KVH Industries Inc (KVHI) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the KVH Industries first-quarter 2006 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. 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 first-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.

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 annual report on Form 10-K, filed with the SEC on March 16, 2006. The Company's SEC filings are directly available from us, from the SEC, or from the investor information section of our website.

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

Thank you, Pat, and thank you all for joining us today. As you've seen from our earnings release this morning, the first quarter was an outstanding start to the year, highlighted by record revenue, strong earnings growth, and an enthusiastic reception to our new products.

I'd like to start with a recap of our first-quarter operations and discuss some of our plans going forward. Then I will turn the call back over to Pat for the financial details, and as always we will take your questions at the end.

Very strong sales in the defense and marine satellite communications markets helped us achieve record quarterly revenue of $20.3 million. This is up 13% from the first quarter of last year. We have also sustained our track record of profitability with a net profit of $1.3 million, or $0.08 per diluted share. Our $0.08 EPS includes approximately $0.02 per share impact to the stock option expenses. For an apples-to-apples comparison, this is an improvement in net profit of almost $1.2 million, or $0.08 per share over Q1 of last year, when we did not expense stock options and reported an EPS of $0.02 per share.

During our most recent call just eight weeks ago, I discussed at length our product development efforts in each of our markets. I am pleased to say that our record revenue results are do in part to the new products we've successfully introduced over the last several months. These products are spurring growth even in our well-established core markets.

We also saw the benefit of our broad base of defense customers and a steady stream of new incremental business. Together, these elements helped us achieve a strong start for 2006.

In the mobile communication market, we are well positioned to benefit from the increasing demand among consumers to stay connected to entertainment and information while on the move. Much has been written about efforts to bring the Internet and TV programming to the tiny screens on cell phones, but we believe that a significant portion of this live mobile media will end up on larger screens mounted in vehicles and on vessels. So our vision is to remain the dominant system provider connecting our customers and these screens to live content.

We are making these connections using whatever services offer the most compelling consumer solutions from both a price and performance perspective, including satellite TV, broadband wireless technology, or satellite Internet technology. We are pursuing this growing market through the development of a range of new products and services, and our efforts have resulted in record mobile satellite sales of $14.3 million for the quarter.

Excellent sales in the marine market continue to be the engine for sat-coms growth, with revenue up 42% in North America and 12% overseas, led by strong sales of our high-performance TracVision systems. Q1 was also the first full quarter of shipments for our new TracVision M3. This small, simple, and powerful satellite TV system offers reception capabilities comparable to our larger 18-inch antennas, but is designed for smaller boats, 25 to 40 feet in length.

So far, the TracVision M3 has exceeded our expectations and gotten an enthusiastic response from both dealers and small boat owners. Many of these owners were never able to enjoy satellite TV on their boats until now. Just as importantly for us, the TracVision M3 sales appear to be largely incremental, and with little indication that the M3 is cannibalizing sales of our larger products.

While marine sales remain strong, sales in the land mobile market were down 31% year-over-year, as we had anticipated. This was due mainly to the decline in our sales to the RV market, which continues to see a slowdown in shipments of Class A motor coaches. According to the Recreational Vehicle Industry Association, sales of these vehicles declined 21% on a year-over-year basis in the first quarter.

As I mentioned in our most recent conference call, we are taking aggressive steps to strengthen our position in this market through ongoing product development and new product introductions. In late 2005, we introduced our TracVision R-Series satellite TV systems, which offer compelling performance and price advantages over competing products.

Our baseline systems, the in-motion TracVision R5 and the stationery automatic TracVision R4, just completed their first of full quarter of shipments and the results are quite promising. While our total RV product sales were down compared to the first quarter of 2005, which was an unusually strong one for RV sales, the decline was lower than we had projected and revenue was up sequentially from Q4 of 2005.

We also achieved one of our major objectives for the quarter when we shipped our first TracVision R6 system on schedule of the end of Q1. This new 12-inch-high satellite TV system incorporates a number of innovations, including a high-efficiency antenna, a single cable install with Flip Ring design, and a GPS-enhanced satellite TV acquisition.

