KVH Industries Inc (KVHI) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen. Thank you for your patience and holding and welcome to the KVH Industries first-quarter 2005 earnings conference call. Today's call is being recorded. At this time for opening remarks and instructions, I'd like to turn the conference 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 first-quarter earnings release that we issued earlier this morning. Copies of the release are available on our website at 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 -- excuse me -- in our annual report on Form 10-K filed with the SEC on March 16, 2005.

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 and results. Martin?

Thanks, Pat. It's only been eight weeks since our last conference call but as you've seen from our recent news, it's been a busy two months. To bring you up-to-date, I'm going to start with a recap of our first-quarter operations and discuss some of our plans going forward and then I will turn the call back over to Pat to cover the financial results for the quarter. After that as always we will take your questions.

Overall it was a very strong start to the year for us in all of our key business areas. Quarterly revenues were the second highest in Company history at $17.9 million. We also continued to show a steady improvement in our bottom line as we posted earnings of $0.02 per share, a $0.01 increase over the first quarter of last year. It was also our second consecutive profitable quarter.

Our financial and operational controls together with good sales in all areas and improvements in operational efficiency are contributing to greater consistency in our earnings and profitability. Many of our long-term efforts are now beginning to show some positive results as well. We are maintaining steady backlog for our defense products; we see the potential for several large long-term applications for our fiber optic gyros.

We've achieved significant milestones in the automotive market and we've seen a renewed affirmation of our leadership position in the RV industry. I'll go into these in more detail now.

Sales of our mobile satellite products continue to show strength with total revenues of 14.1 million, only 1% below our record-setting first-quarter of 2004. Last year's first-quarter results also included several hundred thousand dollars in revenue generated from the sale of our TracNet mobile Internet system which has since been discontinued in North America. So this quarter was actually a record for TracVision sales.

On a year-over-year basis, marine sales were up 11% over last year's Q1 as well as up sequentially from Q4. Both domestic and European marine sales remain strong and we are seeing very positive response to our new high-performance marine TracVision systems which were introduced in February.

Sales in the land market increased sequentially again from last quarter, however they were down a total of 12% from Q1 of last year. However, as we have noted previously, the first quarter of 2004 saw an unusually high sales rate for RV products largely as a result of one aftermarket customer. As a result, the year-over-year comparable in the land market was a tough one.

Just recently we were selected as the exclusive satellite TV antenna provider to Fleetwood Enterprises, the country's number one motorcoach manufacturer. As many of you may know, we've had an outstanding relationship with Fleetwood since 1999 and we've been their exclusive provider of in-motion satellite TV systems since 2001. However, roughly one-third of the stationery antennas Fleetwood sold over the past few years have come from another manufacturer.

I'm very pleased that we recently won a competitive bid and have completely displaced that competitor. It was gratifying to be told by Fleetwood that we were selected because they recognized that KVH is the premier manufacturer and developer of satellite TV systems for RVs. We'd worked hard to attain and keep that position, and as a result, KVH is now Fleetwood's sole source for all its satellite TV antennas, both in motion and fixed mobile, starting with their 2006 model year coaches.

While sales continue to grow in both the aftermarket as well as through our numerous OEM customers, we're also somewhat cautious about the near-term prospects. High oil and gas prices present the potential for some impact on demand. We will continue to carefully monitor RV vehicle sales to assess the ongoing trends in the industry and refine our sales expectations accordingly.

Our TracVision A5 automotive satellite TV system also continued to gain momentum in Q1 with revenue up both year-over-year and sequentially. In addition to growing sales strength, we received several new A5 related technology patents on the antenna and we're making tremendous progress in our ongoing effort to expand TracVision sales through automakers. In March, Cadillac unveiled the first ever stretch version of its best selling Cadillac, Escalade SUV. This new vehicle made its debut at the 2005 limo show in Las Vegas and was also prominently featured in Cadillac's display at the New York auto show.

The vehicle features a prototype of our embedded TracVision satellite TV system. We work closely with Cadillac and their engineers to make the embedded system an integral part of the new vehicle.

