KVH Industries Inc (KVHI) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the KVH Industries third-quarter 2005 earnings conference call. 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.

Thank you and good morning. 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 9, 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 would like to turn the call over to Martin to begin today's discussion. Thank you.

Thanks, Pat. Thank you all for joining us today. As you've seen from our earnings release this morning, the third quarter was another strong one for KVH, marked by solid year-over-year increase in revenue and profits, positive cash flow, and continued improvement throughout our operations. I would like to start my prepared remarks with a recap of our third-quarter and year-to-date operations to discuss some of our plans going forward. Then I'll turn the call back over to Pat for the financial results of the quarter, and after that we will take your questions.

So let's get started. Very strong defense sales coupled with solid marine and automotive satcom revenues helped us achieve 16.0 million in revenue, a 22% increase over the third quarter of last year. Year-to-date revenues are up 15% to 53.4 million. We also posted our fourth consecutive quarter of positive earnings with a net profit of $670,000 or $0.05 per diluted share. This is an improvement of $2.3 million or $0.16 per share over the third quarter of last year. Our ongoing financial and operational improvement efforts are providing a significant benefit to our bottom line, while we continue to see impressive sales expansion in our marine satellite communications and defense navigation businesses. Sales of our TracVision A5 automotive satellite TV system also grew strongly, both on a sequential and year-over-year basis.

We are facing some challenges in the RV market, however, but we are taking steps to address them. Overall our business remains strong and our finances healthy. I believe that our efforts during Q3 and throughout the year have positioned us to take advantage of some new opportunities.

Now I would like to give you a brief overview of the performance and plans in each of our business segments, starting with the satellite group. Our mobile satellite products grew 4% year-over-year with total revenues of 10.9 million. Marine sales overall were up 30% over last year's third quarter, with both North American and European sales showing good results. As anticipated, marine sales were down sequentially due to normal seasonality in the marine market. However, the sequential decline was actually less than we expected thanks to the continued strong demand for our new high-performance marine TracVision systems. These products have been getting a lot of recognition lately. Just this week, our TracVision 4HP and our Tracphone F33 were awarded the National Marine Electronics Association's highest award as our systems were named the best entertainment and best communication products of 2005

This marks the eighth consecutive year the KVH satellite, TV, and communications products have won. However, it is especially gratifying this year as the NMEA reduced the number of categories from 23 to just 7, and as a result we were competing against not only other satellite-based products but also a wide range of other products, including new radio and cellular technologies.

Marine market wasn't the only bright spot this quarter. We also had solid sequential and year-over-year growth in the automotive portion of our business. The steady ramp in TracVision A5 sales illustrates the building momentum in the automotive market. We are seeing good progress in our efforts to build consumer awareness, as well as increase sales through our aftermarket channels. We are also steadily expanding the number of Cadillac dealers that are selling the TracVision system. This process is taking some time, and to date the sales results have been mixed. A number of Cadillac dealers are very enthusiastic and aggressive in their efforts to promote the A5. The result has been good sales through those outlets. These dealers are providing a good example of the potential offered by sales through the dealer channel. In other cases, however, new car dealers used to selling cars have trouble focusing on high-tech accessories.

Our sales reps are working with these dealers to help them understand the appeal of the A5, how to sell it effectively, and the excellent opportunity for profit to the dealership. Although this takes some work on our part, I believe that sales through new car dealerships will eventually become a major sales channel for the TracVision system.

During Q3 we also launched a new pilot program in cooperation with Avis Rent-A-Car and DIRECTV. As part of this program, we equipped all the Avis HUMMER H3s in Phoenix, Arizona with a TracVision A5 and headrest displays for the passengers. The hardware and programming services were installed as part of a revenue sharing agreement between Avis and KVH. With the program now in place for three months, we have gotten great feedback from Avis and from customers on the product and the service. The program is covering our costs and is generating a positive ongoing revenue stream for us.

This is clearly a great promotional opportunity. Rental fleets have historically been an excellent means of introducing consumers to new automotive accessories, enabling customers to try the technology before buying. As the pilot program continues, we will assess the possibilities of expanding the program to other vehicles and other locations in the future. At the same time we are also continuing to pursue similar opportunities with other car rental companies.