The TracVision R6 also includes an integrated 12-volt receiver, a dynamic on-screen interface, and a new electronic dew elimination technology. We have already booked a significant number of orders for the R6 and will be fulfilling those orders during the second quarter.

Just yesterday, we announced that Fleetwood, the world's largest maker of Class A motor homes, will be using all three of our new TracVision R-Series systems exclusively on their new 2007 model year vehicles. We anticipate additional OEM adoption of these new products in the coming months.

The RV market remains a challenge, but based on our first-quarter results in response to our new products, I'm hopeful that we have seen the bottom of our decline in RV sales. I feel good about where the RV sales are going and remain optimistic that quarterly growth will resume in the second half of 2006.

In the automotive market, sales of our TracVision A5 remain steady compared to the first quarter of last year. Like the RV market, sales of SUVs have been down recently, affecting not just us, but a number of other 12-volt automotive products. Nevertheless, we are taking additional steps to stimulate growth.

One such initiative is our recently announced arrangement with InstallerNet. This nationwide program, which already includes many of our existing TracVision A5 dealers, expands our overall installation capacity tremendously. As a result, we are now able to pursue new sales opportunities for our TracVision A5 and other products through retail channels that have typically not supported consumers' installation needs, such as catalogs and online retailers.

We are also continuing to work with DIRECTV, and they have stepped up their support on the marketing side. For example, DIRECTV has just launched a new online effort to promote the A5 and the Total Choice Mobile programming package to their 15 million existing subscribers. This promotion includes six months of free Total Choice Mobile and a rebate on the purchase of a TracVision A5. In addition DIRECTV, has built some new promotional vehicles that are equipped with the A5, showcasing the ability to get DIRECTV service on the road throughout the United States.

We are also preparing to bring our new TracNet 100 mobile Internet system to the marine, RV and auto markets this summer. This exciting new product, developed in cooperation with Microsoft, offers computer-free access to the Internet via MSN-TV on the in-vehicle video screens, along with Wi-Fi access for laptops, PDAs, and other products.

Using the terrestrial EV-DO wireless broadband networks, it complements our existing satellite-based productlines and takes advantage of the best and most appropriate technology and services for mobile Internet access. The TracNet 100 is already drawing market attention, as illustrated by Time magazine just naming it a must-have gadget for 2006.

Turning to our defense business, revenue was up sharply by 57% to almost $6 million in Q1. Military navigation product sales were up 100% -- 108% year-over-year, and fiber-optic gyro sales were up 42% over the first quarter of 2005.

I would like to point out that these sales are coming from a relatively broader base of customers than we have historically experienced. For example, we have seen strong ongoing sales of TACNAV navigation systems to existing customers for program upgrades, expansion, resupply, refurbishment; and we also continue to get orders for new customers. And while individually, many of these orders are relatively small, collectively, they are quite significant.

In our fiber-optic business our year-over-year growth has been driven by two long-term foundation programs, the use of our TG-6000 inertial measurement unit in the Navy's Mark 54 torpedo, and the integration of our DSP-3000 FOG in stabilized, remotely-operated weapons systems that are now being fielded in Iraq.

Winning these two contracts was a major milestone for us, as it established an important long-term base revenue stream for our fiber-optic systems for the first time. With these two programs in place, we continue to make incremental smaller sales that are building on that foundation and positioning us for other long-term programs.

So in conclusion, we had a great first quarter. Our new products are doing well. We've just introduced additional the new products and we have more in the pipeline. The net result was record revenue and stronger earnings.

Now I would like to turn the call back over to Pat, who will give you some of the financial details. Pat?

Thank you, Martin. The first-quarter results were very positive in a number of ways. During our last conference call in February, we discussed how are results were showing the benefits of our ongoing operational improvements. Revenue growth was strong, the bottom line was showing continued improvement, and new product and market initiatives were underway.

The only thing that has changed since that assessment is that the latest wave of new products is now in the market. We hoped for a positive reaction and we are pleased that the initial response, as measured in bookings and sales, has exceeded our near-term expectations.

In the first quarter, we achieved another year-over-year improvement in operating margin, more than 2 percentage points better than the first quarter last year. And this includes the 2006 impact of stock option expense that totaled approximately $230,000.