I believe that this embedded antenna is the next phase in the evolution of the TracVision A5. Unlike the aftermarket A5, the embedded system is actually installed within the roof of the vehicle, rising only an inch or two above the roofline. I expect that we could be offering the embedded TracVision as a product for specialty installers and automakers within the next nine to twelve months. It will serve as a bridge between our roof-mounted TracVision A5 and our flat electronically-scanned antenna which is currently under development.

We also took a major step in expanding potential sales to the original A5. On Tuesday we announced that Cadillac has selected the TracVision A5 for sale as an accessory through it's more than 1000 dealers nationwide. This marked the first time that any automaker has offered live satellite TV on its vehicle through factory dealerships.

It required a dedicated effort by our team over many months to reach this point, but it was definitely worth it. Over the last several months, hundreds of Cadillac dealers have seen the TracVision demonstration hosted by Cadillac and KVH at the Super Bowl, at dealer meetings and at trade shows around the country. Response from dealers has been overwhelmingly positive.

Recently we worked closely with Cadillac to develop a custom A5 installation kit especially designed for the Escalade SUV. We also established a Cadillac specific dealer program in cooperation with DirecTV. We now have started to enroll Cadillac dealers around the country as authorized TracVision A5 retailers. And these dealers are receiving a wide range of sales and marketing materials for their showrooms and vehicles as well as Web-based dealer portals for online training, created specifically for Cadillac.

We are also connecting members of our National Expediter Network for those Cadillac dealers who might need additional support to sell and install the TracVision A5.

All of our efforts over the past year have come together to support this new sales opportunity. We spent the time necessary to establish a unique relationship with DirecTV which was critical; to develop a national expediter network; to create an outstanding technical and a support system, including service; and to earn the interest and trust of the automakers. Each of those initiatives has been instrumental in our success thus far with Cadillac.

Now rolling out the TracVision A5 to this new dealer network is going to be a major effort and one that will take some time. As a result, I expect the potential sales through Cadillac dealers will have a limited impact on revenues over the next few months; however, I believe that the OEM approved sales of TracVision A5 through new car dealers will eventually become a significant portion of our revenue stream in the automotive market. At the same time, these sales will pave the way for potential factory installation in the future.

Now moving on to our defense business, we also had very good first-quarter in our defense business. Defense-related revenues were up 3% year-over-year driven in part by a significant increase in fiber optic sales compared to Q1 of last year. We also continue to receive new orders that are sustaining and building our backlog for 2005.

Fiber optic sales are also contributing more to the bottom line as well as the top line. Q1 sales were up 58% from last year. Our new FOGs, which include the DSP-3000 and 4000 and our precision TG-6000 which is the inertial measurement unit have been very well received and are continuing to gain traction in the market.

One of the most exciting new developments is the use of our DSP-3000 gyros in the new common remotely operated weapon system which is called CROWS. You may have seen an article that was in this week's and the current issue of Business Week Magazine describing this system. The new CROWS system allows U.S. gunners, vehicle gunners to accurately shoot from inside the safety of their Humvee's or other vehicles. So gunners no longer have to ride outside exposed in the turret where they are subject to sniper fire. Instead they can be seated inside the vehicle in front of a video screen with a joystick and weapon controls that allow them to aim and fire the CROWS to greater safety.

There are two DSP-3000 and 5's (ph) installed in each of these CROWS units. Our gyros provide the precise image and gun stabilization as well weapon recoil control ensuring that the weapon remains aimed on the target. Now this system is being used right now in Iraq and is gaining great support from the military as well as from the government. In fact, in President Bush's $80 billion supplemental budget, it includes a line item allocating additional funding for this weapon system.

The use of our DSP-3000 FOGs on the CROWS turret is really a powerful validation of our gyros capabilities and represents a significant long-term sales opportunity for us, one that represents thousands of gyros. We're currently operating under the terms of the letter contract and are already making deliveries to the CROWS prime contractor. I expect that we will receive a formal extended term production order within the next several weeks.

