 percent. So service revenue activations is becoming a bigger part of our ongoing revenue streams.

Okay. Thank you.

Chris Quilty with Raymond James.

Just an idea of how pleased you've been to date with the national advertising campaign. Do you have any way of tracking what the impact looks like either through the television market or the print media stuff that you are doing? And furthermore, can you give us a sense of when you expect to see some contribution from DirecTV and what nature it may take.

Your first question, we've seen significant bump in sales, which is through the real measure of the impact. Now it's a little bit difficult to separate out the impact of the ads versus the impact of the lower price since they happened somewhat concurrently. But it is clear that we've seen an increase in hits on our website from the TracVision.com which is in the ads and in the billboards. So we are tracking that as well as just a general traffic in stores and things. So we are pleased with the results from the ads, especially the national ads. The regional ads, one of them was in Tampa, which of course was part of the weather-related problems in Florida. So that market test results were not as conclusive. The Dallas ones were I think a better, a fairer test. We have not decided yet whether we are going to roll that out on a national basis. We are going to review the data to make sure that is cost effective. The national ads like the ones we did in Newsweek and Fortune and some of the frequent-flier magazines, those have been very effective. I think we are going to plan to continue those.

Okay, and DirecTV, they haven't yet really rolled with anything substantially at this point?

No, we are working on them with some promotional launches that they are going to be in charge of and that we're going to be supporting that we may do perhaps in conjunction with one of the car companies. So we are looking at things that we can do with them, and they're going to be participating. But they are not paying for the ads, the ads that you've seen todate have been part of our ad campaign.

But might they on a go forward basis?

Yes, they might.

Okay, and if Tweeter said publicly that their A5 sales tripled in the quarter, can you give us an indication whether the other chain stores were seeing the same sort of impact in the quarter?

I think that they are -- they have been by far the most effective, although they got a bit of a slow start with the product, they have clearly become our number one retailer of the product. They seem to be doing better than the others. And it may be simply because they are a pioneer with it, so they got on board first and have the most experience with the product. So I think that they were able to leverage the ads and the price reductions better than other retailers. So I do not think that other retailers have been effective as Tweeter has.

Thank you. I will circle back.

Rich Valera, Needham.

A couple questions on the defense side. Could you give us any sense of how you would expect that business to trend sequentially? I am guessing maybe down a bit, since it sounds like most of your backlog is for next year. And then Martin, you alluded to some orders you were expecting from some foreign government on the defense side. Can you talk about if those are TACNAV orders are what they are? And could you give us any sense of the magnitude of those orders?

Sure. Yes, they are TACNAV orders. The magnitude is sort of in line with -- we've been getting a whole series of orders in the $1 to $2 million range. And Pat mentioned in his script that the backlog is up to 6.6 million. So we see most of that as shippable in Q4, we just wanted to give a sense of that not to think of that as a Q4, but we do expect defense to be up sequentially, so I think that we are clearly gaining momentum in the defense side, both with the U.S. and with foreign militaries. So I think that what we saw in Q2 was an aberration. And we are now rebuilding our backlog.

And we are also not struggling to try and get orders and shipments out in the same quarter, especially with the foreign stuff that is becoming more difficult to do because the export licenses are now taking about 12 weeks. So even when you book an order in the quarter, it takes right now it takes longer to get an export license than it did 6 months or a year ago. And so that is why we are scheduling these orders out and not planning for them in the current quarter.

Just to clarify on that that would imply that you have sort of orders in hand for shipment in the fourth quarter of 3 million or more. Is that fair?

I think that is fair, yes. So that is why we are very confident in the -- we are also conservative in a gross projection, but we are very confident in that, in the numbers that we are expecting because of orders already in hand.

Great. I notice this is probably something you don't want to do but you alluded to the significant year-over-year decline in defense this year. It sounds like you are starting '05 with a better backlog than you've had in a while on the defense side. Would you be willing to hazard at all whether the defense, you would expect defense to be flat, up or down in '05?

I don't want to give you a specific percentage but we absolutely expect defense to be up in '05. We are seeing very positive trends, especially in the fiber optic area. We've got strong backlog and good orders and new products. And the TACNAV business we're going into the year with a very healthy backlog. And we expect some further big programs in '05. So we are confident the defense business will grow next year.

Thank you.

Stephen Levenson, Advest.

Could you please give us an inventory breakdown, just between raw, (indiscernible) and finished goods, please?

I don't have that with me Steve. I apologize. I can -- I would be very happy to give summary numbers later on. I could give you a call back.