Now looking at the details for the first quarter, gross margin was 43%, almost 4 points better than last year. Gross profit dollars increased by $1.7 million, or 24%. This reflects some additional improvement in manufacturing efficiency and product cost, as well as a shift in product mix that favored relatively higher margin defense and marine communications products. The first-quarter cost of goods included only about $20,000 of stock option expense.

For Q1, operating expenses were up 16%, or $1.1 million, compared to last year, representing 39% of sales. About $210,000 or 1% of sales was recorded for stock option expense. For the first quarter, research and development spending was up 14% compared to last year. This Q1 level was 10.7% of revenue and was in line with our planned rate of investment. Sequentially, engineering expenses were up as well, as we were launching our new TracVision R6 system and we continued to aggressively invest for future new products.

First-quarter sales and marketing expenses increased about 6% year-over-year and almost 10% sequentially. At 19% of revenue, this spending level is about 1 percentage point below Q1 last year. Although our objective is to achieve even lower sales and marketing spending as measured as a percentage of sales, we will invest as necessary to support the sales opportunities ahead of us, such as the launch of our new mobile Internet product this summer.

First-quarter administration expense increased substantially year-over-year. At almost $1.9 million, this was up 49% compared to last year, and up 23% sequentially. Three primary factors contributed to this increase, ongoing legal expenses related to litigation activities, personnel-related costs, and more than 40% of the stock option expense impact for the Company. We will likely see administration expenses continue at relatively high levels for the near-term as we continue to incur additional costs related to these legal matters.

Turning to the balance sheet, cash at quarter end was $50.3 million, up about $200,000 compared to year-end. Cash flow from operations was approximately $400,000 for the first quarter. Positive earnings and sound asset management continue to be key drivers of this positive cash position. At $11.7 million, the Accounts Receivable level was down sequentially by approximately $600,000, even though sales grew sequentially by 14%.

Days Sales Outstanding was 52, a level that is in line with our expectations. Inventory increased sequentially by approximately $1 million to $7.6 million, as we positioned ourselves for second-quarter demand. Inventory turns were up strongly to 6.5 annualized. This level is well above our minimum objective of 5 turns and we will strive to continue this very positive performance.

Now I would like to briefly review our 2006 outlook. First, I will address the second quarter and then take a look at the year. For Q2, we expect that total revenue will show solid year-over-year growth of approximately 10 to 12%. The mix will change quite a bit compared to Q1. We expect that year-over-year defense revenue growth will be very modest and might not exceed 5% compared to last year. Sequentially, defense revenue is expected to decline. This projection includes only booked military orders that have a high probability of shipping this quarter.

For mobile communications in Q2, we expect to see a continuation of the positive signs that we experienced in Q1. We expect that marine sales growth compared to last year will be strong, but possibly not quite as strong as the first-quarter growth rate. We anticipate that sales of land mobile products could be flat to slightly up compared to Q2 2005. We are hopeful that the second quarter will mark a positive turn for the year-over-year results in our land business. We expect that combined marine and land product sales will increased sequentially.

Given the shift in sales mix that this would represent, we expect that Q2 gross margin will be lower than the first quarter, possibly as low as 40%. We will strive to hold the line with operating expenses and maintain approximately the same level of spending in Q2 that we experienced in Q1. These estimates include approximately $300,000 of non-cash stock option expense.

Given these assumptions, we anticipate that EPS for the second quarter will be modestly below the first-quarter results. From now on, our intention is to include stock option expenses in all guidance figures.

For the full year, we are not prepared to change our 10% revenue growth guidance at this time. Although we foresee a better picture for the mobile communications business, with solid year-over-year growth in marine and stabilization of land sales, we do not have good visibility for military navigation sales.

Since the end of 2005, defense backlog decreased $2 million to $6.6 million, and this backlog extends into 2007. We are working hard to rebuild the backlog, but at this time, given the nature of this business, we have only limited visibility to the second half of the year. As a result, in the defense business, we are taking a more conservative full-year posture at this time. However, we do expect that fiber-optic gyro sales will continue to show solid growth.

We are very excited about the products that we recently introduced and the new products that are in development. In mobile communications, we are optimistic that the RV market might be near bottom and that we could see a turn for the better over the coming quarters.

