KVH Industries Inc (KVHI) 2004 Q4 法說會逐字稿

Good day, everyone and welcome to the KVH Industries fourth-quarter year end 2004 conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to Mr. Patrick Spratt, Chief Financial Officer.

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 fourth-quarter earnings release that we issued earlier this morning. Copies of the release are available on our website, kvh.com, and are also available for 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 November 9, 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'd like to turn the call over to Martin to begin today's discussion of results.

Thanks Pat. I'm extremely pleased with our results for the fourth quarter. While I will go into specifics of each of our business areas in just a minute I wanted to touch on some highlights coming out of Q4.

Our overall revenues were up sequentially as well as year-over-year, but more importantly we continued to make excellent progress toward our goal of returning to profitability. Our defense business, which had been down earlier in the year, showed a strong recovery in Q4 with a 36 percent increase over last year and a 48 percent sequential increase.

Satellite sales were also up sequentially in Q4 although they were down a bit year-over-year. For the full year, satellite sales grew a healthy 24 percent over 2003. During the recent quarter, our satellite business was highlighted by a very strong marine sales as well as a growing interest among automakers in our TracVision A5 satellite TV systems. Specifically General Motors featured our TracVision A5 in its booth at the SEMA tradeshow in November and Cadillac just presented the TracVision A5 to its premiere dealers during their corporate event at the Super Bowl.

Looking at the numbers despite only modest revenue growth the measures we implemented to improve our operational model showed a continued benefit in Q4. Together with a one-time tax benefit these improvements enabled us to return to profitability with the net earnings of 2 cents per share. Even without the tax benefit we would have shown a dramatic improvement over the 11 cent loss from last quarter as well as the 14 cent loss from the year ago.

Total revenue for the year was 62.3 million, a 10 percent increase over fiscal 2003. Looking back at the year as a whole, 2004 was marked by tremendous progress with both new products and new markets. We completed our first full year of sales of TracVision A5. We introduced several new products in the marine marketplace and we developed new features and capabilities for our military Nav systems that will expand our addressable markets.

At the same time, we did face a number of challenges. The defense marketplace changed in light of new operational needs in Iraq and as the pioneer of the new automotive satellite TV market, our approach and expectations had to evolve during the course of the year. I believe that the end result of all this is that KVH entered 2005 with a stronger, more balanced business model and with the products and resources necessary to pursue the opportunities ahead of us.

In our satellite communications business the marine sales in U.S. and Europe were quite strong in Q4, up 30 percent over last year. This is a pattern that was sustained throughout the year. We also saw the benefit of a number of new products that were introduced at the end of 2003 and during 2004 and these include our premiere TracVision G8 satellite TV antenna and our line of Tracphone satellite communications systems for use with the powerful Inmarsat Fleet service.

To expand our marine TracVision line further, we are introducing four new TracVision satellite TV systems tomorrow at the Miami International Boat Show. These new high-performance 18 and 24 inch systems are replacing our original TracVision 4, G4, 6 and G6 systems. These high-performance HP TracVision antennas offer stronger motors, improved software and more robust design. The result is more precise tracking so you can cruise further off shore and still receive the signal. And they also operate in even the most demanding environments that competing systems just can't handle.

So by building on these new TracVision systems, our established Tracphone family as well as the Inmarsat air time services we expect to see continued solid growth in the marine market throughout 2005.

Sales in the land marketplace which include our automotive and RV products were up 10 percent for the full year. Revenues for Q4 were up slightly over Q3 for this year but were down about 30 percent compared to the same quarter last year. Several factors contributed to this including the discontinuation of TracNet sales in North America, the roughly 30 percent price drop for the A5 at midyear, and somewhat softer RV sales during the quarter. It is important to note that the TracVision A5 sales trendline in Q4 remained positive and consistent. We've seen solid quarterly growth in TracVision A5 unit sales in each quarter since Q1 of 2004. We anticipate that this trend will continue and strengthen throughout 2005 as we continue to build the market for A5 and for live DIRECTV and cars.

