KVH Industries Inc (KVHI) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to the KVH Industries fourth-quarter 2005 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions I'd like to turn the call over to Mr. Patrick Spratt, Chief Financial Officer. Please go ahead, sir.

Good morning. I am Pat Spratt, Chief Financial Officer of KVH Industries, and with me today is Martin Kits van Heyningen, 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 so available from our Investor Relations department. This conference call is a simulcast on the Internet and will also be archived on our website for future reference.

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, 2005. The Company's SEC filings are directly 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. Martin?

Thanks, Pat, and thank you all for joining us today. As you've seen from our earnings release this morning, we enjoyed a great quarter and a solid year overall marked by a tremendous turnaround from our 2004 results. Revenues and earnings are on track, new products are rolling out and we're positioning ourselves for the future with new services and new strategic relationships.

I'd like to start with a recap of our fourth quarter and our full-year operations and discuss some of our plans going forward and then I'll turn the call back over to Pat for the financial results for the quarter and the year. After that of course we'll take your questions. So let's get started.

At the start of 2005 we set several critical goals -- to return to profitability and sustain that profitability throughout the year, to grow our annual revenue in both our defense and mobile satellite communications markets and refresh our productlines. I'm happy to report that we did exactly that. Very strong defense sales coupled with solid marine and Satcom revenues helped us achieve $17.3 million in revenue, an 11% increase over the fourth quarter of last year. For the full year revenues were up 14% to $71.3 million.

We posted our fifth consecutive quarter of positive earnings with a net profit of more than $1 million or $0.07 per share. This was up $735,000 or $0.05 per share over the fourth quarter of last year. For the full year net profit was $2.9 million or $0.20 per share which is an improvement of more than $9 million or $0.64 per share over 2004.

From an operational perspective, we finished the year and entered 2006 on a high note. We're in the midst of a significant new product launch cycle, one that will extend through 2006 as we continue to update all of our productlines. I'm also very proud to announce that we recently shipped our 100,000th mobile satellite antenna, the major milestone that highlights the sustained leadership, innovation and customer loyalty that have made us the industry leader. Our new collaboration with Microsoft that we announced in January is the latest in a series of valuable strategic relationships that will play a prominent role in our future success.

Looking at our mobile satellite products, Q4 revenue was down about 8% year-over-year with total revenues of $10.2 million, although for the year as a whole Satcom revenue was up 1% to $49 million. With the exception of our RV market, our Satcom business had an excellent solid year. Marine sales showed continued strength both in North America and abroad. In fact, our European division reached $10 million in annual sales for the first time. Marine sales were up 17% for the year and represented 60% of our total Satcom revenues for fiscal year 2005.

During the fourth quarter we also introduced our new 15 in. diameter TracVision M3, the world's smallest stabilized satellite TV antenna for boats. Until now marine satellite TV antennas have been too large for use on smaller vessels. However, with reception comparable to larger antennas, our high-efficiency TracVision M3 is ideal for vessels 25 to 40 feet in length which is a significant new market opportunity. Historically the primary platforms for our marine TracVision systems have been the 45,000 boats longer than 40 feet. However, the number of U.S. registered vessels between 25 and 40 feet exceeds 200,000. The TracVision M3 is designed specifically to address this untapped market.

The introduction of the TracVision M3 is the latest step in the ongoing revitalization of our marine productline, a process that began a year ago with the launch of our new HP series of TracVision antennas. Those 18 and 24 in. antennas have been tremendously well received as evidenced by our continued strong marine satellite sales. I think the M3 will be a popular addition to our productline and the initial response from dealers and consumers has been very enthusiastic. And we're now in the process of applying that same successful productline strategy to the RV business.

Sales to the RV market were down more than 25% for the year affected by an 18% decline in the sales of Class A motor coaches as well as higher gas prices. However, we also recognize that a factor in this decline was our aging productline. While we've continually improved the performance of our TracVision systems for RVs, we hadn't introduced a truly new product to this market since 2001. So during 2005 we prepared to implement a complete overhaul of our RV systems. This strategy was unveiled in December when we introduced a new productline for the RV market, the TracVision R-series.

First, we streamlined the product family, reducing the number of models from six to three. At the same time we carried out significant cost reduction efforts that now allow us to offer DVB antennas with enhanced capabilities and performance at price points of our older analog systems. And finally, we introduced our new flagship product to the RV market, the all-new TracVision R6. This new satellite TV system incorporates all the best features from our top products, including a high-efficiency antenna like that found in the TracVision M3, a single cable install and slip ring design like the one that we use in the TracVision A5, and GPS enhanced satellite acquisition which we first introduced in our marine flagship TracVision G8.

So the TracVision R6, which is scheduled to ship at the very end of Q1, also includes an integrated 12 volt receiver, a dynamic on-screen Interface and a new electronic due elimination technology. So far the TracVision R-series antennas have received very positive initial feedback from RV manufacturers as well as consumers and, as these products reach the market and gain acceptance, I'm optimistic that quarterly growth in the RV market will resume in the second half of 2006.