For the year, our earnings guidance is also unchanged from what we said in February. We expect GAAP earnings per share of about $0.24, including approximately $0.06 to $0.07 of stock option expenses.

In conclusion, we will continue to invest for growth, while also striving to achieve ongoing positive improvements in financial performance. Now we would like to take your questions. Julie, could you please open the call for questions?

(OPERATOR INSTRUCTIONS) Mike Hickey, Janco Partners.

Great quarter. Just a quick question. On your A5, you regarded sales there as steady. Can you give us any sense or color, that is, to any quarter-over-quarter growth or sequential growth there? Also if you could update us on the margin and any potential for reducing the price there as a catalyst for sales.

In terms of overall color, I think that market has been, as we say steady. SO in other words, we are not seeing a lot of growth in the automotive part of our land business. We attribute that to sort of sales of SUVs and things like that.

So what we are looking for is going forward, we have new products that we've announced, like the Microsoft product, which we will help stimulate our automotive business, these promotions with DIRECTV. And we're not really forecasting any further price drops for the A5. We have not seen a lot of price pressure in that market.

So what we are looking at is perhaps adding some new features and we will be talking about that in the coming quarters.

Great, thanks. In regards to your revenue, obviously you had strong growth this quarter, 13.4% year-over-year. That is above your guidance of 10 to 12%, yet your operating expenses grew about 16.4% year-over-year. It looks like that trend is going to extend through 2006 based on your guidance. Do you see that continuing into 2007, and if not, what adjustments would you make to your operating model to stop that?

We've said all along, Mike, that our operating expenses will selectively grow more or less in line with what we anticipate to see our growth in revenue -- or a little bit below the growth rate of revenue. For engineering, the level of investment as a percent of revenue that we have today is about where we want it; so as our revenue grows, we're going to continue to grow engineering.

Sales and marketing and administration, we anticipate that we've got some opportunity to reduce those over time as a percentage of sales, but that doesn't mean that they won't grow as our sales grow in absolute terms.

The other factors to keep in mind is stock option expense. In the first quarter, as I mentioned, we incurred about a $230,000 expense, which was not in prior periods. And for the year, we are anticipating stock option expenses to be in the range of $900,000 to $1 million. So that is a factor across the board, and as I said in my remarks that stock option expense is something that we intend to include now in all of our guidance going forward.

The other thing you asked about, just to answer it, is gross margin for the TracVision A5. (technical difficulty) some improvement in the first quarter compared to where we had been, and the direct gross margin for the TracVision A5 is now approaching 30%.

Great. Thanks, guys.

Chris Quilty, Raymond James.

A follow-up on the defense business, and you seemed to indicate in the press release that you had some expected orders that had not come in. Are there known reasons why you have pending orders? Is there something with the budget process or particular commands that you're dealing with that are causing the slowdown?

No, it is just that we -- if you recall, a couple of years ago, we started this internal policy of not forecasting defense orders that were not in backlog. So really it is just a continuation of that. It is more of a policy issue, that we don't have the orders in backlog yet so we -- then we start to discount the guidance going forward. But we don't have any particular problems with any programs. It's just that we're just trying to be a little bit conservative on the guidance for the back half of the year since these orders are not booked yet. But they are not U.S. orders primarily; some of them are international, so it is not a budget issue.

Okay. And if I remember, this is sort of the same policy you adopted last year and finished with sales up around 67 or 68%.

Yes, we have had a very strong growth in the defense business and we anticipate still having a good year for defense. But until those orders are booked, we don't want to count on them for the back half of the year. We are also in a position now where the satellite business is going a little bit better than we expected. We are just not ready to up the forecast at this time because we don't have those defense orders booked.

Okay. In terms of ability to turn orders, you had mentioned in the past that military customers had been conditioned to more of a just-in-time delivery than a multiyear procurement schedule. Does that mean that if you had a $5 million order drop in your lap, that's the kind of thing you could turn in a quarter or two?

Absolutely, yes. Our internal lead times are on the order of 8 to 12 weeks, so we could certainly turn that very quickly.