Also despite the price reduction in the A5, gross margins are significantly higher in Q4 than they were a year ago, contributing to a net company gross margin improvement of about 10 points compared to Q4 of last year. Gross margin for the quarter was 39 percent versus 29 percent last year. We are continuing to expand our distribution tradition network for the A5. We've added one of the leading automotive expediters, Prestige Products, who services 600 new car dealerships in 14 states. We've also continued to add new conversion vehicle manufacturers like Cheron (ph) Van, which is now offering the A5 as an option on its new vehicles.

KVH is now selling to the top three van conversion companies in the U.S. and during Q4 we signed a new sales and distribution agreement with an automotive parts supplier. This arrangement opens the door for potential sales of the A5 directly through more than 1800 OEM affiliated car dealers across the U.S. We are now supporting this distributor as it promotes the TracVision A5 to its partner OEM.

While the aftermarket is taking somewhat longer to accelerate than we expected, the OEM side of things is actually progressing faster than we anticipated. We are in active discussions with a number of automakers and these efforts are beginning to show some positive results. During the last few months we've worked closely with General Motors to demonstrate the TracVision A5 to their product managers, engineers, executives and dealers.

As I mentioned, the A5 was featured in the GM booth at Novembers SEMA tradeshow in Las Vegas where it was the highlight of their booth. In fact, the A5 equipped Yukon Denali was such a draw that after the first two days of the show the other GM vehicle managers asked that the A5 be turned off so that SEMA attendees would look at the other Good morning vehicles as well.

It was during the SEMA show that we also receive the General Motors award for most innovative aftermarket product of 2004. This collaboration with General Motors continued through the Super Bowl during which Cadillac introduced an A5 equipped Escalade to more than 350 of its premiere dealers as well as to the members of the media. The response was extremely positive. We are now continuing to work with GM and other automakers to explore near-term applications of the A5 through their existing dealer networks. This provides a natural segue into the Next Generation factory installed products. We remain very optimistic about embedded applications of the TracVision in future OEM vehicles.

Towards that end, we have also reached a new milestone in the evolution of our automotive technology. As I mentioned in the past, we've been working on an embedded version of the A5 that would be mounted directly within the vehicle roof. I'm pleased to announce that the first vehicle equipped with an embedded system will be unveiled in March at the limousine and transportation tradeshow in Las Vegas. This system has been installed by a major automotive OEM on one of its new vehicles for promotional and development purposes.

At the same time, we continue to move ahead aggressively with our efforts to develop a full production version of the embedded system that could potentially be available for factory installation in 2007 on new vehicles.

As you might expect, many of our development efforts in the last year in resources were spent on the refinement of the TracVision A5. But strategically going forward, we are going to be leveraging our technology across all of our product lines so that improvements from any one of our vertical markets will ripple through the others.

Expect to see the results in the aggressive product launch schedule from KVH in each of our markets during 2005 as we benefit from the investments in our core technology that we have been making over the last 18 months. We expect that these new products will expand our reach within our existing markets, increasing not just our market share but expanding the markets as well. Although we're seeing signs of growing competition, our new TracVision systems together with the TracVision A5 will equip us with the products we need to maintain our leadership position. We have the resources available and we will take whatever steps we believe are necessary to maintain and strengthen our lead in the mobile satellite marketplace.

Now moving onto the defense side of our business, during the fourth quarter our defense business continued to gain strength with revenue of 4.5 million, a 36 percent increase from the same period last year -- sorry, a 36 percent increase in the same period the year before and a 48 percent increase from the third quarter. Although our defense revenue for the whole year was down 20 percent from the prior year, in recent months we've received a number of contracts from both U.S. and international customers for a TACNAV navigation system as well as our fiber-optic products. These orders are building our backlog for 2005, a foundation that we anticipate will allow our military products to make a steadier contribution to our overall revenue growth and profits in the future.

One of our ongoing objectives is to make sure that our TACNAV productline evolved to meet new and emerging mission critical requirements. By combining our expertise in communication and navigation technology, we can position TACNAV to support new opportunities with both the U.S. and foreign militaries. For example just last month we successfully demonstrated the integration of our satellite communication technology with our TACNAV unit creating a nav system capable of exchanging critical information with other vehicles and digital battlefield management systems.