In the RV market, sales were off quite a bit on the year-over-year basis, and this decline is due in part to the continued weakness in sales of recreational vehicles themselves. Sales of Class A RVs, the primary platform for our TracVision system, were down 15% for the first eight months of the year, according to the Recreational Vehicle Industry Association. Sales in our land mobile market were down 21% over the third quarter of last year. I think it is safe to say that gas prices are one of the factors having an impact on this market. As a result, RV OEMs continue to scale back Class A vehicle production, and we've seen a corresponding decline in OEM orders for our systems.

However, the decline in the recreational vehicle sales is not the only challenge we currently face in the RV industry. Competition in the RV market is stiffening, especially in the low-cost, stationary or fixed mobile end of the market. Since there is lower barrier to entry here than for in-motion products, we have seen a number of new entrants come in with stationary systems that are putting price pressure on this end of our market. We recognized this some time ago and have been taking steps to address it. For example, we are continuing our aggressive cost improvement efforts across all of our mobile satellite product lines, but with a particular focus on our RV products. The steps we have taken to date have given us the level of price flexibility necessary to win competitive OEM bids without adversely affecting our product margins.

Going forward, we recognize that our leadership and market share in all of our business areas also depends on the continued evolution of our technology. We are committed to investing in R&D while maintaining the fiscal health of the Company. New product efforts have been underway throughout the year, and you'll see the results over the next several months. I think it is safe to say we will be making a splash at a number of upcoming trade shows as we launch new products in many of our satcom business areas. I'm confident that these innovative new products will have tremendous appeal to consumers and strengthen our leadership position.

Now, moving onto the defense business, we have had another very positive quarter. Q3 defense-related revenues were up 79% year-over-year to 5.8 million, and up $800,000 from the second quarter of this year. This strong growth representing 35% of total revenues for Q3 was driven by significant increases in both military navigation and fiber optic sales. On a year-to-date basis, defense sales were up 63% compared to the first nine months of last year. Even with the strong revenue shipments during the quarter, the backlog at the end of Q3 was virtually unchanged from our Q2 levels. Our sales teams have done an outstanding job of bringing in new business and landing a number of major new programs that we have been pursuing for some time.

During Q3 we announced 2.4 million in new contracts for our TACNAV vehicle nav systems and components. We are also now in production with our DSP 3000 gyros to support the contract for the remotely-operated weapons stations that we talked about in the last conference call. Now two of our DSP gyros are installed in each of these systems to provide image and gun stabilization necessary to ensure that the weapon remains aimed at its target. Our success in this program has also spurred interest in our FOGs from makers of similar systems, both domestic and internationally.

We are also very proud that our DSPs were onboard during the recent DARPA Grand Challenge. Two Carnegie Mellon Red Team autonomous vehicles which finished second and third in this race use our DSP fiber optic gyros to stabilize their nav and guidance systems. The Red Team vehicles' performance proved both the viability of autonomous vehicles, which is an interesting new market for us, as well as the capabilities of our gyros in these applications.

We are also now in full production of the TG-6000 inertial measurement unit. This is the most technically advanced guidance product KVH has ever created. As I announced during our Q2 conference call, the IMU was successfully qualified for use in the Mark 54 torpedo. This long-term sales and development effort has resulted in a multiyear contract from Raytheon, which we announced in mid-September. The first year of the production contract is valued at roughly $3.2 million and has additional options running from 2006 through 2009. If all the options are exercised, the total contract is worth more than $15 million, making it the single largest order for any product in our Company's history. There is also potential for follow-up sales for U.S. and international retrofit markets.

So, in conclusion, we are now experiencing the benefits of the broad strategic initiatives that we have undertaken over the last few years. Our defense business is sound and growing, spurred on by several long-term program opportunities that resulted in multiyear contracts. We continue to build momentum in the automotive market, and marine satcom sales are growing rapidly. I'm confident that our cost improvement efforts will enable us to adapt to the increasingly competitive RV market. Overall, I'm very pleased with our results for the quarter. We anticipate that we will be able to achieve the goals that we set out at the beginning of the year for the full-year revenue growth and sustained profitability.

Now I would like to turn the call back over to Pat who is going to give you some of the financial details.