Okay. Presumably a lot of the visibility that you do have now is probably related to FOG sales, both the Mark 54 and the CROWS program?

Yes.

Okay. Switching over to the automotive, the TracNet 100, have you yet established a channel or preferred channel for going to market with that product?

Well, right now we're selling -- our plan is to sell through the same three channels that we're selling our satellite TV product -- so marine, RV and automotive. And within each one of those, we are offering it for sale through dealers as well as OEMs. So we are pursuing that through our regular sales force, through the regular retail outlets.

And that's why I also mentioned that in answering the question about the A5, because I think that the products work very well together.

Okay. Is there a requirement or you think an opportunity with that specific product to go outside of your existing channels -- the perhaps larger consumer electronics chains or some other channel I'm not thinking about?

Yes, you are right. So some of the big box retailers, it's a much simpler product to install. There's no external antenna, it's 12 volts and you're done. So it's a much simpler product to install, so it is also something that consumers to do themselves, which allows for catalog sales, online retail, that type of thing.

Okay. Do you work or have you been working with your partners, Microsoft and I guess Verizon for EV-DO, to try to leverage those relationships to get a footprint in the big box?

We are working on it, but we're doing -- right now we're working it through our own sales channels.

Okay. With (technical difficulty), can you give us an update of where you are terms of number of distribution outlets, and maybe what you are seeing in terms of is the number of channel outlets growing or is it about stable?

It's stable. We have added some but we've dropped others. So I'd say the net number -- and it's actually on our website -- has been stable. It's not increasing.

But does that include the Cadillac dealers?

Those are listed -- I am not sure if those are -- those would be incremental to that number. What I was referring to is the 12-volt dealers and the aftermarket retailers, excluding Cadillac. The Cadillac ones would be incremental to that.

And is the Cadillac continuing to grow?

It is. The number of Cadillac retailers is probably not growing at the pace we would like to see. So I would say that we're still in the top 20% of their retailers that are selling the A5.

Okay. And are you seeing any volume increases in those dealers that have been established, or do they basically, like your 12-volt dealers, get up to where they're selling two or three a quarter and then that's it?

Yes. I think what we are seeing from the Cadillac dealers is not fundamentally any different from the other retailers, so that they have a certain level of business that they do. But we have not seen a big push from them that would justify a big increase in our sales forecast.

So I think the Cadillac business has been steady, but it is not -- they are not doing a superb job for us in terms of pushing the product. So if somebody wants it, it's available, we refer them. But it's definitely something that requires some selling, and at the present time, the automotive car dealership is not really structured for that.

So what we're doing is really pushing to see how we can get it on the price sheet for the vehicle, because until that happens, it is pretty hard to sell in the dealership environment as a self-standing option.

Chris, excuse me, at this point, I'd like to suggest, if possible, if we could move on to the next person. If you'd like, please get back in the queue.

Will do.

James McIlree, C.E. Unterberg Towbin.

Could you give the year-over-year revenue increase in the marine business?

We did, and I --

I thought you gave it by geography, but I was hoping for the total.

The year-over-year increase for the quarter for marine was approximately 30%.

Great. Pat, when would you expect to start accruing for taxes?

No time line right now, Jim. We still have pretty substantial NOLs on the balance sheet. We have fairly substantial valuation allowances on the balance sheet as well. And the need to accrue for taxes is one that the accountants look at over a period of time and some history of consistent profitability. So it is at some point in the future, but I wouldn't expect anything this year.

Okay. The strength that you had in the marine business this quarter, how much of that can you attribute to an inventory build at your dealers for the M3?

I think it is pretty small. I think there might be a little bit with some of the big retailers like West Marine. But the marine business is very different from, for example, the consumer electronics business, where you have distributors and dealers that are pretty substantial. The marine business tends to be a lot of smaller outlets that buy one or two or they don't buy until they have a customer. So I don't see channel fill being a significant issue in the marine side.

Okay, terrific. Martin, lastly, you mentioned that there are more new products coming down the road. Could you either talk about those in greater detail or kind of clue us in about where they might come from, either defense or commercial or where in the satellite they might be becoming?