This includes text messaging technology, integrated satellite tracking, and digital radios for secure intervehicle data communication. Each of these enhancements add value to our TACNAV solutions and expands the possible applications for our technologies.

Key international TACNAV sales remain a priority for us, however the cost of using U.S. mil spec (ph) GPS units in conjunction with our TACNAV, can be a liability when working with international customers. So during the fourth quarter we integrated a commercial Garmin (ph) GPS unit with our TACNAV. Doing so significantly reduces the cost of our TACNAV solutions to our customers while increasing the flexibility and user-friendliness of the system as a whole.

Interest in our fiber-optic systems also continues to grow. Fourth-quarter fiber-optic revenues were the second highest in our history. The fiber-optic gyros that we sold during the fourth quarter are being used in a variety of applications including remote gun turrets, turret stabilization and guidance systems. We are also seeing increased interest in our DSP 3000 gyros and our new system, the DSP 4000, the militarized gyro, is already in testing for turret stabilization on the Leopard 2 (ph) tank (indiscernible) vehicle.

We are actively pursuing these (technical difficulty) amenities across our fiber-optic product family. So looking ahead, we're starting 2005 with a good backlog for military orders for the first half of the year. Our marine satellite communication products continue to perform well, and I expect that our RV sales will strengthen as the year progresses.

We've recently started to hire additional assembly workers and we have increased the use of overtime at our Middletown factory as demand is currently stretching our capacity. I am also pleased with the progress and the opportunities for the TracVision A5. It is continuing to gain momentum, increasing fraction in the aftermarket. We've also got very strong support from DirecTV, our service provider partner for the automotive market. We remain confident that the A5 and the automotive market will be a tremendous strategic value for KVH during 2005.

I believe that these factors will enable us to achieve our goals of improving profitability for the year and growing revenue in the 10 to 20 percent range. I'm now going to turn the call back over to Pat, who will take you through more detail on the numbers. Pat?

Thank you, Martin. During the fourth quarter we continued our efforts to improve operations, everything from manufacturing efficiencies and cost structure to the predictability of our business performance. We are focused on building a stronger business foundation that will drive a return to long-term profitability. We have made progress. While our 2 cent profit in Q4 included a favorable tax adjustment of approximately $775,000 or the equivalent of 5 cents per share, we achieved a very significant improvement in operating margin on both a sequential and year-over-year basis. This improvement in our bottom line reflects the balanced approach we're taking to control spending while still maintaining strategic investments.

I would like now to touch on some of our operational results and the balance sheet. As we indicated during our third quarter conference call, we now only base our near-term defense business growth expectations on orders in hand. We will not make projections that depend on additional orders to ship in the same quarter.

During the fourth quarter we had good success replenishing the defense backlog. Defense-related backlog at the end of December was $5.4 million, but by mid-January it was back up to a $6.8 million. This backlog is slightly above the level in mid-October 2004 and includes tactical navigation in fiber-optic gyro systems, as well as funded engineering projects. These orders are scheduled to ship over the course of 2005.

On the cost side, gross margin was 39 percent, reflecting strong improvement on both the sequential and year-over-year basis, 5 and 10 points respectively. Factors contributing to the improvement were a more favorable product mix. Defense sales were 28 percent of Company revenue in the fourth quarter versus 22 percent in the third quarter. Also higher overall sales volume for the Company and our continued success containing manufacturing overhead.

For the year gross margin was 32 percent, down 8 points from fiscal year 2003. This decline was primarily the result of changes in product mix especially influenced by lower defense products sales for the year and the impact of the price reduction in inventory re-evaluation for the TracVision A5 in mid 2004.

Operating expenses at $7 million were up less than 7 percent on a sequential basis and up 12 percent year-over-year. As a percentage of sales, operating expenses were 44 percent, down 3 points sequentially but up 4 points year-over-year. The year-over-year increase includes the incremental TracVision A5 marketing investment that was made during the second half 2004. For the full year operating expenses were up 12 percent, approximately in line with revenue growth.