We are also making progress with our TG-6000 inertial measurement unit. As we have discussed in several prior calls, the TG-6000 was selected by Raytheon for use in the guidance system of U.S. Navy's Next Generation lightweight torpedo. And we have now successfully passed formal qualification testing. As a result, we're expecting a multiyear production contract for our IMU within the next few months.

So in conclusion, 2005 has started out on a very positive note for KVH. I believe that we're making excellent progress on our strategic plan as illustrated by our improving results in each of the last three quarters. We have returned to profitability. We're seeing continued improvement in our operations in manufacturing. We're building momentum in all of our key business areas and KVH remains the leader in substantial markets with excellent growth opportunities.

We're taking the actions we believe will help us deliver consistent long-term profitable growth and positive shareholder return. Overall we're striking an appropriate balance between moving aggressively into new markets and building profitability.

Now I'd like to turn the call back to Pat to give you the financial details. Pat?

Thank you, Martin. First a housekeeping note. We've historically reported our revenues in three parts; mobile satellite communication, defense navigation and guidance; and lastly, Legacy products, which is composed largely of our digital compasses and some OEM sensors. While these Legacy products continue to contribute to our overall revenues, the percentage they represent has declined as we focus on the more strategic areas of our business.

Due to their dwindling significance in our overall business structure, we have decided that it is more meaningful to group the small amount of Legacy product revenues into our satellite communication and defense revenues as appropriate. This change starts with our Q1 results. To ensure accurate period-to-period comparisons we've applied the same adjustment to the 2004 results that we are referencing today.

I'd like to review our operational results at this point. I'll begin with the bottom line. During the quarter, we maintained an emphasis on continuous improvement in operations across the Company. This is driving better efficiency and predictability. We're very pleased with our progress thus far and are encouraged by the fact that the first quarter was another in which we delivered a very sizable sequential improvement in operating margin.

The first quarter reflects a $1.1 million improvement compared to the fourth quarter. And a $2.2 million improvement compared to the third quarter of last year. We have now achieved a level of operational performance that should serve as a solid foundation for ongoing improvement.

We also made good progress in booking new defense business as the order backlog grew approximately 10% compared to the prior quarter. This backlog includes tactical navigation and fiber optic gyro systems, as well as funded engineering projects. Shipments are scheduled over the course of 2005. But international orders are always subject to lengthy and sometimes unpredictable government license review processes that could affect timing.

On the cost side, gross margin was 40%, reflecting a 1 percentage point improvement on both a year-over-year and sequential basis. Manufacturing efficiencies and purchase price reductions for product components contributed to the improvement. A number of initiatives are underway to continue to lower the cost of our products. These effort should give us the flexibility to sustain or improve overall gross margin and to have the room to adjust prices to meet changing competitive realities as necessary.

Operating expenses at $6.8 million were roughly flat year-over-year, and were down about $200,000 on a sequential basis. As a percentage of sales, operating expenses were 38%, roughly flat year-over-year and down about 6 points sequentially.

First-quarter research and development expenses increased approximately 5% from last year to $1.9 million, and represented 10.6% of revenue. As mentioned before, we place high value on the competitive advantage that we derive from our technology and our strategic intent is to grow R&D investment generally in line with revenue.

First-quarter sales and marketing expenses represented 20% of our revenues and declined to $3.6 million. This level of spending is 6% below last year. We are aggressively working to leverage prior investments that support sales growth. We have made good progress but to achieve our longer-term financial objectives, we will need to continue to look for efficiencies in these areas.

First-quarter administration expense was $1.3 million, up 14% from the same period last year and down slightly on a sequential basis. Professional fees related to the implementation of Sarbanes-Oxley regulations represent a sizable ongoing expense challenge.

Now the balance sheet. Cash and marketable securities at the end of Q1 were $45.2 million, down $500,000 sequentially. This modest decline can be attributed to a continuation of solid asset management and profitable operating performance.

Accounts receivable increased $1.5 million from the December level, to $11 million. This increase is a direct result of the sequential growth in sales. Days sales outstanding, or DSO, was in line with our expectations at 56. This is 15 days better than the comparable period, one year ago.