Looking at the automotive market, sales were up very strongly for the year, but were flat in Q4. I believe this was a result of the spike in Dan gas prices during the first two months of the quarter which seems to have slowed SUV sales and may have had a negative impact on the 12 volt automotive accessories market in general. We're now looking forward to working closely with DirecTV in 2006 on several new initiatives to spur additional interest in the automotive market.

DirecTV is currently moving ahead with a plan to actively promote the TOTAL CHOICE Mobile automotive programming package and the TracVision A5 to their existing subscriber base of more than 15 million customers. This should include six months of free TOTAL CHOICE Mobile service for DirecTV home subscribers who add the TracVision A5 to their vehicles.

We're also working closely with the DirecTV engineering team on the development of new mobile receiver technology. This collaborative effort will lead to some significant enhancements to the programming available to our mobile customers. The new receiver and expanded programming should tie in well with the updates and variations of the TracVision A5 that are already in the pipeline.

In addition to new products for each specific market, we've also taken steps to diversify in all markets by bringing mobile high-speed Internet to cars, boats and RVs. We're developing our new mobile Internet system in cooperation with Microsoft MSN TV Group. This exciting new product complements our existing mobile satellite systems while taking advantage of the best, most effective and most affordable technology and services that are available.

By using MSN TV we're leveraging an Internet service designed specifically for use on a TV screen to provide consumers with access to the Web, e-mail, instant messaging and streaming audio and video content. Our solution offers an integrated 12 volt system that uses high-speed EVDO cell data services for mobile connections as well as a Wi-Fi hub to support multiple users. As a result we're going to be offering mobile access to the Internet both on MSN TV as well as through any Wi-Fi enabled laptop, PDA, phone or other device.

We'll be introducing the mobile Internet system variance to specific markets over the course of the spring with the next one being tomorrow at the Miami boat show. We're actively collaborating with Microsoft MSN TV on marketing, public relations as well as customizing the service for the marine, RV and automotive markets. We anticipate product shipments will begin in mid 2006 through our existing authorized dealer network.

In addition to consumer Satcom products, we're also working on developing military Satcom products by transferring our proven commercial technology into mobile military applications, including small, affordable, high bandwidth antennas suitable for military vehicles. We've had preliminary discussions with several prime contractors who are looking to achieve the same unique combination of size, performance and affordability found in our TracVision A5.

While we don't have anything specific to announce at this time, we're excited about the effort to broaden our military portfolio and add a new capability to a defense business that continues to show good strength. In fact, our Q4 defense related revenues were up 56% year-over-year to $7.6 million while our full-year defense revenue was up 61% to $22.2 million. This represents approximately 30% of our total revenue through fiscal year 2005 which is right on our target split for defense and Satcom.

Our military navigation business, which is base around our TACNAV vehicle nav systems, saw outstanding growth, up 79% for the fourth quarter and 81% for the year as a whole. In addition to ongoing product shipments in Q4, we completed and delivered to the U.S. special operations command a new Interface between Garmin commercial GPS units and our TACNAV system and the U.S. military's FBCB2 digital battlefield computers. Integration with common systems should enhance our overall acceptance within the U.S. Army.

Other military productline enhancements are also underway including a concept for enhanced mapping and display capabilities which we're previewing today at the AUSA Army show. In addition, we have received a small development contract from the U.S. Army to provide prototypes of a secure convoy messaging communications system later this year. This would be a new approach to the use of TACNAV for joint navigation and communication, one that I think offers some very interesting possibilities.

Our defense business also enjoyed strong fiber optics sales which were up 20% compared to Q4 of last year, and up 35% for the full year. Our DSP line of fiber optic gyros continues to sell well and gain growing interest. Our initial measurement unit for the Mark 54 torpedo is now in full production and shipping on a regular basis to Raytheon, the prime contractor. In addition, we are actively pursuing a number of other sales opportunities as well as developing some new pieces of technology, and one of these is an ultra precise north finding gyro, the initial development of which is being funded by a Department of Defense research grant.

We are also working on smaller versions of our existing fiber optic gyros for an optical sensing customer. These potential new products will further expand the capabilities of our gyro productline that is now proven, competitively priced, and getting designed into more and more systems.

So, in conclusion, we had a great fourth quarter and solid year. We achieved a significant turnaround from our 2004 results with growing revenues and earnings that are on track. We are revitalizing every one of our productlines with new products and services, and we're positioning ourselves with other industry leaders, thanks to important new strategic relationships. Based on the progress we have made to date and the product enhancement initiatives that are underway, I am very optimistic about our prospects for 2006.

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

Thank you, Martin. We just completed a very good year. The results reflect many operational improvements that were initiated several quarters ago including productivity initiatives, product cost reductions and investments in new products. Evidence of our progress shows in our revenue growth, on the bottom line, on the balance sheet and in the many new products and market initiatives that are underway.

In the fourth quarter we achieved another big year-over-year improvement in operating margin, more than 8 points better than the fourth quarter last year. For the year operating margin was 3%, 15 points better than 2004. We will continue to focus our energies to keep this momentum going. At the end of December the defense backlog was $8.5 million. This reflects a net decline compared to the prior quarter but it is in line with our expectations. This backlog includes products in engineering services and it spans several quarters of planned deliveries.