Thank you, Martin. As Martin mentioned, the ongoing execution of our operational improvement initiatives continues to show positive results. We have achieved more focused spending, reductions in product costs, higher productivity, and efficiency improvements across the Company. The result is sustained profitability and a strong balance sheet. The third quarter was another in which we achieved a sizable year-over-year improvement in operating margin. Overall, operating margin was 2% of revenue, a 16 point improvement compared to the third quarter of last year. Sequentially, operating margin was down 3 points, influenced by the lower revenue level compared to the second quarter.

We have made good progress improving the operating results of the Company, and we believe that we have the foundation in place to support a positive long-term improvement trend. During the quarter, we did well replenishing defense business backlog. At the end of September, the defense backlog at $11.2 million was just about equal to the June level. This backlog includes tactical navigation and fiber optic gyro systems, as well as funded engineering projects, and much of it extends through 2006. We are pleased with the additional visibility that derives from being able to book business well in advance of the requested delivery dates.

On the cost side, gross margin was 42.4%, more than 8 points better than last year. Gross profit dollars increased by 51%. This improvement is the result of ongoing improvements in manufacturing efficiency and product cost. It also reflects a shift in product mix that favored higher margin marine and defense products. Operating expenses at $6.7 million were up less than $200,000 on a year-over-year basis, but declined on a sequential basis. As a percentage of sales, operating expenses were 40%, down 7 points compared to last year.

As we have said before, we are fully committed to funding the research and development that is necessary to expand our technology base and bring new products to market. Third-quarter R&D spending was $1.8 million. Although this represented a modest sequential decline, it was more than $400,000 or 31% above last year's level. This Q3 investment was 10.7% of revenue. Going forward, we intend to grow R&D investments roughly in line with revenue to ensure an ongoing flow of innovative products that fully satisfy customer needs. Our intent is to generally maintain engineering spending at about the current percent of revenue, but there could be quarter-to-quarter fluctuations.

Third-quarter sales and marketing expenses were flat on a sequential basis and declined 15% year-over-year to $3.3 million. This represents 20% of our revenues, down from 29% in Q3 last year. For the past several quarters, we have been emphasizing a more targeted and selective approach to our sales and marketing efforts. As a consequence, this has contributed to an improvement in the returns on these investments. Third-quarter administration expense was $1.5 million, up $300,000 compared to last year, and about flat on a sequential basis. Administration expenses have been challenging. In addition to the ongoing demands related to the compliance regulations that apply to us as a public company, we have also seen an impact from litigation actions.

Now to the balance sheet. Cash and marketable securities at the end of Q3 were $49.4 million, up $2.3 million sequentially. Cash flow from operations was $2.7 million. This positive performance is attributed to a continuation of solid asset management and positive earnings. We continue to do a good job converting sales to cash. Accounts Receivable declined $1.3 million from the June level to $9.1 million. Our Days Sales Outstanding or DSO at the end of September was 49. This is down modestly on both a sequential and year-over-year basis. Although we will strive to achieve even better performance, we would not be disappointed to sustain DSO at approximately this current level.

Inventory declined by $200,000 from last quarter to $7.8 million. Inventory turns were 4.9 annualized, down about 0.5 turn from the second quarter due to lower manufacturing output as a direct result of lower sequential revenue. We expect to achieve improvement in turns performance as we go forward.

Looking ahead to the fourth quarter, we expect that revenue will show positive year-over-year growth in the range of 10 to 15%. We expect that defense sales growth will remain strong compared to last year. We are only including in our projections confirmed military orders that have a high probability of shipping this quarter. Satellite communications sales are expect to continue to be mixed. Marine and automotive are expected to show solid growth, while RV product sales are expected to be soft. We anticipate that earnings will be in line with or slightly better than the $0.05 that we reported for the quarter just ended. Looking at fourth-quarter costs compared to the third quarter of this year, we expect that gross margin will be equal to or slightly better than the third quarter, and operating expenses will increase in absolute dollars and could be about the same as a percent of revenue as in the third quarter.

This fourth-quarter guidance puts us right in line to achieve the primary 2005 financial goals that we set at the start of this year. That is, revenue growth of 10 to 20% and sustained profitability. With each quarter of improving results, our expectations increase. We intend to stay focused on achieving a positive balance of solid financial performance with continuing aggressive investment for future growth. We tentatively are planning to provide guidance for 2006 when we report our 2005 results early next year.