Inventory increased by $1 million from last quarter to $8.3 million. Inventory turns annualized improved to 5.5, up from 5 in the fourth quarter. Inventory turn performance continues to trend up and we are working to generate more improvement throughout the rest of 2005.

Looking ahead to the second quarter, we expect that the second quarter could look reasonably similar to the first quarter that we just reported. There is the potential for a very modest sequential top line increase, although this would represent very strong year-over-year growth of up to 25%. We anticipate that the bottom line could be equal to or up modestly compared to the first quarter. The bottom line should be substantially better than Q2 2004 when the net results included the TracVision A5 price reduction and the revaluation of existing TracVision A5 inventory and raw material purchase commitments.

Defense sales should be up modestly on a sequential basis but up strongly year-over-year. In keeping with our stated practice, we are only including in our projection confirmed military orders that have a high probability of shipping in this quarter.

We expect that gross margin could be a bit lower than the first quarter due to an anticipate shift in product mix but we will work aggressively to minimize the impact. We expect that operating expenses should be down on both a year-over-year and sequential basis.

For the remainder of the year, we continue to believe that all key product groups will show solid year-over-year growth and there is potential for upside. For example, our new sales opportunities for the TracVision A5 through Cadillac dealers could serve as a springboard for broadened market demand. And there are few sizable multiyear defense program proposals that are progressing but not yet to the point that supports including it in our plans.

From an investment perspective, it's important to note that if opportunities with automotive OEMs point to a need to accelerate our ongoing TracVision A5 design initiatives, we will not hesitate to take that step and we would update our operating guidance as appropriate. The guidance that I just provided does not include any effects of the new requirement for public companies to directly expense compensation related to stock option programs.

The SEC recently announced that this requirement has been postponed. KVH's first quarter for implementation will now be Q1 2006. We are currently assessing this matter and we will provide further insight in the future.

With the conclusion of the first quarter, we maintained and built upon the improvements that began during the second half of 2004. This reinforces our expectation for ongoing financial performance improvements.

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

(OPERATOR INSTRUCTIONS) Rich Valera with Needham & Co.

Good morning, gentlemen. In terms of the -- you mentioned two military programs that CROWS and the potential IMU production order I think one, you said that CROWS you would maybe in the next few weeks and the IMU I think in the next few months. Would those generate upside to your current 10 to 20% revenue guidance range for the year if you got them in that timeframe?

I don't want to answer that in isolation. The short answer is yes. But what we normally do with our defense product forecast is we tend to probabalize a large number of different programs. If we were to get those -- if we were to win both of those and also win some probability some probabalized number of the other ones, then it would upside.

I may not be answering your question well but what I'm trying to say is that I can't answer that question in isolation because we're also counting on a number of other things happening in order to meet our defense forecast.

That's fair. Pat, in terms of taxes going forward, you paid a little bit of tax this quarter. How should we think of taxes going forward?

It's an interesting subject, Rich. The taxes -- the tax expense that we recognized in the first quarter is related to the profits generated in our European subsidiary. So going forward when we earn profits in our European subsidiary, those are subject to tax expense. And the effective tax rate, just to give you a sense, is approximately 30%. For other taxes that are U.S.-based company taxes, as you know, we've got sizable valuation allowances and consequently we wouldn't be recognizing any tax expense on any profits in the U.S.

So I'd say that it's a hard one for me to give you a specific number because as a percent of our pretax earnings for the Company, it looks like quite a sizable number but it relates to the European operation.

Should we maybe think about just putting a tax number, sort of an absolute dollar similar to the one from the first quarter?

Yes, keep in mind -- roughly yes, but keep in mind that our European business is for the most part Marine-based. And the Marine business tends to be more seasonal than much of our other business. The first half of year typically is stronger than the second half of the year. So I would expect that you should be thinking in terms of the second half potentially not having the same level of tax impact as the first half.