Now looking at costs. Gross margin for the fourth quarter was 43.1%, more than 4 points better than last year. Gross profit dollars increased by $1.5 million or 24%. This reflects improvements in manufacturing efficiency and product cost as well as a shift in product mix that favored relatively higher margin defense products. For the year gross margin was 41.6% and gross profit increased by almost $10 million over 2004.

For Q4 operating expenses were up less than $100,000 compared to last year. As a percentage of sales these expenses were less than 40%. For the full year we did a very good job controlling expenses. While revenue grew 14% we managed to keep operating expenses flat compared to the prior year, but we didn't simply keep the lid on. We shifted the profile of spending. We were able to substantially increase the investment in engineering by being more selective with respect to investments in sales and marketing programs. We now see the benefit of this shift in the flow of new products.

For Q1 engineering spending -- excuse me, for the fourth quarter engineering spending was up 49% compared to last year. This Q4 investment level was 11.4% of revenue. For all of 2005 engineering spending was 10.8% of revenue, a $1.4 million increase over 2004. We intend to continue growing these investments roughly in line with revenue trends but there could be quarter-to-quarter fluctuations when measured as a percentage of revenue.

Fourth-quarter sales and marketing expenses were flat sequentially, but declined 18% or $800,000 year-over-year. This level was about 20% of revenue, down from 27% in 2004. We achieved this by refining the focus of sales and marketing programs. For the year sales and marketing was just over 19% of revenue, down from almost 26% in 2004. Fourth-quarter administration expense was about equal to the third quarter but up $200,000 compared to last year. Administration expenses continued to be challenging due to the ongoing demand of public company compliance regulations and the cost of litigation actions. These had an effect throughout 2005 as seen in the 13% increase for the full year.

Turning to the balance sheet -- cash at year-end was $50.1 million, up more than $4 million for the year. Cash flow from operations was $1.3 million for the fourth quarter and $6.1 million for the full year. Positive earnings and sound asset management drove this positive flow. We experienced an increase in Accounts Receivable in the fourth quarter to $12.3 million and Days Sales Outstanding, or DSO, was 62. Both were well above the levels of the prior four quarters. However, five days of this DSO was simply due to timing. There was a single $1 million U.S. government engineering services contract for which revenue was recognized over the previous five quarters, but we did not invoice until the contract performance was fully complete in December. This invoice was paid in mid-January. The aging of our Accounts Receivable remains quite good. We expect that that future DSO will generally be in the 50 to 60 range.

Inventory declined substantially to $6.6 million. Inventory turns were 5.6 annualized. Maintaining five turns or better is one of our key objectives.

Now I'd like to provide our outlook -- or excuse me, our initial outlook for 2006. First we'll give some insight to the first quarter and then take a look at the year. For Q1 we expect that total revenue will show modest year-over-year growth of approximately 5%. We expect that year-over-year defense revenue will continue to be strong, but compared to the fourth-quarter sales will probably decline and represent a lower percentage of total revenue. As a reminder, we only included in our projections confirmed military orders that have a high probability of shipping this quarter.

Satellite communications sales are expected to be challenging. While we expect marine and automotive sales to grow solidly, RV sales will likely show another significant year-over-year decline because of the ongoing softness in the RV market. Unlike the last two years when the first quarter was the high point for our RV product revenue, we expect that this first quarter could be the low point for the year. Evidence shows that our new products are positioned well and we have more products coming, but it could take several months for these products to become firmly established. We could see improved year-over-year results later in 2006.

Due to the shift in revenue mix we expect gross margin will be a bit lower than the fourth quarter. In addition, we expect to increase the investment in sales and marketing programs to support the launch of new products through the course of the first half of the year. Otherwise we will strive to hold spending about flat sequentially.

Before including the effective stock option expenses we project first-quarter net earnings will be about double the $0.02 reported in the first quarter of 2005. This will be our first quarter to report stock option expenses in the income statement. Projecting the expense is difficult. The actual expense will be a function of the number of outstanding options and the market value of our stock at the time of the grants. For the first quarter, however, we estimate this expense to be in the range of $200,000 to $250,000.

For the full year we expect revenue growth will be approximately 10%. We expect continuing strong growth in sales of fiber-optic products. At this point we do not have clear visibility to the probability of closing some key military TACNAV opportunities, so we are taking a more cautious view of that part of the defense business. Overall we expect defense sales to increase solidly for the year but not near the percentage growth that we experienced in 2005.

In satellite communications there are reasons for optimism and for caution. The optimism comes with the new products that Martin covered. We expect continuing good growth in the marine and automotive markets. The RV market is the primary area for caution. Although we expect to see improving year-over-year conditions in the second half of 2006, the first year -- the full year could be another of year-over-year decline, albeit at a smaller rate decline than in 2005.

