KVH Industries Inc (KVHI) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the KVH Industries fourth-quarter 2006 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to the call over to Mr. Patrick Spratt, Chief Financial Officer. Please go ahead, sir.

Thank you. 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 and year-end 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 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 discussions. Factors that might cause these differences include, but 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, 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'd like to turn the call over to Martin to begin today's discussion of results. Martin?

Thanks, Pat. Thank you all for joining us today. Overall we're very pleased with our results for 2006. Despite softer than expected Q4, we were still able to meet our goals for the full year. Sales in 2006 were up 11% over 2005, highlighted by a 15% growth in our SATCOM business and strong growth in our fiber-optic group. Operationally we introduced a number of new products for the marine, RV and automotive markets and we also expanded our military productline.

Based on the progress we made last year and our expectations for this year, we've set some very aggressive targets for 2007, including double-digit revenue growth and increasing our earnings per share by as much as 90%. Following a recap of our 2006 results, I'm going to discuss our plans going forward and talk a little bit about why we're confident that we'll be able to achieve those goals in 2007. Pat will then cover the financial results and provide some additional color on our guidance for the coming year. As always, we'll take questions at the end.

So during Q4 we achieved quarterly revenue of $17.4 million, that's a 2% decline from last year. Earnings were $0.01 per share including approximately $0.02 impact due to stock option expenses. For the full year, total revenue was $79 million, which is up 11%, with net earnings of $3.7 million or $0.25 per diluted share. That's an increase of $0.05 per share, but that includes approximately $0.07 per share impact due to stock option expenses. Excluding option expenses, EPS was up $0.12 compared to the $0.20 we reported last year.

In Q4, mobile communication revenue was $12.1 million, up a solid 19% year-over-year. Defense-related sales, including those our TACNAV military nav system and fiber-optic gyros, were $5.3 million. That was down 30% from the same period last year. For the full year, mobile communications and defense-related sales were up 15% and 3% respectively. The fourth quarter was tempered by schedule changes for several confirmed military orders and an unexpected softness in the marine market. However, those military orders are on track for 2007 and we expect that the marine market will improve as the year continues.

It's worth noting that even in the marine market that was somewhat softer than we anticipated we did continue our trend of year-over-year sales growth, though at a slower pace than we had in previous quarters. Sales of marine products were up 11% overall. That's about 7% in North America and a 20% increase overseas during Q4. For the full year, marine sales as a whole were up 23%.

Our most successful new product this year is the TracVision M3. This 14 inch antenna made satellite TV practical for smaller boats in the 25 to 40 foot range. In October, the M3 was named the best entertainment product of the year by the National Marine Electronics Association. And a few weeks later, the M3 also won the overall marine electronics design award at the METS show in Amsterdam. This marked the first time that the same satellite -- marine satellite product has ever been named the best product in North America and in Europe by these two organizations.

Coincidentally, we launched the TracVision M3 for European boaters only a few weeks later. The early response has been outstanding. Based on feedback from the London boat show, we're optimistic that the product will be as successful in Europe as it has been in the U.S.

We began shipping the M3 in volume in early 2006 and tomorrow we'll be introducing three new marine satellite products at the Miami International Boat Show. We're also planning to introduce additional new product later in Q1 as well as in the second quarter. Our goal in all markets is to update, enhance, and improve our product lines more rapidly than in the past, allowing us to maintain a technological lead over the competition and always offer our customers the best and most innovative solutions.

The benefits of this effort are clearly seen in our land mobile market. In Q4, sales were up 32% year-over-year, spurred by strong growth in both our RV and automotive businesses. There are two important factors in the rebound of our sales in the RV market. The first is the overhaul of the TracVision of our RV productline, which is our new TracVision R-Series antennas that began shipping early in 2006. We offer more robust designs and more versatile operation than competing systems. Plus the quality of the products is the best in the RV industry by far.

To date, less than 0.3% of our TracVision R-Series antennas have required factory service. I don't believe any other mobile satellite TV manufacturer can come close to this record of excellence. Retailers and customers are recognizing that the R-Series offers the best combination of price and performance in the market; as a result we've suddenly gained ground in sales even as shipments of Class A motor homes declined 14% in 2006.