Fair enough. One final question just on the gross margin, Pat. You had some nice gross margins this quarter. Pretty well above your 38 to 39% level you'd suggested was appropriate for the year. Might you have the potential to be bumping up that 38 to 39% level or do you see some reason to model more conservatively in the second half?

Well we have the potential, Rich, to do a little bit better than the guidance we gave a couple of months ago. You know as Martin said about the orders and the revenue projections for our defense business and the Company overall, a lot of things need to happen right for that to come to be. I would say at this point the first quarter turned out to be a little bit better at the gross margin line than we had originally anticipated and part of it is because we're aggressively trying to work cost out of our products. And so I would say that there is some potential to do modestly better than the gross margin guidance that we gave a couple months ago.

Great. That's all for me. Thank you.

Chris Quilty with Raymond James.

Good morning, gentlemen. Can you give us a little bit of background in terms of the negotiations with Cadillac and how that that transpired? And additionally, can you comment on the distribution methodology you've got in place there in terms of the Web portal and how usual or unusual that sort of set up is in terms of working with one of the OEMs?

Sure. Let me start with the -- I don't want to get into details about the contractual negotiations, but I will say that we had a pretty working relationship with them based on product demonstrations where they wanted to show some new technology which started at the SEMA show in November and then they decided to show it to their dealers to get some feedback at their Super Bowl event down in Florida where they took their top 350 dealers to the Super Bowl, and there were a number of events where our product was featured. And they got an incredibly strong reaction, positive reaction, so much so that they decided to accelerate their plans and try to figure out a way they could this now as opposed to the normal auto cycle which takes years and years.

So it was really a momentum that was built by demand from their dealers who saw it and loved it and said, we need this product. Based on that, we said, well, how can we do this and work. So we tried to be creative and come up with a method where we were actually going to drop shift (ph) directly to the catalog dealers. We signed them up. As you mentioned, we have a Web portal. Our in-house graphics team did a great job, created a new website just for Cadillac TracVision dealers, so they can go in and they can sign up online. And we've had our salespeople calling on Cadillac dealers showing them the product. We've got point-of-sale material in the showrooms. It's in their dealer binders, in the salesmen binders on the floor so that when they sell a car, they can offer this feature.

And we're signing up dealers, even though it just started a couple of days ago, we've had salespeople that went out and showed it to four dealers yesterday and they all signed up and bought some product. So I think it's a great program. It's not your typical OEM structure, but it was really just a creative way to move quickly.

Two other questions. Right now, the Cadillac website or primary website only shows in-vehicle entertainment systems. It doesn't show the TracVision A5. Do you think there is a chance that Cadillac will put that as an option on the corporate website? And the second issue, the three-year warranty that you are offering on that, are there some special provisions you're going to have to make for warranty reserves, or how should we look at that?

Sure. The website, I'm not sure whether that's going to be on their website because technically, we are offering it directly to the Cadillac dealer. So it is not technically Cadillac that is offering the product. So it's a subtle distinction. I think we certainly encourage them to put that on the website, and they have done an outgoing e-mail to all their dealers describing the product. So the dealers are getting the message.

I can answer the warranty question, Chris. As we sell systems, yes, any systems that go with the three-year warranty we would recognize for the second two years, which is outside of our standard warranty range. We would recognize that as a deferred item and only recognize the revenue over the term of that second two-year period.

At least the feedback I've gotten from most dealers is ever since the redesign last summer, the quality experience has been pretty good with the product.

Right. And we're also -- we're actually charging for the extended warranty. So that is built into the price. So what Pat is referring to is we sell the A5 at the base price, recognize the revenue. The delta between the price the Cadillac dealer pays and the standard price is for the extended warranty, but we don't recognize that revenue in the current revenue.

Gotcha. Shifting gears over to the defense side. Can you give us an idea of the number of systems that you think on the CROWS might be involved within the supplemental and what the longer-term outlook might be looking like when you're getting feedback from the program managers on this?

It's my understanding that within the $80 billion supplemental bill is for something on the order of another 800 CROWS systems. But I have heard that secondhand; I have not seen that myself. And we're not sure when or if that budget is going to be signed. And there's two die rows of ours per system.