We expect to improve gross margin by about 1 point compared to 2005. This is primarily (technical difficulty) to product cost reductions. We will grow operating expenses in absolute dollars, but we expect to show some reduction as a percent of revenue. Before the impact of stock option expenses we expect earnings to grow approximately 50% year-over-year. However, we estimate stock option expenses for the year will be in the range of $850,000 to $950,000 and impact earnings by about $0.06 per share.

In conclusion, we intend to stay focused on investing for growth and achieving positive investments and financial performance -- positive improvements and financial performance. Now we'd like to take your questions. Operator, please open the call for questions.

(OPERATOR INSTRUCTIONS). Tom Watts, Cowen & Co.

Congratulations on the revenue and earnings growth. Just going back to TracVision A5, could you just comment a little bit on what sort of response you saw in the fourth quarter, consumer electronics reception to that? And I know previously you talked more about expanding mass-market distribution for that product. And then also with the automotive OEMs, any progress on that front? How has their slowdown in sales affected those discussions?

In general the automotive market, the first two months of the quarter were very slow and it seemed to correlate with the big spike in gas prices that happened and then we saw some abatement, prices kind of reverted again and then December was a pretty good month for our automotive sales. So -- and obviously the SUV sales were reported down some 50%. So it was a really bad quarter for SUV sales. And some of that was also showing up in the RV market.

So most of the car companies still expect SUV sales to recover and that's our primary market. So I think that obviously we're impacted by that. On the other hand, the installed base is so large that it shouldn't be directly correlated to sales of new SUVs, although a lot of our customers tend to buy our product when they buy a new car. So I think there was a correlation and we're keeping an eye on that.

As far as the OEM business goes, we're continuing to make progress there. The work that we've done with Cadillac I think has done a good job in terms of verifying the performance of the product at the car dealerships. We've had some feedback that there have been literally zero returns so they're happy with the product performance. We're still struggling a bit with the retail sales in that environment. It's just a tough way to sell product that doesn't come as a factory option on the vehicle. It's more of a push sale and it's a difficult environment to get car salesman to sell products that aren't cars.

Okay. And also on mass-market size either for the A5 or for any of your Internet products, do use see broader distribution there?

Yes, I think that the MSN product is an ideal product for a mass-market installation because it's much, much easier to install and smaller and it's at a lower price point. So I think it's a good product for us from a distribution strategy in that it gets us into some of these larger retailers hopefully. And also that can pull the A5 along with it. And I also think it's a good market for us in terms of the hedging strategy in that we now have something to offer people at a much lower price point and it gives them some interesting entertainment options. It's not full DirecTV but it has some nice capabilities for watching videos and listening to music and displaying any stored content whether it's on an iPod or any USB key chain memory that has video stored on it. So it's a good versatile product and it's a good door opener for us.

And then just on the financials. You commented a little bit on the tax rate, it has bounced around a little bit for the last couple of quarters, what the drivers of that are and what we're likely to see in '06?

Yes, I can give a bit of information for that, Tom. As you said -- as you know, our tax rate -- we have significant net operating losses on the balance sheet and so consequently for our U.S. operations we really are not in a position yet of incurring any tax expense on the profits that we earn. We do however pay taxes and recognize tax expense on the profits earned for our European operations. And so for the most part that's what you're seeing in the tax expense on the income statement for 2004.

There were a couple other minor adjustments but they were relatively small -- that relate to valuation of assets and so forth. For the coming year, again, I would expect that on a run rate basis for the Company as a whole you could expect to see that the actual tax expense that we will recognize will be fairly small. And I would think that it would probably be -- and I'm going to give a wide range here -- but for the full year the total tax expense could be in the range of $100,000 to $200,000 barring anything unusual occurring.

Okay, thanks very much.

Rich Valera, Needham & Co.

Good morning. With the new Internet product, Microsoft Internet product, can you talk about -- I think you had mentioned pricing maybe at [CES] talked maybe at around $1000 for the hardware. Could you confirm that and then talk about the different service offerings that you guys are planning to offer with that?

Right. We still haven't set the final price yet, but right now it still looks like it'll be just at $1000, the $999 retail price point. That's still our working assumption at this time. And were you asking about service options? The service option that we're going to launch with is going to be Verizon EVDO because it has the best coverage right now. And we're going to by supplying sort of an end-to-end solution. So in the future we may allow some flexibility, sort of bring your own plan or card. But in the beginning what we want to do is kind of control the launch so that we're also able to control the tech support and make sure that everything works from day one rather than have a whole bunch of options. We're going to launch with Verizon EVDO and we're going to supply the card and the service.

And what type of monthly fee are you expecting? Are you expecting a range of plans for that?

Yes, I think that initially we'll go with it'll probably be an all you can eat kind of plan which, depending on whether or not you're already a Verizon sub, we'll be in the $59 to $79 price range, somewhere to -- or identical to what you can get elsewhere.

Great. And just in terms of revenue for that product, where well that go in the segments that you've traditionally reported?