Fourth quarter research and development expenses declined approximately $650,000 or 32 percent from last year to $1.4 million and represented approximately 9 percent of revenue. Sequentially R&D spending was flat. We now have R&D aligned well for our ongoing business objectives and from here we intend to grow R&D expenses approximately in line with revenue growth.

Fourth quarter sales and marketing expenses increased to $4.3 million, up 41 percent from last year and about 8 percent sequentially. Sales and marketing expenses were also up significantly for the full year. For both periods the increase is largely attributable to the launch of the TracVision A5. Fourth quarter administration expense was $1.3 million, up 17 percent from that same period last year and up $100,000 sequentially. The substantial effort to satisfy Sarbanes-Oxley requirements was a factor throughout the year.

Now, the balance sheet. The year-end cash balance was $45.7 million, down $1.2 million sequentially. Accounts receivable increased $1.7 million from the September level of 9.6 million. This increase directly reflects the sequential growth in sales as the days sales outstanding or DSO remains low at 54. This is 11 days below the comparable prior-year period. This is the result of good collections flow and continuing improvements in the aging profile.

As mentioned last quarter, a long time European distributor was experiencing a serious cash flow strain through the second half of 2004, putting collections from this account at risk. After further review, we decided to fully reserve for the outstanding balance in the fourth quarter.

Inventory decreased to $7.3 million, a sequential decline of 1.2 million. The decrease in inventory resulted from our emphasis on lean operating actions which include efficient transfer of demand signals to the supply chain. Inventory turns on an annualized basis improved 5, up from 4 in the third quarter. Inventory turns performance is trending up and we are confident we will generate more improvement in 2005.

Looking ahead to the first quarter, we expect sequential revenue growth could approach 10 percent but will probably be down modestly when compared to the extremely strong first quarter of last year. Solid sequential growth across all Satcom groups will be partially offset by a sequential decline in defense.

Defense orders for foreign customers are subject to lengthy U.S. Government license review. We expect that this process will delay some scheduled shipments into our second quarter. In keeping with our stated practice, we are only including in our projections confirmed military orders which also have a high probability of shipping in the period referenced.

On a sequential basis we expect to generate a very positive improvement in operating margins. We will work to maintain the gross margin percentage approximately equal to the fourth quarter level and achieve a modest sequential reduction in absolute operating expenses. We are striving for a breakeven bottom-line result for the quarter.

For the full year we believe all key product groups will show solid year-over-year growth and there is potential for upside. For example, further acceleration of TracVision A5 demand and sizable longer-term defense programs that have not yet progressed to the point that supports including them in our plans. In that context however, I need to remind you that although we see solid long-term growth for our defense business, the pattern of military sales can be very uneven quarter-to-quarter.

For 2005 we are striving to reach a gross margin of just under 40 percent for the full year and to reduce operating expenses as a percent of revenue by 6 to 7 percentage points. Our objective is to achieve breakeven results in the first quarter and demonstrate further improvement as we move to the year. If opportunities with automotive OEMs point to the need to accelerate our ongoing TracVision A5 design initiatives, we will not hesitate to take that step and we would update our operating guidance.

Cash could fluctuate somewhat through the year but we expect to end the year relatively close to the balance that we now have. Accounts receivable will grow about in line with revenue and we are working toward achieving annualized inventory turns of 6. The guidance that I just provided does not include any effects of the recently passed accounting rule which will require public companies to directly expense compensation related to stock option programs beginning with our third-quarter results. We are currently assessing this matter and we will provide further insight in the coming months.

The foundation of our Company is solid. We have proven products and established positions in our markets. And we have a very healthy balance sheet to aggressively support the execution of our plans. We have shown meaningful sequential improvement over the past few quarters and we are focused on sustaining that momentum. The combination of improving operations and making strategic investments in technology and resources will allow us to successfully meet the challenges that come with creating new markets, adjusting to shifts in our product mix, and staying ahead of a merging competition.

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

Thank you. (OPERATOR INSTRUCTIONS) Tom Watts from SG Cowen.