So that's 4.5, $5 million?

That would be about the size of it, yes.

Again, this is anybody's guess since you've been waiting for in excess of a year for that so-com (ph) order, but your assumption is that this would be a fairly quick turnaround order to get these units over to Iraq?

I think so. We are actually making deliveries. We have been making deliveries for this program already. It's just that we've been getting this month's production order -- it's not a master PO that covers a long period of time. We are in production with the product as we speak.

Would there be any production constraints at this point?

There could be. It depends on how quickly it ramps up. I mean, in addition to that program we've got some other fiber optic gyro programs that are active; other turret stabilization programs. So the fiber optic gyro part of our business is ramping very quickly. I mentioned it was up 58% this quarter. So we are looking at expanding capacity there and we've been hiring people.

April, if we could, we should probably move onto the next caller to give everyone an opportunity.

Jim McIlree from Unterberg, Towbin.

Thank you. Martin, you mentioned the electronically scanned antenna. When do you think that might be available and how long have you been working on that?

That is part of a long-term R&D project. So it's in the R&D phase now so -- and we don't really comment on future product availability. It is not something that's going to be available this year.

I just want to make sure I have the numbers correct. You're assuming about a $6000 per CROWS system content for you? Is that ballpark-ish right?

Ballpark-ish, that is correct. That is sort of our list price on the gyros.

And the content per the breakdown torpedo program that you mentioned?

It's on the order of $20,000 per torpedo.

Okay. I'll queue back up. Thank you.

Mike Hickey from Janco Partners.

Congrats on your quarter. Good job on the GM agreement. That's fantastic news. Can you talk a little bit about your original guidance of 10 to 20%, did you have the GM deal baked into that? Also, if you would, you mentioned in previous calls talking about the potential for a model year 2007 A5 entering which would be a 2005 news events. Is there a window of time where we could expect such an announcement before we kind of check it off to maybe a 2008 event?

Also, if you could talk a little bit about DirecTV and your relationship with them? Maybe about how they impacted the GM deal and where you see yourselves growing with them?

You've got a lot of questions in there. Let me start with the last one, the DirecTV. I think it's something that we've worked very hard on and I think you really can't overestimate the importance of having a service provider partner for this because when you talk to a General Motors, they don't want to hear about that you might be able to connect to a TV service but you really don't know what it's going to cost. Or whether it's okay to use in your car, so really the key to making this available is to have a firm agreement with the service provider. We've got a great working relationship with them. We're working on some new products with them. So that is continuing to go very well.

The model year '07?

The model year '07 as we've said, is our goal. I think that the work we're doing now helps with that and -- but we really can't comment on the likelihood of that happening. As far as the timing goes, it would have to be sort of midyear this year announcement in order for it to be an '07 reality.

And the 10 to 20% rev guidance -- was the GM deal baked into that?

I would say it was not.

And lastly, 1000 dealerships -- do you have any estimate of the penetration of those dealerships by year end?

I'm not -- we don't know whether all 1000 are really going to be good candidates for us. I think as a starting point, we're internally making the assumption that the top 350 dealers which do about 80% of the Cadillac Valley, the Escalade volume, would be a great place to start in terms of our own target marketing. In terms of visits to those dealerships and our sales force being involved, I think as a goal, the top 300 would be a very reasonable goal.

Thanks, guys.

(OPERATOR INSTRUCTIONS) Tom Watts from SG Cowen.

Good morning everyone. In the past you've you talked about as you might move to an OEM model, you might end up and sort of licensing agreement or be required to open your technologies so that there are more competitors. And I would think it would change your economic model. As you've gone along in your discussions, is it still going in that direction or would you still think that you would be the primary manufacturer for any actual OEM installations you might do?

Our thinking on that has changed. Originally we were thinking that an automaker would not deal with a Company like KVH. They'd want to work with another tier one supplier. And we very surprised to see that they prefer to work directly with us. Our thinking on that on originally was to do what the carmaker wanted. You know, if they wanted to roll it up and have a large tier one supplier supply it, we were amenable to that. But in the meantime, we found that they are quite willing, much more so than we expected to work with a Company our size. It's not that we have ruled it out. It's just that it doesn't appear to be what the carmakers want right now.