That would be great. Thank you. Second of all, on your patents, we know there is some competitors out there, but with your discussion in the text here and in the conversation about your discussions with OEMs, do you think your patents are going to give you the protection you need or against that competition? Do you have any intent to go after any of those guys?

Yes, that is a good question, in fact we just had a major new patent -- we got notice of allowance just yesterday, so we are happy with our technology position and our IP protection there. So I think that is a big part of our strategy is to protect our intellectual property, and these patents are evidence that we do have unique technology.

Thank you very much.

Tom Watts, SG Cowen.

On the guidance you provided in your press release, it sounded like that low single digits, year-over-year would suggest revenue in the 16 million range, that gross margins would be better, operating census probably higher. Does that in terms of EPS, does that suggest better EPS in this quarter, or lower? Could you give us some direction where we should look?

When you ask better EPS in this quarter, are you talking about better than the third quarter of 2004?

Right.

We expect to see an improvement in the fourth quarter compared to the third quarter as Martin indicated, however, it is likely that it would still be a loss position for the quarter. But we should see a marked improvement.

Okay, and at what point do you expect to see (indiscernible) see a return to profitability? Is there a steady progress for that? Is that a mid '05 event?

Well, our expectation right now is that we are going to be able to make steady progress. And you know, our focus is on just continuing to improve the fundamentals of the company, improve our predictability, keep marching toward the, a profitable breakeven and then profitable position certainly in 2005. And I would hope earlier rather than later. And for the year, right now our objective is to be profitable for the year in 2005.

Thanks very much.

Mike Hickey (ph) (indiscernible) Partners.

In regards to your discussion with the OEMs, do you feel that you have to be able to have an in roof antenna system in order to hand off or close a relationship with an OEM? Or do you think that the attached version you have now could be on the factory line?

Our original assumption was that they would only want the embedded version. And that is what we were proposing to them, but it turns out that we've had interest in both products. So the attached version as a dealer-installed option, as well as the embedded one for factory-installed option. So we were actually surprised that they have interest in both versions. I think it is really kind of a market issue, which is fine with us obviously. But I think both products make sense, depending on the method of installation.

Okay and can you give any more color on the nature of those discussions that you're having with 12 different OEMs? And any sense of timing or kind of what sort of hurdle that you have to get over in order to close a relationship?

As you know, these things, the car companies have very long product planning cycles. The good news is we've been talking to them for a while. The aftermarket version of if you will, which is the A5 as it exists today as a dealer-installed option would be on a faster path than the factory-installed embedded version. But so those sort of a near-term and a mid-term solution for us. And can't really comment on specifics within individual car companies within their product planning cycles for confidentiality reasons.

Thanks, guys.

Jp Mark, Farmhouse.

I wanted to ask more of a philosophical question about the direction of the company. I know that in years past you've had some great products, some of which have done well and some of which have sort of sat on the sidelines; I think the current sense here is being one that has got a huge potential market, but it's not something that you are focusing on. And I'm wondering if you look at the A5, it took off initially and now it has certainly got a trajectory by I am wondering whether you had thought about perhaps just licensing the technology to others, and then refocusing on being an R&D development company that gets royalties rather than manufacturing company. How important is it to you to be a manufacturer?

I think it is important as part of the core strategy of the company to be a company that creates products and delivers them. And sort of everything we do is focused around that. So it is part of our culture, and it is part of -- it is really part of what is this company. That doesn't mean that licensing can't be a part of that strategy, and we have already had discussions with companies that are interested in licensing the A5 technology. And we are very open to that. But we see that as in addition to, not in place of because part of the challenge in most of the products that we do is being able to develop technology that is manufacturable. And if you are really not a manufacturer, then it is difficult to design products that can be built. So I think it is something that we can do more of in the future, but I don't see it as being in place of our core business.

Secondly have you seen any other A5 type products hit the market yet?

I haven't seen any that are on the market. I've seen the ones that were being shown in January at the consumer electronic show in Las Vegas. And I think those are progressing, I assume to market, but as far as I know, they are not delivering yet.

Okay, great. Thank you.

Chris Quilty, Raymond James has a follow-up question.

On the defense side of the business, I know you have substantial order from SOCOM, defense budget has passed. But I haven't seen the specific problem (ph) for SOCOM that breaks out how much of that order got funded this coming fiscal year. Have you gotten any visibility on that?

No, we haven't. So that is currently not part of the 6.5 odd million in backlog. So we would expect those kinds of orders to come in, but our product is not an individual line item in the defense budget. It is rolled into other sort of vehicle support and other things. So there's no specific line item that tells us how much they have budgeted.