Congratulations on the progress in the quarter. Could you give us a little bit more detail on retailers (ph), one on the TracVision A5 what steps you can take to get broader distribution. I know another product in the sector I think partnered with Audiovox to try to get into mass-market retailers. Are there steps you can take? Is there a chance to getting it inserted to your Best Buy this year? On the defense side, I did not hear you talk about some of the new potential new applications for TACNAV. Could we see modified versions in missiles or in other applications?

Okay, let me start with the first question. We are actively working on expanding the distribution not just through the dealerships but also through our retailers. We signed up some new regional distributors, dealers, mutli-store chains. We expect to have some announcements about that and specifically you're asking about Best Buy/Circuit City. I think that our goal is to continue to expand our distribution into one of the major national retail chains such as the two you mentioned, so that would be on our list of goals for 2005.

On the TACNAV we are expanding opportunities for integrating into larger numbers of vehicles. The program that I mentioned where we did a demonstration for new technology that includes communication is actually for a very large program following hundreds of thousands of vehicles for new technology, new Humvees and new light trucks actually a rebuild program. So there are some big things we're chasing out there.

As far his missiles go, we do have this new IMU which we are just in the process of qualifying literally as we speak for production for Raytheon for a torpedo program and we hope to get as a result of that qualification we expect to get our first production order during the quarter of -- first quarter of 2005 which should be a substantial order. So we don't have anything for missiles but we do now have a guidance package that is suitable for missiles. So I guess the next question please.

Steve Levenson with Advest.

Just one little accounting question. I know it is only $55,000 but could you explain that -- I don't know if it's a reversal of part of the charger you took previously but if you could explain that, that would be great.

It was small and that was an item where in our accounting back when we be revalued inventory -- as you know we had to revalue commitments we had with vendors as well. That was a small portion of the commitments that were outstanding. As it turns out, the vendor who we were dealing with found another buyer for that inventory that he had on hand, so he wound up selling it. We did not have the obligations so the reversed that portion of the entry. Does that answer the question?

Rich Valera with Needham and Company.

Thank you. With respect to the defense business, I know you probably don't want to get too specific here but would you be willing to go as far as to say you think defense could grow faster than the corporate average this year coming off a reasonably easy comparison I guess from last year?

I would say that is probably a good assumption. I don't think we've really built into our model big growth because we're trying to be more conservative and I don't know if you caught it but Pat's point on the export license is that not only are we not including things that we don't have firm POs for, but we are not including things in our guidance that we don't have export licenses for yet either because there's always some risk on the paperwork side. So we are being more conservative and we are working on some larger programs. So if one of those were to hit, then you are absolutely right, it could significantly exceed the corporate growth rate.

You talked on previous calls about one of I think your largest OEMs had taken a significant piece of business from you and I think in the first quarter of '04 and then had instituted a very rigorous inventory management program and hence had not taken much product from you I think in the second and third quarters. Can you talk about where that OEM stands? Were they back to taking a reasonable amount of product in the fourth quarter and do you think -- where do you think you stand in that inventory correction you had with that big OEM?

In the RV market, it wasn't actually an OEM. It was a retail customer, a large retail customer and fourth quarter was still a little bit light from them. But we have seen larger orders again starting for Q1 delivery. So that seems to have normalized so they have worked through their inventory issue and -- but created the problem a year ago in the first quarter. So if you compare it to the first quarter, we don't expect them making that mistake again if you will in terms of their inventory. So what we have seen is that they are now back to a normal order pattern and they have sold through their inventory, so that issue appears to be behind us.

Jim McIlree with Unterberg.

Thank you. The OEM relationships that you have referred to, would you expect those to happen this year? And do you have anything from an OEM relationship baked into your guidance for the year?

The answer to the second question is no. There is no OEM revenue baked into our guidance. Obviously where we are now the only thing that is possible in 2005 is OEM supported dealer sales directly to their dealers and we have two opportunities there. One would be directly with the manufacturers selling to their dealers. The other one is this relationship that we have established with an automotive parts distributor that sells and supports their OEM through the dealership. We have two different avenues to pursue that but neither one is baked into the guidance. So that would be upside for '05.

Chris Quilty with Raymond James Associates.