The second key contributor to our growth has been a reinvigorated independent dealer network. We're committed to ensuring that an RV owner using KVH satellite TV or mobile Internet system always has the best possible customer experience at every stage of the purchase and ownership cycle. For this reason, our 2007 aftermarket sales and [support] efforts are solely focused on our independent dealers and distributors. We've seen that problems from installation can be a major nuisance from our customers and in our experience these independent dealers are more motivated and offer superior sales, installation, and service to consumers compared to RV discount channels. With this in mind, we're now directing resources previously allocated to chain store support to these committed retailers.

I'm also pleased to announce that Lazydays RV SuperCenter, which is the nation's number one RV dealership, has just joined our independent dealer network and is now offering the TracVision satellite TV antennas and our TracNet mobile Internet system.

So with three consecutive quarters of year-over-year growth it's clear that our products are appealing to RV owners as well as RV manufacturers. A few weeks ago we announced a new OEM agreement with Gulf Stream Coaches. We're pursuing a number of other new OEM sales opportunities and expect to have some announcements later in the year as the RV manufacturers begin to roll out their new models. We hope to sustain this momentum with several new product initiatives that are currently in the works and are slated for introduction this summer.

Our 2006 productline updates also extended into our automotive line, where Q4 marked the first full quarter of TracVision A7 shipments. The A7, successor to our original automotive satellite TV system, starts shipping at the end of August and includes many improvements. The most significant of these is the use of virtually silent motors and tracking and the addition of local channels to the A7's programming lineup. Now the local channels were made possible by the A7's integrated GPS and the exclusive 12 volt mobile receiver that we developed in cooperation with DIRECTV.

The initial feedback has been extremely positive. Dealers like the A7's easier installation, its setup, along with its improve reliability. As in the marine market, we've also got some industry recognition like the 2007 Design and Engineering Award given to the A7 by the Consumer Electronics Association. But most importantly, customers like the A7 and we saw a solid year-over-year increase in automotive revenue in Q4.

To help drive A7 sales in 2007, we signed a new distribution agreement that will significantly expand our sales efforts in the commercial vehicle, bus, limousine, and commercial van markets. We'll be announcing more details about this in the next few days.

Turning to our defense business, our fiber-optic gyro group continues to perform extremely well and had another great quarter. Revenues from FOG sales increased more than 30% from Q4 of last year and would have been even higher had we not had some last-minute test requirements for a key customer that caused some schedule changes. Nevertheless, FOG sales were up almost 50% for the year and our lease and bookings continue to be very solid.

The only part of our business that declined in Q4 is our TACNAV navigation business, which saw a decline of more than 60% from last year's robust sales level. We expected Q4 to be quite low based on our backlog going in, but this was even steeper than expected and resulted from some contractual issues that impacted the schedule on some confirmed contracts. However, those issues have been resolved and we expect these orders to ship in 2007.

Looking forward, we expect TACNAV sales to rebound later this year. We recently announced a major new sole source contract from the U.S. Army Tank and Automotive Command to procure TACNAV systems to sell a version of the Bradley fighting vehicle, and if all options are exercised this contract has the potential value of $11.5 million over five years. Just two days ago we announced another major order; it's a follow-on of more than $2.6 million worth of our TG-6000 inertial measurement unit for use in the U.S. Navy's Mark 54 torpedoes. This is the first three options associated with a contract we originally received in September of 2005. The full contract has the potential value of more than $15.8 million.

Raytheon's use of the TG-6000 within the torpedo program is a testament to the precision, performance, and reliability offered by our technology. And strategically we intend to move more into higher level integrated systems like these IMUs which provide greater gross margin and revenue expansion opportunities. And we're also actively pursuing new applications of our existing fiber-optic gyro products throughout the military.