So conceivably you might have to ramp up manufacturing -- the multifold if you actually did end up with an OEM deal over several years?

Yes.

You might be able to do that internally?

Yes. We would definitely be able to do that and we have planned for that from day one. And as you know you get a lot of visibility for factory production meaning if you're in an '07 vehicle, if you're starting pilot production 18 months ahead of that and you've got a very detailed production schedules and a lot of warning. We are not concerned about that. The hard part is getting the order.

In terms of as you move to that vast marketing type of model, do you still think you can put gross margins up in the low to mid-40s? Overall?

As an OEM supplier to a car company, I think it's probably unrealistic for us to expect 40% gross margins. I think that we could still have 40% gross margins on a blended basis as a Company. But that particular piece would be lower margin. It would more likely be in the 30s in order to be competitive and attractive because the dealer, the car company has to make money, the dealer has to make money.

But as we look out several years, we might be able to still see a blended gross margin in the 40% range, it sounds like?

Yes.

Depending on the mix obviously.

Yes, that is our strategy and our pricing models are based on that internally.

Great, great progress.

J.P. Mark of Farmhouse Equity Research.

Good morning. I'm not sure if my question has been asked already but I wanted to ask a little bit about this current (indiscernible) network and whether you feel like you've totally penetrated that? I know you are looking at Circuit City and Best Buy and if they change at some point down the road, maybe later on this year -- but in terms of independence in that, would you say you are done with that?

Not at all. We are continuing to work that and trying to build it out and it's a big country. We certainly don't have saturation or anywhere close to it. We're working hard to get more retail points of presence. I think in a funny way I think this GM deal is going to help that because it sort of builds credibility for the average consumer that it's an endorsement and now it is soft okay to go out and buy this product. A lot of people aren't early adopters. They kind of see what everybody else is doing and what the new technology on the new cars is. Even if they're not buying a new car, I think it will help us in the aftermarket.

Did you put a number in terms of advertising or marketing dollars behind the GM deal? Can you talk about that?

No, no we have not put a member behind it. So far what we are doing is really direct marketing in the showroom and the expense for that is fairly modest in terms of -- it's not like a national ad campaign.

Do you have plans for some kind of national ad campaign -- you kind of mentioned it this year -- or is that on the books at any point?

We are doing -- continuing to do national advertising. But it's more a percentage of revenue type of advertising as opposed to the launch that we did last year which was far outside of the normal ad spending.

Thank you.

Steve Krueger (ph) from Foresight Investing.

Good morning Martin and congratulations. A few questions about the A5. Do you have a sense of what the retail price for the A5 will be at the Cadillac dealers for the Escalade?

I think it will be as a fully installed product with the extended warranty, around 2995 will (indiscernible) retail.

Where does the -- you had the announcement earlier about to the embedded version of the A5 that you demoed. Where does the embedded version of the A5 fit in your product roadmap? Is that a product you intend to make at some point? Is that the Next Generation or is that just for demo purposes? Is your next stop in terms of a production model the electronically scanned antenna? Can you give us some idea of what the product roadmap looks like?

Sure, the embedded version is really the Gen-2 product. So it's the Next Generation A5. It's smaller; it's quieter; it's easier to install at a factory level. So that would be our factory install product.

And that would not be visible external to the car?

It would be slightly visible. It raises about an inch or so -- to two inches above the vehicle depending on the particular headliner that is inside the car.

But it was just between the liner and the exterior skin of the car?

Exactly. So inside the car there is no penetration into the user space. It's almost identical to the way a sunroof is installed. When a sunroof opens, it drops down into a track and slides between the headliner and the roof. And the motor, and both the sunroof and the electronics. You just don't see it. This goes in that same space but behind the sunroof.

So would there still be room for a sunroof?

Yes.