Good morning, gentlemen. Two -- I guess this is a two-part question. On the defense side as I look to the programs you're involved with, there is I think four major programs at least domestically that you're involved with and I was hoping you could give us some general size on these programs? The SOCOM order you received over a year ago and is there any visibility on that in the procurement or the supplemental budget? Then you have the torpedo program with Raytheon, the Striker platform, and then a family of medium tactical vehicles I believe? So if you could kind of give us the size and visibility on those potentially for this year?

And then the second question relates to the TracVision A5. You did an advertising test last year. Did you ever get any definitive results? Is there an intent to follow up on that or is it primarily to use your marketing partners like DirecTV to do the heavy lifting for you? And is there anything we should expect to see from DirecTV?

Okay, let me start in the order that you asked them. On the military side, those were some of the specific programs that we are going after in terms of size, the FM TV, there was a specific earmark for our technology that was about $1 million which is really to get on a new platform. FM TV is a truck basically so there was about $1 million to get our technology on light trucks which would be a new platform for us. So then eventually that could be a large program. The program that I mentioned before this reset program also includes FM TV type platforms.

The Raytheon torpedo program is approximately a $20 million program. It's a multiyear program. We would expect to get orders in the initial production order for 2005 -- we would expect the order to be in the 1 to $3 million range. The SOCOM procurement is for about 3600 vehicles. They've taken about 600 so far so its round numbers are still another $30 million left for them to procure and that will be procured incrementally as they get funding and unfortunately we don't have a line item in their budget so we don't actually have visibility right now as to what they have in their budget for 2005.

And the Striker vehicle is currently not on our horizon for TACNAV. We don't believe they have the budget for that right now; however, there is on the fiber-optic gyro side we have been designed into this automated gun turret, it's call the CROS (ph). Its a common remotely operated weapon system that is scheduled to be put on vehicles like the Striker and a bunch of other vehicles and we have two gyros that sell for $3000 apiece, so $6000 per vehicle and as you know there are 6000 Strikers out there, so that has the potential of 12,000 units at $3000 apiece. So that is over a $30 million opportunity.

There's some big programs out there and some of the bigger ones we are chasing are in the Middle East both as direct and prime as well as working with companies like General Dynamics or working on programs and we are supporting them on their vehicles. So several programs that are out there.

And the second part of your question was about DirecTV, helping us support out advertising and the effectiveness of our ads. We had done multiple ad campaigns within our major campaign, meaning we've done national advertising in the print media and we did some regional test marketing of radio ads and billboards and while those ads were successful in driving awareness and sales in specific cities, they were not self funding. So we didn't find that the return justified the incremental expense of those ads. So if we do it again, it will be on a more limited basis.

So as part of our guidance we are expecting to be rolling back our ad spending as a percentage of revenue to a more nominal, more normal level that we use for our other products. So we think as A5 revenues ramp, the percent of sales will start to come down and that is part of the reduction in our operating expenses.

DIRECTV gave us great support at the consumer electronics show in addition to the joint press event that we did in our booth was DirecTV. They also do their own press event and Mitch Stern, their President, gave very nice support to our product. They had a video running of our product in their booth as well as at the press event. They had our hardware in their booth. We were the only hardware vendor showing in the DirecTV booth, so we are delighted with their support. They've announced the new mobile pricing package. They are supporting that directly now. They are adding premium programming to the package through stars programming which is now included in the price package.

So we are getting great support from them and we are also exploring ways that we can do further advertising together perhaps through targeted marketing at their -- directly to their subscribers.

(OPERATOR INSTRUCTIONS) Joan Lappin with Gramercy Capital.

As I sit and listen to this call I am perplexed and I am perplexed because I've followed the Company since before you were public and you have great products and you have great engineering and you have a great ability to identify interesting products to develop that other people don't have the skills to do or aren't doing. And somehow you can't seem to turn that into profitable growth at a rate that your product deserves. So how do we fix that?

That's sound like a question for Pat.

It isn't. It's really a question for both of you because if you make great stuff, you have two choices. One is to price it so that you don't make any money and then you can sell a lot of them but you still don't make any money. And the other is to -- I don't know. You have to change something and I don't know -- it's not just well, we're going to be more conservative in our estimating. The answer is a combination I guess of marketing and something but what do you think it is?