And just to clarify we are talking in the range of 30 to $40 million worth of equipment?

Well, that is over the course of the program for all their vehicles. We would not expect orders anywhere close to that magnitude in the current fiscal year.

Correct, but given the tempo of operations it isn't something they are going to spread over five years?

I would hope not.

Thank you. Shifting back to the A5, can you comment on what efforts you've or what success you've achieved in attacking the automotive dealer network, which to me seems to be really the ideal method for selling the product?

I think that we have had some success in that, and I think you're right it is sort of the ideal method because when a customer is buying the vehicle it is a great time to add technology and features that can be part of the payment and installed prior to him taking ownership of the vehicle. I think that we've had some success there. I think that we will have better success when we do it in conjunction with the car manufacturers so even if it is a dealer-installed item it is on the option sheet, and it is trained and the installation is all part of the program.

So that is part of our thrust now is we see individual dealers be effective but we have not been effective on a nationwide level, and we think now that the best strategy to do that is to make it part of the option program. Even if it is a dealer-installed option its endorsed by the car maker, available through the parts department, installed at the dealership. So I think you are right; I think its the right strategy but I think we need to get the support of the car maker's for this and that seems to be a lower hurdle than getting it installed at the factory, built into the roof and it can also happen faster.

Is that really, do you want to go talk to the Hummer or the Escalade productline manager and try to convince that guy to talk to his dealer network? Or do you go directly to the large regional dealers and send a salesman in and talk with those guys and get them on board yourself?

We are doing both, so we are talking to the platform managers and trying to get it option listed and available at the dealership so that you get all the dealers everywhere in the country having the product available. In the interim we are doing exactly that, and our sales guys, sales reps and expediters are going to the dealers and the regionally large chain of dealers to get them to offer the product. But again, their focus is on selling the vehicle, so we have to pitch this as a profit enhancer for them. And it is a very good option going that route.

And can you give us a sense of today, what do you think the contribution is from dealers versus -- your primary channel that you're pushing now of going through independents and chains?

Well today the vast majority is through the independents and chains, the Tweeters, and the individual dealers, the expeditors are a subset of that.

So is that less than 10 percent or?

I don't have that breakdown, Chris. I could probably get the number for you, but I don't have it off the top of my head and I don't want to guess.

Final question here. Your RV OEM and the channel inventory issues, is it your sense that that is largely complete as of the September quarter, or could there be lingering impacts in the December quarter?

Yes, just to clarify before I answer, it is not an OEM issue, so we will be calling RV OEMs, or the Fleetwoods and the Monacos of the world that are buying our product. And that inventory tends to be very current with their production. So this is a retailer, and again to point out it is not specific to our product, this is an initiative they are doing across all of their products. So has in one sense nothing to do with KVH. So I think the majority of it is behind us. I think that they will -- we may see some continuing impact. They have in mind product all along in Q2 and Q3 to get their inventory in balance and as Pat pointed out there their sell through has been very good, much higher than last year. So if you look year-to-date, our sales to them are up as well. So it is sort of a Q2, Q3 problem and we expect to be managing out of that starting now.

James McIlree with C.E. Unterberg Tobin.

Martin, I think you said that your RV sales were down year-over-year. Did I hear that correct? And also, what were they versus the prior quarter?

Yes, we haven't -- I was just compared to the prior quarter -- we haven't been reporting the RV sales separately. I was just trying to give a little bit of color because the A5 is lumped in with the land mobile sales. So although land mobile sales were up 3 percent, within that you had a big increase in A5 and a decline in the RV business due to this inventory issue that we were just talking about.

Okay. Is it possible to categorize the inventory issue directionally, that is was it worse or equal to or better than the inventory issue in Q2?

I think it was about the same, and we were hoping that we would see more of a bump this quarter. So now we've got good visibility, and one of the solutions that we've worked through with the retailers we actually have visibility now into their distribution centers, as well as there in-store inventory so that we are -- as Pat mentioned that the go forward benefit of this is we have sort of real-time in-store sell through data that will help manage their inventory for them. So that is the positive. And based on that data and what they have told us is that the in-store sales are up year-over-year, and they are up throughout this year.

Okay. Very good.

Gentlemen, there are no further questions. I will turn things back to you for any additional or closing remarks.

We had a couple of things that we need to follow up on, and we will get that data out to you. If you have any other questions, feel free to give Pat or myself a call. Thanks again.

That does conclude today's teleconference. Thank you for your participation. Have a wonderful day. You may now disconnect.