I think what we're going to do is we're going to try and split it out. And we're going to have unique part numbers for each of the three segments. We're going to have a marine version which we're introducing tomorrow that has a large external antenna and an amplifier and the part number is unique because of -- the splash page will have marine specific data one it. It will have marine weather forecasts, notice to mariner, that type of thing. So we're going to break it out and put it into each segment -- marine, RV and automotive depending on where they're sold.

That's helpful. And then for the full year for '06, I think you've given some guidance with respect to the A5 -- sorry, the RV which you said you thought might be down, but I think you said A5 in marine you thought would be up. Can you talk about for the whole year just the land category, whether you expect that to be up or not?

For 2006?

For 2006, yes.

At this point it's a tough call. But in the guidance that we gave we're expecting that the land category in total will be approximately flat year-over-year. As I said, the RV portion of it we expect will show some signs of improvement in the back half of the year. We expect good continuing solid growth in the automotive market, but land overall within that guidance we gave is about flat.

Great. And just finally on receivables, Pat, they were up pretty meaningfully sequentially as were DSOs. Was it just a back end loaded quarter and how should we expect them to (multiple speakers)?

Well, as I said, one of the key factors, Rich, which was this $1 million contract that we had for engineering services with the Department of Defense. And we actually recognized the revenue as we progressed through that project over five quarters. But we didn't bill for it until the very last day when we completed all the contract work. And so there's a case where we added $1 million at the very end of the year to our Accounts Receivable when for all intents and purposes in the quarter there was next to no revenue associated with it. And the way we calculate the DSO is we just calculate it based on the Accounts Receivable and the DSO is just on that specific quarter's performance. So that had an impact of five days right there, just that one contract, on the DSO and $1 million in the accounts receivable; that was collected within two weeks of the end of the year.

The remaining reason for the increase in the Accounts Receivable in the quarter was really the timing of the revenue. We had a quarter where we had about 50% of the total revenue in the third quarter which was per customer request -- in the final month, I'm sorry -- and that was per customer request and their order scheduling. So I'd say a little bit of it was the SKU of orders for the quarter which was something that customers requested, not unusual, and five days of it, $1 million of the Accounts Receivable was related to that one order. We expect that we will continue to show DSO on a going forward basis. Our target is to be roughly mid-50s.

That's very helpful. Thank you.

Jim McIlree, Unterberg Towbin.

Good morning. Martin, in your comments you said that the A5 was flat. Were you referring to year-over-year or quarter-over-quarter for Q4?

Year-over-year.

Okay, great. And the military for the year in 2006 you say has solid growth. Is there a way to greater quantify 'solid'? Is it greater than the 10% overall for the Company?

Yes, Jim, it should be greater than the 10% overall for the Company. It's roughly in the 10 to 20% range for overall defense growth the year -- at least that's our -- that's the assumption that we have right now that it's tied into that guidance that we gave. We do expect to see growth in satellite communications overall, good continuing solid growth in the teens in the marine space, but, as I just mentioned, roughly flat for the land portion.

Okay. The Q1 revenue that you have -- the Q1 revenue guidance that you put out assumes -- it looks like about $1 million up versus Q4, but you've got defense down -- or the military down, excuse me, RV down and so clearly you're looking for a relatively strong showing out of marine and/or auto. Is that correct? Just speaking relative to Q4.

Relative to Q4?

Yes.

Yes, marine should be up nicely relative to Q4 and, as you just mentioned, we would expect the automotive to be up as well.

Is the marine sequential increase more a function of the new products or is there a seasonality -- Pat, I'm sorry, I ask you this every time I speak to you -- is there a seasonality on the marine that is more the driver?

There are seasonality for sure. The first half of the year in our marine business is typically stronger than the second half of the year. The first and second quarters showing an uptick over the fourth quarter of the prior year. But we're also anticipating a benefit from the new products, specifically the M3 that was just announced late in 2005. It's still early in the process, but the product is still early in its life. All of the signs are very positive, but I can't say that we fully -- we've certainly integrated that into our thinking, whether we've integrated it enough yet we don't know.

Right. And lastly, the defense revenues were very strong in the quarter, was there anything unusual about that that you can comment upon?

I'm sorry, ask your question again. Were you asking about the fourth quarter?

Yes, the defense revenues in Q4 were 7.6 versus -- I think that's the highest I've ever seen.

I'd have to go back.

On a quarterly basis. I'm just curious if there's anything unusual about that special contract or, I don't know, a catch-up from prior quarters. I'm just trying to understand the strength in that quarter.

Actually there was nothing particular about Q4 that was unusual or a onetime event or something that we would call an anomaly. And it's actually consistent with the year-over-year or growth. In fact, it was up 56% for the quarter, but it was up 61% for the year. So it was I would say nothing unusual.

Okay, terrific. Thank you.

Chris Quilty, Raymond James.

A follow-up on that defense line there. You had mentioned you don't have in your expectations potentially large TACNAV orders. Is there anything in there besides the SOCOM order that's been hanging around for a while?

Is there anything in the projection besides that?

When you talk about things that you're not counting in your projections in terms of large potential TACNAV orders. SOCOM -- that's what, probably $30 million worth of potential orders.