One such area is a new cooperative engineering effort with FLIR Systems. We've developed a new smaller fiber-optic gyro to support optical stabilization and tracking in FLIR's next generation gimbaled products. FLIR is a world leader in thermal imaging and stabilized camera systems. Potential applications for their new products, along with our smaller FOG, include airborne surveillance and reconnaissance, search and rescue, and maritime border patrol. We're pleased to be working with them on these systems and we'll be providing additional details later this year as their new products are announced.

But perhaps the biggest and most exciting untapped opportunity for KVH is the expansion of our satellite communications business into the defense and Homeland Security markets. We're continuing our work on several product development efforts, among them the use of our fiber-optic gyros to improve the accuracy of our mobile satellite communications technology for ruggedized military applications. Doing so would offer our military customers affordable in-motion high bandwidth communication options for a wide range of platforms. And it now looks very likely that we'll receive our first military SATCOM-on-the-Move contract in the near future.

We're also making progress on the development of our military truck convoy communication system that we recently announced. This product offers a simple and easy to feel solution to a significant problem facing the military, namely the inability of commanders and vehicle crews to communicate clearly in a real-time while in the field. Using our approach, convoy members in Iraq using a ruggedized PDA with color touchscreen, icon based messaging and audible alerts. Signals are sent using secure radio data bursts via ad hoc network radio modems. Convoy members can alert the rest of the convoy to ambushes or to other threats as well as confirm that they've received every message. All this happens in real-time and the result is a significant enhancement in situational awareness.

So the development of our convoy comm system was originally funded under a contract from the U.S. military. We've completed a number of successful tests with the Army during Q4 and we're continuing to work with the military on possible fielding and trials in Iraq.

So in conclusion, we've set some very aggressive financial and operating goals for 2007, including growing revenue 10 to 17% and increasing our earnings per share by 60 to 90% over 2006. We've laid the foundation with our new products and have additional new products on the way. We expect 2007 to be a breakout year for the Company in terms of positioning, market share, and overall technological leadership. We're confident that our existing in new product market position to operating strategy, and sales prospects will give us the basis to achieve these goals and maximize long-term shareholder value. And now I'd like to turn the call back over to Pat to fill you in on some of the numbers. Pat?

Thank you, Martin. Although the fourth quarter results missed some of our near-term expectations, in many ways the quarter was quite encouraging and it completed a year of some positive year-over-year improvements. In spite of a relatively weak year for military navigation sales, we were able to increase net income by more than 60%, excluding the impact of stock option expenses, and generate almost $6 million of cash from operations.

We are not discouraged by the issues we experienced in Q4 as they appear to be temporary and our competitive position remains strong. We expect that we will successfully manage our way through this and be stronger financially as the year progresses. Overall, we are pleased with steady progress that we are making on a long-term basis.

Now looking at the details for the quarter -- gross margin was just above 39%. This reflects the impact of the lower-than-expected level of revenue for the quarter. On a year-over-year basis, gross margin was down about 4 percentage points. The key cause for this is the fact that relatively higher margin military navigation sales were less than 40% of the near record level that we experienced in Q4 2005. The fourth-quarter cost of goods included roughly $38,000 of stock option expenses. We continue to aggressively advanced programs to drive product costs lower through the use of new suppliers and increasingly efficient product designs. These should have very positive future benefit for gross margins.

For Q4, operating expenses were up only 4% compared to last year and, as we had anticipated, declined on a sequential basis -- $216,000 or 1% of sales was recorded for stock option expense. For the full year, operating expenses only increased 9% over 2005. If stock option expenses are excluded, the true increase was only 6% or about half the rate of our revenue growth. This is a result of the focus we have placed on improving the efficiencies of our operating activities.

For the fourth quarter, reported R&D spending was about 4% lower than last year. This is mainly due to the fact that we had a higher level of non-recurring engineering projects for customers. As a percentage of revenue, the reported R&D for the quarter was above 11%. We maintained the overall investment at a fairly consistent level throughout the year with full year R&D spending just under 10% of revenue.