We typically don't talk about new products if it is replacing products that are already in the market, so we've got some in that category that I can't talk about. So when we talk about something like the Microsoft, the Internet product, we talk about it because we don't have a product in that category that would slow sales down.

But what we have just -- what you've seen us do is revamp the marine productline last year, with our HP series and with the M3. Then we did the RV market with the R4, the $5 and we just started production on the $6 with the Microsoft product coming. So we're targeting some other products for the automotive segment, other products for defense. And so you will be hearing about those later on.

And I lied. This is the last one. You got $50 million in cash that's been sitting on the balance sheet for I think 2.5 years. Can you update us on any plans to deploy that?

Pat suggested management bonuses, but I shot that down.

Right now, we're looking at -- we have got some great product opportunities ahead of us in terms of product ideas, some of which are pretty substantial, that we feel the cash would be useful for. But we also periodically look at acquisitions. So it is not on our immediate horizon, but we are certainly looking.

Great. Thank you.

Tom Watts, Cowen & Company.

Congratulations on a good quarter. On the gross margin, you mentioned we're going to see a decline in the next quarter, just based on product mix changes. Do you expect that to be a low point for the year in the gross margin? And longer-term, you've certainly shown a nice trend of bringing that up. Is there anything that would keep us from continuing to expand the gross margins, and can we look to -- do you think there's a potential to get another point or two over the next couple of years?

Well, yes. Our objective, Tom, has been for a while to get our gross margin -- given our assumptions about the profile of the business not changing dramatically from what they have been for the last few quarters, our objective is to get the gross margin to roughly 44% on a fairly consistent basis. So that remains our objective.

If the business profile changes, either in our favor or not, based on the mix of products -- naturally different products have different margins -- then that could affect that, if it were something where there was a change in the mix of the business for a longer period of time. But right now we see our objective as getting to 44%.

As far as whether the second quarter could be the low point for the year, we certainly hope so. And for the full year, we are still anticipating that our gross margin will be north of 40% for the full year, but I don't know at this point whether I can get any more specific than that.

Okay. Secondly, could you also just expand a little bit more on the mix of products within the defense sector? I know you made some comments before.

In terms of the revenue mix?

Right.

Well, there's two broad categories of products. There's tactical navigation and then there's fiber-optic gyro products. For the last quarter, the fiber-optic gyro products and related services that go with them represented about one-third of our total defense sales. And tactical navigation and related items represented the remainder, the other 67% roughly.

Okay, thanks very much.

Rich Valera, Needham & Company.

With respect to the DIRECTV promotion that you mentioned, Martin, can you say when they actually started that and when you expect to see benefits from that, if you haven't already seen them?

It just started in the last -- I want to say week or so, but it has been a few days to a week at the most.

Okay, that's helpful. On the large defense opportunities, is there any other color you can give on those? Are they related to existing programs or are these sort of relatively greenfield programs for you guys that would really be truly incremental to the run rate you've been experiencing recently?

There's a mix. In other words, there's a number of programs that we're going after, some of which are follow-ons for existing programs, particularly in the Middle East, where they have bought X number of vehicles and then the next brigade or division or whatever has to be procured. So those are very high probability, but the timing is in question.

I probably should have said that earlier, that that is really the thrust of our defense, where we are being conservative in the guidance for the back half of the year. These are programs that have very, very high probabilities, but the timing is always tough to call. So that is why we are a little bit nervous about the Q3/Q4 defense number. So the programs are -- we are speced in. We're going to get these programs.

And then there's also some new greenfield ones -- they are brand-new projects that would be incremental. So as I pointed out, we've got more defense business now than we have in the past in terms of number of customers and number of ongoing programs. So it is a little bit less binary than it was in years past, where you have these single big orders that either happen or don't. I don't know if that helps, but --

That does help. That's it for me. Thank you.

(indiscernible)

I was just hoping you guys could quantify this Fleetwood deal you announced.

Well, Fleetwood is an existing customer, so the significance here is that they've selected our new products, which in the past, the products for Fleetwood have been our low-end products, our stationary -- what we call our SF and LF series. So the significance here is that these are our new products, they are more sophisticated than in the past, and it is really an endorsement by them for this new technology.