I think we have been profitable 6 out of the last 12 quarters, so we are just getting basically up to break even at the macro level. So -- and I think the reason for that is that we, as you said, we have got some really exciting products. The Company has been able to develop new things and right now we are pioneering something. We are creating a new product category with the A5. We're moving into the automotive market. This is something that has never been done before. We've got to create awareness through advertising which is expensive and at the same time, we don't have revenue from automakers. There's no product built into cars yet so we are creating things.

And sometimes to be a pioneer means that you have to take some risks and spend some money in advance but the advantage is that there will be profitable growth in the future and we see that happening in 2005.

J.P. Mark with Farmhouse Equity Research.

Good morning, Pat and Martin. Just quickly to follow upon that question, the last question that was asked, long-term growth rate -- obviously this year you're looking at you said 10 to 20 percent in the press release. Isn't your long-term sustainable growth rate typically in the 20 to 30 percent plus range? That's the first question. The second question, any thoughts about lowering the retail price on the A5 again and how much do you think that might stimulate demand if you did that?

Let me start with the last question. No, we don't have any plans to lower the price of the A5 further. And in terms of long-term growth rate, you're right. Our growth rate has been historically above 20 percent but we are coming off a year where the growth rate was 10 percent and because the business is somewhat complex for a Company our size. We have different segments between defense and fiber-optic, between marine, RV, and now automotive; so what we're really providing guidance for is a blended growth rate and each one of those parts has a fair amount of variability.

As we saw last year, the satellite business exceeded our normal long-term growth rate. It was up 24 percent but that was offset by defense, which was down 20 percent. So I think that while the potential exists to continue to have growth rates that are higher than 20 percent, we think that the current guidance is a good blend of what we feel as sort of the most likely outcome given the four different subsegments that we are operating in.

(OPERATOR INSTRUCTIONS) Mike Hickey with Janco Partners.

Just a couple questions for you. In thinking about the A5, Martin, you mentioned margin expansion and how that helped your overall gross margins for the quarter. Can you give us some clarity or an update on the actual product margin that you're getting from that now as well as maybe what margin the dealers are working with? Also after talking with maybe 40 or 50 of your distributors, they kind of are begging for a $2000 all-in price point, which would put the A5 maybe around 1700. So just curious as why you wouldn't maybe consider lowering that a little bit more.

And the last question -- congratulations on getting the embedded version, it sounds like complete. That's great. I was wondering how the cost of that unit would compare to the current A5 aftermarket unit?

Right, on the resale price point, the resale price now is 2295. The dealer pricing is in the 1500 to 1700 price range depending on volume. So we do have retailers who are retailing it for 1999 and then -- so we are getting close to what you point out as sort of a key price target.

But your first question was about margin and that's also why we are not eager to drop the price right now. We're still rebuilding our margin on the product. It is in the mid to low 20 percent gross margin now and we expect to ramp that into the 30s and approach 40 percent which is sort of where we think we need to be to support the advertising and all the things we need to do to build product momentum and also be profitable as a Company.

Steve Krueger (ph) of Foresight Investing (ph).

I'm interested in the same question asked by the previous gentlemen that I don't think you got to which was -- had to do with the integrated version of the A5. You mentioned that you have that now in a demonstration vehicle on the road and you thought there was some possibility that you might actually be selling that by fiscal 2007 or maybe model year 2007. I'm interested in understanding more about the characteristics of that product. Could you give us some idea of what your selling price -- order of magnitude, what you might sell that to the OEMs for? And give us some sense of what kind of volume might be in store as you move forward with that product?

Right, initially the product, the integrated version or the embedded version is to a first approximation similar to the existing A5 in terms of cost. In other words, it has less parts and it’s a simpler installation, simpler for us because it's not attached to the roof racks, all the plastic and all the attachment and all the mounting kits and all that stuff disappears. So it's a cleaner, simpler install in terms of our product. So it is less expensive but it is not in order of magnitude less or fundamentally different in terms of the way the whole product operates or performs. So we would expect the sell prices to be perhaps less than it is now but not dramatically less and at the OEM level of course the price that they would pay would be very dependent on volume. So in volumes that are comparable to sort of the aftermarket we see the price being similar but in large volumes, say 50,000 or 100,000, it would be quite a bit less.