Right. The things that we were talking about that aren't in our bunch of two or three orders that are for foreign customers that -- TACNAV orders, each one of which is around $10 million. So orders like that we don't project because it's kind of binary, you either get them or you don't. So those are the types of things that we have upside but we don't put it in our projection because we don't have control over the timing.

And those were two or three foreign orders at $10 million apiece?

Correct.

SOCOM is ballpark $30 million.

Right, and SOCOM is also not in the projections.

Right. And any progress on both Stryker and the 5 ton trucks, both of which you were working on engineering specifications?

No, the only progress we've made really with the U.S. Army is the completion of this digital Interface between our M100 and the big Army's digital battlefield computer system. And one of the problems that we've had with the SOCOM product is that it was isolated to special forces. And one of the reasons that they said it couldn't be more widely fielded is that it didn't Interface with the main computer system that shows where all the good guys are and where all the bad guys are. So we've now completed, as Pat mentioned at the end of Q4, that integration effort. So now we have hopefully removed any obstacle so we can go back and try and push that harder now.

But if I remember the nature of that engineering contract, wasn't SOCOM paying for the integration even though it's really the Army that primarily benefits?

Correct. Yes, so it was SOCOM funded but it was something that the big Army wanted.

Got it. And again, on Stryker, there were some initial RFIs that were floating around for specifying a TACNAV system.

There's no news to report there.

Okay. And on the FY '07 defense budget, it doesn't look like there's a line item for the CROWS system, at least in the main budget and I haven't seen the line item on the supplemental, but any indications there?

I think that the next budget it will have its own line item, that's what we're hearing. So that in the interim this is another year, as has been for the last couple, where it's really specially funded. But it doesn't have its own line item.

And you're expecting funding levels around the same 75 million, 90 million that you've seen in the last two years?

I'm not quite sure what their -- that's the prime contractor's amount. What we've seen is continued orders. We are under contract, we're shipping every month on that program and they're expecting an increase to occur towards the end of this year, end of '06 for bigger numbers. So that's what we've been told.

Okay. Shifting gears on the marine market, it seems like a lot of your strength has come in in the European side. Is there something that distinguishes the European market from North America that shifts those dynamics?

They're actually about equal, 16 versus 17%. So the growth has come from both sides. The European market, they've just done a great job in terms of selling our products and giving great after sale service which is really key to success with the European boat builders where a lot of our sales are coming from. So that's what's happening there.

And does the new product, the M3, have equal attraction in the European market as North America?

Unfortunately no. Right now it's a U.S. only product because of its design and implementation. Right now they don't have the benefit of that product.

Okay. And I'm just trying to make the numbers work here. Pat, can you give us an idea of in the fourth quarter what was the general contribution of the RV market as a part of the overall -- or even if you give that on an annual basis, as part of the mobile satellite? You said that marine was 60% of mobile satellite.

As you know, Chris, we don't break out the RV separately from the automotive by the land. For the fourth quarter the marine was just over 60% and the land portion was just under 40% obviously since those are the two large pieces of the Satcom business.

Okay. On the automotive side, you've talked about you're putting, and I guess this is across the Company, more into engineering efforts. But is there not an opportunity in the automotive product to more aggressively market to the Cadillac dealers or are incremental efforts in that direction in your view not going to drive greater adoption by the dealers?

As I mentioned to Tom in his question, it's been a tough sell not because the product is hard to sell but because it's difficult to get the sales guy on the floor to sell a product. And it really has to do with the economics of the car dealership where they are not rewarded, believe it or not, for gross margin on the sale. So they're only rewarded for selling the vehicle. So if they put accessories on it they are not compensated for that at all. So their motivation is to sell the vehicle and to actively not sell anything that might take longer for the guy to make up his mind.

That was something that I don't think we fully appreciated going in. So it's made it more challenging than we expected to sell through that. Now there are exceptions, there are dealers that buy vehicles relatively stripped and add accessories and they're incredibly successful at doing it and we're doing very well with those kinds of dealers. I think that's why it kind of revalidates -- it's done two things for us. One, it verified for the OEM like for Cadillac that the product works great, customers love it, it's reliable. When they buy it they don't bring it back, they think it's great which is a key step that we had to go through.

But it also validated for us that we -- in order for us to be successful it really has to be either factory installed or a factory option which is, as you know, we've been working on to at least get the vehicle prewired so the vehicle -- so it is something that the customer can just tick off when he buys the car. I think that could be critical to getting a larger success there.

And has the Cadillac distribution agreement helped accelerate any of your OEM agreements or discussions or has anything substantial happened?

Well, it's helped us with other car makers and other models so that the first one is definitely the hardest one. And it's also helped us in our discussions with DirecTV about new services because it really validates the whole premise and some of those things are interactive. In other words, a car company might want a feature that we have to ask DirecTV for and they'll only do it if a company like General Motors is asking for it. So we can work both parties, get them in the same room and hopefully create something here.

So what would you assign as a probability for adding a new OEM or a new productline in 2006?