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

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

Congratulations on a great job. As you are looking at the increases going into fourth quarter, I know you mentioned that you expected it to be strong in both Defense and also in the Automotive and Marine segment. Can you give us a sense of where relatively most of the growth is coming from those? And particularly in the Marine, isn't this -- I usually think of Marine going more into the first quarter than the fourth quarter. Do we always see a fourth quarter strong in the Marine side?

It is not always strong, but usually Q4 is better than Q3, because there are some trade shows in the fourth quarter that help stimulate demand. So if you look at where the growth is coming from, we say Defense. bit even Defense you can break out into Fiber-optic and the Navigation products. So really, of the five categories, Navigation, Fiber-optic, Marine, Automotive, and RV, four of those are growing solidly we expect in Q4, and the real exception would be the RV product line.

And can you update us on any progress in terms of the integrated TracVision product, just where we are in that?

We are making great progress on that and we hope to have something to announce on that in the next couple months.

Okay. And clearly, your dealer program with Cadillac seems to have gone well. Are there prospects for expanding to other lines? You mentioned -- HUMMER would seem a good choice, given what you're doing on the rental car market there.

We are talking to other brands as well, not just within the GM family, but also other car companies. The first one is the hardest, so now we have established the viability of the program and we've gotten great feedback from the users. We have done some independent surveys that we have sponsored and we shared those results with the car manufacturers, people who actually own the product. That was very positive.

So I think that this is really a good springboard for us to approach other car companies and we are doing that and we hope to expand it.

Okay. Thanks very much and good job.

Rich Valera, Needham & Company.

Thank you. Just with respect to your comments on the integrated TracVision, you said you expected to have something there soon. Is that the A5 you're referring to?

It is a variant of the A5 that is designed to be embedded.

Right, the embedded A5.

Embedded A5, yes. So is there anything else you can stand on -- is this necessarily an OEM type of announcement you have coming up or more of -- I know you have done some stuff with some sort of custom coach builder types on integration.

Right. There's no OEM announcement pending, so I don't want to give that impression. But it is a product based announcement.

Okay. Thanks for that clarification. On the Defense side, you've got very solid backlog there. Can you just give a sense maybe of the near-term and longer-term trends, just in terms of the revenue run rate relative to this third quarter? I think you gave some year-over-year types of comparisons. But sequentially, would we expect that to be maybe flattish and maintaining that rate roughly going forward?

On a sequential basis, meaning the fourth quarter compared to the third quarter, Defense sales could actually be up a bit and up solidly on a year-over-year basis. Whether we will be able to continue to advance on a sequential basis quarter after quarter, that is yet to be seen. Clearly the sales, the shipments that we will make in the fourth quarter of this year will be against a good portion -- fair amount of the backlog we have in place today and then we will need to continue to replenish that as we go forward.

Sure, understood. And with respect to your pilot program with Avis, Martin, you mentioned you were covering your costs with that program. Are you in essence capitalizing the upfront costs and then covering your operating costs, or are you covering the actual upfront equipment costs there as well?

In this business model, what we did is we actually are providing the hardware, not just the A5. We are actually providing the headrest monitors and the DIRECTV programming as well. And then we are being paid as the vehicle gets rented. So there was a rental rate that we had to be above in order for us to be above breakeven, and we are now above that point.

So we actually were interested in doing it just from a promotional, from a marketing point of view, but it is actually self-funding now.

And what period are you sort of amortizing the hardware over to calculate that breakeven?

We have not disclosed the terms of the contract for the pilot program, but it is over the life of the pilot program agreement.

Fair enough. And just quickly, you mentioned the litigation, Pat, in your comments on G&A. Can you give us any status on the Teamsters' class-action suit, where that is? Do we have any sense of when that might wind down?

Well, there really isn't much I can add to that, Rich. As a matter of fact, our lawyers have advised us not to really discuss it. It continues to be in process and obviously we feel strongly that we have done everything appropriately throughout. And at this point it is in the hands of the lawyers who are pursuing the process. Expectation as to when it could be resolved, I really don't have any projection on that.

Understood. Thanks for taking my questions.

(OPERATOR INSTRUCTIONS) Chris Quilty, Raymond James and Associates.

A follow-up on the Defense area. Have you gotten any visibility out of the Senate appropriations bill on potential incremental funding for either SOCOM and their effort to outfit their vehicles or the CROWS systems that might provide some hint of upside for next year?