There would. Okay. So you just say you'd need a fairly large car, a smaller car, a standard sedan might not be big enough to accommodate both a sunroof and the embedded version?

Yes, you are probably right, depending on the curvature of the roof. So this embedded version, this Gen-2 would be good for all SUVs, all minivans, vehicles that have reasonably large -- these crossover hybrid vehicles that are look like a cross between a station wagon and an SUV. Those are all good targets for this kind of a solution.

And when do you think that that product might be ready for production?

We've prototyped it as I mentioned and we might be in limited production with that within the next nine months.

Last question. Do you see any kind of competition on the horizon from any kind of wireless technology for mobile satellite, mobile TV reception?

I think there's a lot of competition in the sense that there's going to be many different ways you can get video. But right now it's all even the fastest system that you can buy today like the Verizon EVDO system, really video clips -- a very short 30 second clips, a couple minute clips. You can download to your phone and watch them. There is nothing that gives you the breadth of content that we have. We're talking about 100 -- now up to about 140 channels of digital quality, live programming. It's the real deal. It's exactly the same quality that you get at home. That is what has people excited in the automotive market is it's not something you have to explain to the customer -- oh you can download this clip or that clip. It's just TV and it's live.

Have you followed the roadmap in the wireless arena? Do you have any sense as to whether or not they are likely to be able to catch up to you any time in the next year or two or five?

The technology is going to continue to improve but our technology is improving as well. I think that if you look out five years, I think that satellite based video content delivery is going to have a tremendous advantage for the mobile market.

Great, thanks, Martin.

Mike Hickey.

It's been almost about a year since you initially reduced the price of the A5 unit. Could we -- I think it was in July of last year, could we expect a price decline this year?

No. No, we don't have any plans to lower the price of the product.

New products on the parts horizon, maybe in the RV market?

We certainly have new products in the pipeline for RVs, for Marine, for military. We've got a very active R&D group, a bunch of creative engineers that are working on all kinds of new things. So you can definitely expect new products from all in all of our major markets.

Great. Lastly on the dealer's side for the A5, is the sales force getting a commission on a sale of that unit or how are they being motivated?

The sales force normally is commission driven; especially the sales reps are commission based.

Then on the accessory side, that would be a spif (ph) or is there any idea in the economics on that?

I don't want to get into the details on what is going on in the showroom floor because some of that is driven by the dealer/owner. But there normally is in the pricing model -- there is economic incentives for the dealership and there is some that is targeted for the salesmen on the floor should the dealer choose to spend it that way.

Thanks, guys.

I hope that answers your question. It's going to be dealer by dealer specific but we have put some room in there for that.

Okay.

Jim McIlree has our next follow-up.

If I heard you correctly, you said that you thought that defense might be up modestly Q-to-Q in Q2?

Correct.

Which implies that the satellite is down modestly Q-to-Q on a flat sales? I was just trying to figure out -- is that because Marine is down or is land is down? What is the dynamics from either a seasonality perspective or just relative to what was going on last year that might be -- ?

I think you could -- the satcom business overall is going to be roughly flattish. If it is down, it's going to be down slightly sequentially. I'd say that you should think of it as pressure -- we had a very good quarter in the first quarter with our RV business. We're just being a little bit cautious here in terms of fuel prices and things like that the second quarter may not be quite as strong in the RV sector.

When does the Fleetwood agreement kick in? Is that Q2 or is that later?

It's kicking in now, so it is in process. It will be phased in over the next few months.

Their '06 model year production I believe begins in June so it will be late this quarter, but starting in Q3.

Then you'll get the 100% of the Fleetwood fleet? Is that what you are saying, Martin.

For their new model year. The structure of the agreement is in place now.

Right. I meant the deliveries of that new agreement.

Right.

I think that's it. Thank you.

Gentlemen, currently there are no further questions remaining in the queue at this time. Mr. Spratt, I'd like to turn things back over to you for any additional or closing comments.

We'd just like to thank you all very much for participating. Please don't hesitate to give us a call if you have any follow-up questions.

Once again that will conclude today's conference. We do thank you for joining us and have a great day.