So I know that doesn't answer your question specifically but we don't really have specific volume requirements yet, so when we do we would design to that cost target and that's how we would get the cost out of the product.

Greg Weaver with Kern Capital.

I was just wondering if you could help me sort out here what segments you still report in terms of dollars, what they were in the '04 versus '03?

Sure, which -- did you have a specific question?

As much as you'll break it down like in terms of Satcom, defense, and then break it among those segments, Legacy?

Well the way we break down is the total revenue as we reported was $16,011,000. The smallest piece of that was Legacy piece, which was about 730,000 and that was up pretty substantially year-over-year, which was unusual. But actually that was because we had some component supply issues back in the third quarter that pushed some deliveries into the fourth quarter.

For the full year that segment was down 15 percent which was what we anticipated for the full year. The defense business for the fourth quarter was just a shade under 4.5 million in total. That was, as Martin had indicated before, was up 36 percent year-over-year and for the full year the number was just a shade under 13 million for the total defense business, and that was down 20 percent.

And then the satellite communications business, which was just about $10,790,000 for the quarter and that breaks down -- the way we break down now is between land and marine and it was just about an even split in the quarter between the two, just about 50-50 in terms of revenue. Total satellite communications was down year-over-year 10 percent and for the full year satellite communications was $47.3 million, which was up 24 percent for the year.

(OPERATOR INSTRUCTIONS) Murray Williams with Century Management.

On the TracVision A5 you said you had solid quarterly growth in each of the quarters. What percentage growth did you have during those quarters? And was it a linear growth or are you seeing exponential growth as you get more and more penetration?

I think the growth has been accelerating but I would say it is still linear. And if you look at the data -- I don't want to get into specific percentages but I think it would be helpful to point out that we had good linear growth up until about midyear and then with the price drop we saw an acceleration of that growth. It is a really different trendline but again, linear. So it has been very steady.

It is not a hockey stick kind of growth but its sort of two different trendlines first half and second half but both very positive. I think growth rates are larger than for example the RV business. So it's very solid growth and in the last two or three quarters it has been very pleasing the growth rate that we are on and we expect to see that continue in '05 or accelerate further.

One follow-up question. On the RV sales, you said you expected them to be stronger this year than last year even though the RV industry is expecting reductions in the shipments of RVs. How do you plan to do that?

A lot of our RV business is in the aftermarket, number one. Number two, we expect to continue to gain some market share with the OEMs, so while the overall RV new production rate might decline in '05, we expect our RV business to increase.

However I would add with the RV business in the guidance that we gave a little earlier that our internal planning is a little bit more conservative in terms of the growth rate that we have seen over the last few years.

A follow-up from Jim McIlree.

Pat, can you reiterate the Q1 guidance that you provided, revenues and OpEx?

Yes, Jim, I will. In terms of total revenue, as I mentioned we expect to see some good, solid sequential growth approaching 10 percent. And on a year-over-year basis, however, if you recall our first quarter of the last year was a very strong quarter. We do expect that the comparison, the first quarter of this year could be down a few percentage points compared to last year.

In terms of gross margin, as I said, our goal is to roughly maintain the same gross margin percentage that we experienced in the fourth quarter that would put it at about 39 percent, I would say 38 to 39 percent, in that range. Operating expenses we're looking to have a modest reduction sequentially and actually a modest reduction on a year-over-year basis as well. And in terms of absolute spending. As a percentage of revenue if you compare it to the fourth quarter just ended, we are expecting operating expenses will be in the high 30s as a percent of revenue. So about a 5 to 6 percentage point improvement compared to the fourth quarter.

There are no further questions at this time. Mr. Spratt, I will turn things back over to you for any additional or closing remarks.

I just want thank everyone very much for your participation and we look forward to talking to you in the future. Thank you.

That concludes today's conference. We thank you for your participation.