We have not heard anything on the SOCOM, but we have seen the beginnings of an acceleration from our customer in the CROWS system, so the monthly production rates are increasing. So we take that as a sign that they are getting their funding. We are in full-scale production on that now.

No capacity constraints on your end?

No, not on our end.

Defense products are generally higher margin than any other product, but have you seen with the increased volumes any margin improvements within the Defense line, or it is there that potential?

There is potential, but it is more from the leverage of the infrastructure. So on a direct cost basis, certainly we will always strive to try to improve our margins. But what we are experiencing at this point is a bit of improvement because of the fact that as we increase our volumes, we are leveraging getting more benefit, if you will, out of the manufacturing infrastructure that we have in place for our fiber-optic operations and our tactical navigation operations.

So we are seeing some benefit there. And that's what I would say has probably been the majority of the cost improvement in that area over the last several quarters.

So more on overhead rather than the bill on materials?

Yes.

Okay. On the RV product line, can you give us a sense of how big stationary products are as a percent of the overall RV? And is that -- were you also seeing weakness in the mobile products that was unrelated -- that was competition related, or was it solely in the stationary?

It is pretty much confined to the stationary. The stationary is a big part of unit sales, but it is a very low dollar, low margin. That is part of the reason why we are able to expand our overall gross margin for the quarter, because it doesn't have a big impact on the bottom line.

Okay. Shifting over to the automotive product, you had talked in the past about efforts that GM might be undertaking with pre-wiring vehicles at the factory. Are there any definitive actions they have taken or that we might watch for?

That effort is ongoing on their side and there is not much that I can comment on what they are doing. But that is still underway.

Okay. You did not mention anything specific to -- I think in past quarters you've mentioned a dozen OEMs that you were in discussion with. Have you seen any meaningful forward movement with those OEMs?

Yes, we are continuing to see forward movement and we are, as we mentioned earlier, I think that the Cadillac effort is a good baseline and it's a good model for us to go to the next -- to do the same thing with either another brand or another manufacturer. And what we're trying to do is make sure that once we do that, we are able to sell through into those dealerships.

And that is what we have been focusing on right now, is, as I mentioned in the call, is how do you get these dealers to focus on that; because they can make quite a bit of money selling the product. For them, the profit potential is about $1000 per A5 that they sell, which in a lot of cases is about what they are making on selling the car. So we just need to get them to focus on that.

Okay. And would you possibly give us what are the odds that you may have some sort of an OEM announcement, additional announcement in, say, the next quarter or two?

I don't to give odds on it but, we are certainly working towards that.

Okay. And have there been any changes in either your pricing trends to the dealer network or end market pricing that you have seen?

No, there has been no change.

And you've obviously got a list from the dealer channel in this quarter, but if you strip that out and looked at the pre-existing independent dealer and regional chains, did you get quarter-over-quarter, year-over-year improvement through that channel?

I believe so, yes.

Okay. Final question. Anything to report on the commercial vehicle market? You had talked about limos in the past as a good potential.

It is still a good potential. To be honest, we have not pursued it that aggressively, only because we have got a lot of things on our plate right now and there are some bigger opportunities that we are pursuing, rather than the limos at this time. So we have a lot of things in R&D and we're trying to focus on the biggest opportunities, even though limo is a viable product and people are asking us for it and the limo companies are asking us to do it. We just have constraints within our development team because we are in a lot of different markets and trying to bring a lot of products to market quickly.

Okay, very good. I will jump in the back of the queue. Thanks.

(OPERATOR INSTRUCTIONS) Mike Hickey, Janco Partners.

Congratulations on your quarter. We are thinking about your contract with Raytheon here and the production of the MK54 and the TG-6000. Based on your contract, 50 million by 2009, I think that would imply around 700 to 800 torpedoes of that timeframe. I think that is replacing the 46 torpedo, right? I think there's about 20,000 or so of those units fielded over its lifetime. Is that about accurate?

There are more out there, for sure. I know that there's about 4500 internationally as well that Raytheon is trying to sell upgrades to. So there is an international market upgrade. And I think that even beyond -- I think you're right about the 800, but I think there is an additional -- I think the total market was about 1000 for that, so there is additional opportunity even within the U.S. within this specific program beyond the 800.