26.4 -- I don't know. I think that there's a good probability that we'll have some kind of announcement this year about OEM relationship either with another aftermarket dealer or something. We're working it actively so I think I'd be disappointed if we don't continue to make progress there. I don't think that there will be any standard or any major announcement in terms of having significant financial impact in 2006.

Chris, we probably ought to move on and let someone else have an opportunity.

Mike Hickey, Janco Partners.

On your sales and marketing for the fourth quarter for the A5, did you pull back a little bit on your spend there?

On a year-over-year basis we pulled back -- I mean, we got a lot more focused on our sales and marketing overall. If you recall, Mike, in the second half of 2004 we made a very significant additional push for the automotive market in some target markets especially through the southern states. And so on a year-over-year basis the answer is, yes. But certainly from our run rate and from our going forward driving the growth of the business we really haven't reduced our level of effort at all.

Okay. And just to clarify, for Q1 are you guys seeing a sequential increase here in A5 sales so far through the quarter?

We can't comment on that where we are now for Q1.

Okay. And a question on your new Internet offering. When you look at your three different categories here where you're going to offer across the auto, marine and RV, where do you see your greatest near-term opportunity and just to make sure that that opportunity is within your 10% guidance? And do you see any sort of OEM opportunity in your calendar year 2007?

For calendar year 2007, I think that's feasible. I think that to answer your first question, we have interest in all three markets. Perhaps I think the land applications are probably the biggest because the marine applications -- I think it's a good companion product to our new M3 because it's small and simple and easy to use just like the M3. And so I think for that smaller boat, the 40 foot boat I think it's a perfect product.

It's probably not as good for some of the high-end luxury yachts that have two-way satellites or need global capability and they need the product to work 1,000 miles off shore. We have other products already in our portfolio that are targeted at those customers. So I'd say the land market is probably going to be larger than the marine for the Internet product.

Okay. And that is in your 10% guidance for 2006?

It's in there, but don't forget, we don't anticipate shipping the product until the second half of the year. It's supposed to come out in the mid 2006. So we're assuming a conservative rollout on that.

Thank you, guys.

(OPERATOR INSTRUCTIONS). Jim McIlree.

TACNAV fiber-optic mix in 2006 is shifting towards the fiber-optic products, is that correct?

Right now in the guidance we're anticipating that the growth on a year-over-year basis in 2006 for the fiber-optic products will be stronger than the growth for TACNAV as we see it at this moment. And as -- I'll remind you again that we -- as Martin said earlier in response to a question, we don't have some orders that we're hopeful we will be able to land later in the year. We don't have those in this guidance at all for TACNAV.

No, I understand that. Okay. And it's my understanding that the TACNAV margins generally speaking are greater than the fiber-optic margins. Is that also correct?

That's true. But they're both good.

Right. But even with that you're looking for an overall company gross margin improvement for the year. So it seems like every product's gross margins need to be improving versus last year. Is that also correct?

Yes, I don't know if I would say every product, but generally across the board we are working very diligently on driving cost out of our products and showing improvements in gross margins as we move forward.

Okay. In times past you've made commentary about the A5 gross margins excluding overhead. Can you update us on where that is?

Yes, it hasn't changed much from where it's been. It's still in the 25, the gross -- the net -- what we call the direct gross margin is between roughly 25 and 30%.

Is there an opportunity to improve that in 2006?

Yes, there's an opportunity and that's something that will be getting our attention for sure. At the same time we're looking at other enhancements to the product as well.

Okay. When we have this conversation a year from now, that 25%, are you targeting that to be 30% or 35% or is it more of a let's say 100 to 200 basis point improvement?

Well, for the end of 2006 I don't know that -- I don't think I've got a specific answer for you, Jim. But in general our target has been to get the TracVision A5 to roughly the same level as our recreational vehicle products, especially those that we sell in the OEM space. Which would say that we'd be looking for certainly another 5 to 10 point improvement in gross margin anyway.

Okay, but that's over time not necessarily by year-end '06?

Not necessarily by the year end of 2006, correct.

Terrific. Thank you very much.

J.P. Mark, Farmhouse Equity.

Good morning, Martin and Pat. A couple of quick questions -- and I apologize if you've covered this already, I was disrupted a couple of times during the call, so I'm not sure if you talked about this. On the A5 pricing distribution, one, I wanted to know if you had any thoughts about pricing, whether you're going to lower the price and at what point you might consider doing so? And then second of all, did you address the question about large retailers like Best Buy and Circuit City and getting distribution into those kinds of channels.

Right. Yes, we did talk about the Best Buy, the big -- what I call the box retailers and it was in the context of the new Internet product and that potentially being better suited for those channels and something that also might pull the five along in, because we're a multi SKU company then to go in with a bunch of different products.

On the pricing side we don't have any plans to change the retail price of the A5 at this time. So as Pat mentioned, that we are working to improve the gross margin on that product and I'm a little bit more optimistic than Pat is. I think we will improve the margins on that by year-end.

Okay. And then a quick question on the RV side. In your prepared statement I think I heard you say that you expected some improvement in your RV market. And I wasn't clear whether it was based on the fact that you have a good product or you think the market itself is going to pick up at some point.