In terms of revenue impact, I think it will be bigger than last year with Fleetwood as they put it on more vehicles, but we don't have a specific dollar number for you.

Sure. And I guess the ASP of that unit.

Well, in general, these are contracts between OEMs and us, so I can't disclose specific pricing for specific customers.

Sure. I guess in your guys' release and in the call you said EPS for the second quarter will be modestly below first quarter result. Is that based upon basic or diluted EPS?

That is diluted.

One more. You kind of touched on it -- the marine. What was the reason for its strength this quarter?

We had some new products like the TracVision M3, and that is addressing a new segment of the marine market, which is smaller boats. And there are a lot more small boats, obviously, than the big boats. So it is a new segment that hasn't been reached before by us or by any competitor.

Okay, sure. Thank you.

A follow-up from Mike Hickey, Janco Partners.

For your TracNet 100, I'm guessing you guys are still planning to launch that in the second half of '06. If you could just let me know that for sure, I'd appreciate it. When you look across the marine, RV and automotive markets, is there one market in potential that you think there is more upside than the others for the TracNet 100? Then on the auto side for the 100, can you give us a little bit more granularity on the type of or who your target market is?

Sure. The answer to the first question is yes, we still plan on introducing the product this summer, so that would be the beginning of Q3. In terms of target markets, we really see the land market as being a larger opportunity for this product than the marine market, although we are targeting both.

Within land, I would say that probably the RV is a larger target market than the automotive, only because people spend a lot more time in their RVs than they do in their cars. So I think the usage pattern will be higher and the demand for this product, I think will be higher. But that is my personal opinion. But we're marketing to all three segments.

And within the vehicle market, I think your question was who is going use it in the automotive market. We're really targeting people who need Internet, people who want to check traffic. We have live traffic information. There's things like MapQuest or Microsoft MapPoint so you can get directions while you're driving.

And in terms of the video screen, kids in the back seat using it for chat, using it for e-mail, watching video clips, playing games. There's online games. So it's really a pretty versatile product. You can also use it to play videos that are stored on either an iPod or on a USB keychain.

Okay. Just to clarify, that product launches as part of your guidance for '06?

Yes.

Last question, on the A5, considering -- I think we're two quarters now into some fairly -- not necessarily weak growth, but I think you've lost a little bit of momentum there. I think a lot of that is the price side and maybe the most is the aftermarket delivery. At some point, do you guys consider discontinuing this product for aftermarket delivery and focusing more on factory install, or what are your thoughts on that?

No, the A5 is a good product for us. It is selling well. We look at the aftermarket as key to all our markets. So really the automotive companies do not pioneer technology; it's more or less pulled from the aftermarket. So if you look at headrest monitors or CD players or MP3 players, the automotive companies don't pioneer that technology. That really gets pulled by the consumer.

So it's very important for us to establish that demand and credibility from the consumer side, and we've have done that. And the Cadillac venture has been very successful in that way. The Cadillac dealers and the Cadillac consumers have been delighted with the product. And that is very important, establishing credibility with the carmakers about the value of the feature.

You also have to remember that this product, like all our products, is the first in a series of product introductions. It is not the endpoint for this technology. Even though we're first to markets and we don't have any competitors, we are always looking at ways to improve the products and the customer experience.

Thank you.

A follow-up from James McIlree, C.E. Unterberg, Towbin.

You have kept the revenue guidance for the year the same, but it sounds as if the composition has changed more towards the satellite and less on the defense. Is that a correct reading?

As far as mix of the business goes, that's true. It is a little bit -- compared to what we said in February, absolutely.

Okay. But at the same time, the EPS guidance is the same, implying that the internal margin expectations have improved for the satellite business. Is that fair?

Well, I think that part of the puzzle here in terms of the guidance staying the same for earnings for the year is the fact that we did beat our expectations in the first quarter. So we are already a bit ahead of where we thought we would be at this point in time, if you go back to the guidance we gave in February.

So if you want to look at it that way, that we are a little ahead right now, based on the guidance we gave, we would expect to give a little of bit of that up over the next rest of the year, but come out at the same point that we had given guidance for in February overall.

Right. I just wanted to make sure -- Pat, did you say that you expected to end the year with 44% gross margins or exit the year at 44% or (multiple speakers) all of that?