This seems like a huge market opportunity for you. I'm sure you recognize it. Can you help us maybe understand how that could unfold for you, thinking beyond the U.S. Navy and looking international and maybe potential other contracts? Does Raytheon have the capacity to significantly increase output if more orders do follow in?

Yes, they certainly do. And from our perspective, the good news on this program is that we do not need to do the marketing ourselves. We have got one of the largest primes in the world in charge of the program. So we are just -- every time they sell one, we sell one.

Historically, I think you have guided that military, whatever, defense sales will represent maybe 25% of your sales. It looks like the strength in the Defense side is extraordinary. You are gaining considerable traction here. Your backlog remains strong and the market opportunities seem to be growing daily. Are you at this point willing to maybe mark up that percentage of sales number?

Yes, I think that right now for the year, it could be closer to 30% for the year -- calendar year 2005, which I think is a great percentage to be at. I think 25% was the target that we set when it was only 10 or 12% and we had some very low quarters. So I think that 30% is a reasonable target. And it is about the right mix going forward. I think that is a healthy percentage, because while the military's great and it is good margin business, it also can be volatile. So we don't want it to be 70% of our revenues.

Okay. And the A5, you guys talked about, overall, that is, reductions in product costs and increased manufacturing efficiencies, which is obviously showing up well in your margins and your ability to be profitable consistently. Can you update us on the A5 margin there?

The A5 margin is continuing to improve slowly as well, so we are really reducing costs across the board. And one of the very positive things that our development teams have done is that they have consolidated a lot of the electronics and parts across the different product line, so we have a lot of commonality now in terms of hardware and software and components. So that the cost reduction efforts in one product yields benefits in the other product lines.

And that is really starting to help us and help us leverage, because we are really the only company that is involved in the automotive, the RV, and the marine markets. So we get benefits from those cost reductions and we also get benefit of sharing the development costs over three different product lines.

That's great. One final question. It looks like RaySat does have a product in the market now, launched within the last month, the automobile market, that is. Do you have any commentary on how you expect this impact from now a new competitor to be positive or negative for you moving forward?

Well, I think that going forward, if the market expands, it would be great for us. Because I think right now we still have 100% market share, so if they come into the market, if it is promoted aggressively, that might help us, because I feel confident that we have got a better product at a better price with better service. And we continue to improve our product going forward, as well as we're going to continue to improve the service offering going forward.

So I think that the key for us is to increase awareness and to grow the category. We are really not concerned at the sales levels that we are at -- we're certainly nowhere near saturation in this market. So right now, I don't see as a problem for us; I see it as an opportunity.

Thank you.

Greg Weaver, Kern Capital.

Nice quarter, gentlemen. Martin, can I interpret from your comments that GM's SUV's prewiring for '06 model year is out the window?

There never was a prewiring for '06 model year.

It was always '07?

The year would be determined by them, but it was never an '06 program. So yes, absolutely do not think of a prewire program as part of '06. They are in production with '06.

Right, exactly. Okay. And on the gross margin situation, I am surprised there isn't more sequential improvement. They are very nice margins, but just given your mix is so favorable and RV being down sequentially, is RV your lowest margin product?

Yes, RV and A5. A5 is probably right now, in terms of direct gross margin, is our lowest margin individual product. The RV product set as a collection is the next. And the Marine and the Defense products are the stronger margin products.

Part of what you need to consider, Greg, in terms of the sequential change -- and I understand what you're asking -- is related back to what I talked about before, the infrastructure or the overhead portion of our manufacturing operation. That is fairly fixed. It is not fully fixed, but it is fairly fixed. So when we see a sequential falloff in revenue, as we did in the third quarter, obviously that has an impact on the gross margin line.

Okay, got you. Is the A5 margin now better than stationary RV?

It is fairly close. We typically do not get into discussing exact gross margins, but on a direct gross margin basis, the A5 is now between 25 and 30%. So as Martin said, it has been gradually improving and we continue to work costs out. And the stationary portion of the RV market would be not too much different. A little bit better, but not too much different.

Thank you very much.

It appears there are no further questions at this time. I'll now turn the conference back over to our speakers for any additional or closing remarks.

Okay, thanks for listening and if you have a further questions, please contact us directly.

That does conclude our conference for today. We would like to thank everyone for their participation. Please have a wonderful day.