I was talking about our own products, so obviously we can't control the sales of the RVs themselves, but given that a good percentage of our sales are in the aftermarket, those shouldn't be impacted by sales of new RVs. The OEM sales of course are directly correlated to how many RVs they sell, so that part is kind of out of our control. Although I think that that is expected to stabilize a bit this year so you shouldn't see any -- I don't think they're anticipating the same rate of decline which was 18% in 2005. That's not currently the RV Association's forecast for 2006. But we'll have to wait-and-see on that.

So I think our feeling is that we've got great new productlines, the last [Vr6] is shipping at the very end of this quarter. So we'll start to see revenue from that in a meaningful way starting in Q2. Once these new products are out there hopefully they'll gain acceptance and we'll see the same type of growth that we're seeing in the marine market eventually when we do the same thing in that sector.

Okay. Last question, you have 50 million sitting on the balance sheet, do you have the urge to go out and spend it?

Interesting word, 'urge'. We certainly want to put it to good use and we continually keep our eyes and ears open for opportunities that will enhance the overall strategic performance of the Company going forward and the financial performance as well. I think it's fair to say that we are being somewhat proactive in terms of looking at opportunities and assessing opportunities, but we don't feel an urgency to do so.

Okay, thank you.

Steve [Krueger], [Foresight] Investing.

Good morning, Martin. Martin, how many Cadillac dealers are participating in the dealer install program with Cadillac?

I don't have that number handy. It's a small percentage of the total number of dealers that could. And some of the dealers are also not buying directly from us but buying through one of our distributors or expediter channels.

So it's by no means all dealers?

No.

I see, so that would explain why when I called a couple of dealers they didn't really know about the product?

Well, they should certainly know about it and that's through communication from us as well as through communications from Cadillac.

I'd say initially when I talked to a couple of people they hadn't heard of it and then when they asked around and they dug a little bit they did see that it exists, but they certainly weren't familiar with it. So I'm wondering why the limitation on just a small number of dealers and is there any plan to roll that out? If Cadillac is really so pleased with it why would they want to roll that out?

Well, I covered a bit of that earlier and an issue is really one of -- the way car dealerships are structured today, they're really not structured to sell ancillary products on the showroom floor. That's part of we're kind of breaking the business model here for the dealership and pioneering that is taking longer than we thought. I think that's probably the best way to describe it.

Okay, Thanks.

Chris Quilty.

For Pat, can give us an idea when you do report the stock option expensing in Q1 are you going to give us a pro forma that shows the breakout between sales and marketing and cost of goods sold?

Yes, that's our intention, Chris.

And you'll obviously give us the year ago comparables also?

Yes.

Okay. For Martin, can you give us a little more information perhaps on the nature of the DirecTV marketing program that they might be launching? I think you said that they will for existing home users give you six months free, but how are they going about promoting that program?

They haven't announced it yet, this is something that's in the works, but the intention is that it would be a direct mail piece to existing DirecTV subscribers. That's how they would get the word out saying that now you can get it for your car as well as and we'll give you six months free service and then -- and we might do something as part of that promotion as well.

So what I was really trying to say is that we seem to be making some progress in getting DirecTV to support on the marketing side, they've been very helpful on the programming side in terms of creating the package and they've been very helpful on the engineering side in terms of developing some new products which we haven't actually announced yet. But so they've been working with us, but on the marketing side we really haven't gotten any kind of a push and this would be the first direct promotion that they've done.

I'm a direct TV subscriber, if I see this and I'm interested in it, how would they (multiple speakers) me to get the product?

There will be a call to action in the direct response piece which will be managed by us.

So it's either an 800 number or a website that directs them back to you?

Correct.

And so does that require incremental call support so when you get a call from somebody in North Carolina you can tell them who the local 12 volt dealer is where they can get it installed?

Yes, and so whether we need incremental phone line support --.

We can only hope.

Well at least successful we'll gladly pay that bill and hire those people.

Okay. And final question here, you mentioned a military Satcom effort, is that an Immarsat type solution that you're looking at?

It could be. At the AUSA show in November -- I think it was October, November, we showed some A5 style concepts for Immarsat [V-gan] type product and we're also looking at some KU receive only as well as a [Kvan] and two-way V-sat Satcom on the move. So we're really exploring a bunch of different opportunities and there seems to be an awful lot of interest out there in these types of products.

So it's interesting because there are a lot of product that are out there but they tend to be very high-end, $100,000, $250,000 kind of products. So our strength has really been in providing very practical, low-cost, low-profile solutions and there seems to be good interest in that.

And do you have the sufficient channels into the appropriate procurement centers or is this something where you'd have to do a teaming relationship in order to get traction?

I think we'd do both. I think we have some direct interest and we've actually written some response to request for proposals where we would be the prime. But we've also responded to some prime contractors who would just want us to build the antenna portion.

Okay. Very good. Thank you and congratulations on the results.

Great. One more question?

There are no further questions at this time, sir.

Okay, great. If anybody does think of a question feel free to call or e-mail us. Thank you.

Thank you very much. That does conclude our conference for today.