No, I said that our objective is to get to 44% as a model. I do not expect that we will get there this year based on our current outlook and the mix of the business. What I expect is that we will be above 40% for the year, but at this point, I do not see us getting to the 44% for the full year.

Okay. I just misread that. Thank you.

Chris Quilty, Raymond James.

Pat, I have a follow-up for you also. On the table you provided for year-over-year comparisons, you reported $0.02 last year and you're showing the stock option expense adjusted comparison still at $0.02. Did you not have any expenses in last year’s period?

For stock option expense?

Yes.

That was a GAAP number reported, was $0.02.

It was GAAP at the time, right?

It is still GAAP. GAAP doesn't change for prior periods.

But we are not comparing apples to oranges, are we?

We are comparing apples to oranges in a sense, if you look -- I mean, we did GAAP to GAAP. However, the GAAP in 2006 includes stock option expenses. In prior periods it does not.

Right. So if I guess that it probably would have been about $0.02 last year, then you actually did $0.10 this year versus -- on a non-stock option basis. You probably were about nil earnings last year, $0.02 of stock option expenses.

The quarter we just reported, our stock option expenses were approximately $230,000, which equates to approximately $0.02 per share. That is all included in what we reported, the $0.08 diluted per share earnings that is per GAAP. Last year, our GAAP reported earnings were a positive $0.02. However, at that time we did not -- no companies were reporting stock option expense as part of that number. But we did report them in a footnote in our 10-Q filing. And I can tell you that the expense in that period for the first quarter of 2005 was $437,000.

Okay, got you. So if I went back -- if you were to restate -- to give me a pro forma and account for those, we would obviously have different comparisons on your gross margins and other cost items.

Yes.

I just wanted to make sure I had that correctly.

Yes, you do. You absolutely do, Chris. We're trying to just go by the rules and report GAAP information, give a sense of what the stock option expense is that's included in our 2006 numbers, and quite honestly stay away from us reporting pro forma numbers that then we have to reconcile on a consistent basis with everything we do.

Okay. We are analysts. We don't play by the rules. So I just wanted to make sure I had that comparison right.

Also a question for Martin. You had talked about existing programs that you are involved with on TACNAV. I know GD just got another big order or another lot of Stryker vehicles. Have you yet been able to position the TACNAV as sort of a standard install?

No. Believe it or not, there is no requirement for a nav system on the Stryker vehicle. So we are on that vehicle for almost every other foreign military. But for the U.S. program, there is no nav system on that vehicle. That is not one of the programs that we are waiting to book.

Okay. Also I went back onto the DIRECTV site. I still for the life of me can't find the mobility package on their website. Is that still a pending website upgrade item?

Well, they are redoing the website, so they are going to add that package for noncustomers. Right now, they are doing a promotion for existing customers. So if you are a DIRECTV customer, they are going to offer this as an incentive; in other words, if you already have their programming package. So you have to log on by putting in your phone number to get into the promotion part of the website.

So this promotion I was talking about is being marketed specifically to their existing 15 million subs. It is not being marketed to people who are not subs at this time.

Okay. I just got my bill two days ago and I actually looked in it for once, and there was no direct-mail piece in there. But you said the program just began about a week ago, right?

Right. So this is the first step of it, which is this online offer through DIRECTV.

Okay. One final question. Tax rate going forward, are we best to continue modeling something around a 2% or 3% tax rate?

For the foreseeable feature, it is going to remain low. The taxes we pay relate to our profits earned in our European subsidiary. And so my expectation is that our total taxes will be fairly comparable in 2006 to what we saw in 2005.

The question was asked earlier about at what point do we need to start accruing for taxes as NOLs are used up. And I really don't know the precise answer to that, but I certainly don't expect anything in 2006.

Okay, very good. Congratulations on the results again.

Gentlemen, it appears that we have no further questions at this time. I'd like to turn the call back over to you.

Thank you very much. We appreciate all of your interest and your participation in the call today. If you have any further questions for the Company, please give us a call directly and we will be happy to answer your questions. Thank you.

That concludes today's conference call. Thank you for your participation and have a great day.