Fourth-quarter sales and marketing expenses increased only 5% year-over-year and 7% compared to Q3. The sequential growth was due largely to the fact that the fourth quarter includes large industry shows for both the defense and consumer markets. For the full year, sales and marketing expenses were down 1 point when measured as a percentage of revenue. We are making good progress toward our longer-term financial target in this area. It is worth a reminder that as a percentage of revenue, sales and marketing in future quarters will reflect some variability as we continue to grow and adjust to variable market conditions and as sales patterns reflect seasonal changes.

Fourth quarter administration expenses were in line with our expectations, although this does reflect a 12% increase over Q4 2005. More than 40% of the increase was due to the impact of stock option expenses. For the year, administration expenses were up 34% compared to 2005. Stock option expenses represented one-fourth of this increase.

Turning to the balance sheet. Cash and marketable securities at quarter end were $54.7 million. Cash flow from operations was positive at just under $400,000 for the quarter. For the full year, cash flow from operations was $5.9 million. At $10.6 million, Accounts Receivable was equal to the prior quarter. Days Sales Outstanding was 55. Although DSO was higher than the prior quarter, it is in line with our goal and we are very pleased with our results.

Inventory increased sequentially by about $900,000 to $9 million. Annualized inventory turns declined compared to Q3 to just below 5. Late in the fourth quarter we staged additional materials for the Q1 introduction of the TracVision M3 in Europe. Although the Q4 turns level was not as good as our ongoing operating target, we believe our inventory management remains solid.

Now I'd like to review our outlook for the full year 2007 and the first quarter. As Martin said, we expect that the full-year top-line will grow between 10 and 17% over 2006, while earnings per share should increase by [60] to 90% year-over-year to a range of $0.40 to $0.48 per year.

I'll now fill in more of the profile using the midpoint of these ranges as the context. We expect that mobile communication sales will increase approximately 15% compared to the increase that we saw in 2006. Excuse me -- comparable to the increase that we saw in 2006. Although the recent market dynamics have tempered our near-term expectations for the marine business, we still expect a very solid year of growth led by a range of new products. We anticipate that the land business will return to double-digit growth on the continuing strength of our auto and RV product lines.

On the defense side, fiber-optic gyro sales should continue to grow strongly, although the rate might not equal that of 2006 when this business grew close to 50%. At the end of Q4 2006, we had approximately $4.3 million in backlog for defense orders. We will be rebuilding the military navigation backlog over the next several quarters and we expect to have a stronger backlog position around midyear. However, most of this will probably be scheduled for shipments in 2008 and beyond and as a result we expect that revenue from this part of the business could be flat to modestly down for the year.

For the year, gross margin should improve by about 2 percentage points over 2006. This only driven primarily by cost improvements in the mobile communications business and additional leverage from our production infrastructure for fiber-optic gyros. On a percentage increase basis, our 2007 engineering expenses are expected to grow at roughly the same pace as revenue. At the same time, we intend to limit the growth rate of sales, marketing, and administration expenses to about two-thirds of the percentage increase of revenue. Also for the year, the effective tax rate is expected to increase to about 12% of pretax profits, up from 9% in 2006.

With respect to the current quarter, the top-line should be about equal to the first quarter of 2006. Although we expect solid year-over-year growth from mobile communications, we are being somewhat cautious about the U.S. marine market until we gain better visibility. On the defense side, we expect that FOG sales will be up strongly again, but that military navigation will be down substantially due to the low-level of shippable backlog. As a result, overall defense sales will likely decline year-over-year by about the same percentage that we saw in the fourth quarter.

Based on this profile, we anticipate that the bottom line will be in the range of $0.01 to $0.03 per year. Gross margin percentage will be comparable to the level experienced in Q4 or about 4 points below Q1 last year. This is mostly due to the expectation of a very low level of military navigation sales. We plan to constrain operating expenses to only modest absolute growth compared to Q1 last year. We expect to gain momentum as we move through the subsequent quarters.

In conclusion, we are pleased with our overall progress. We will manage through the current cycles that we are experiencing in U.S. marine and the military navigation markets and gain strength as we do. As you will see in the continuing stream of new products, we are making meaningful investments for future growth. Now we'd like to take your questions. Operator, could you please open the call to questions?

(OPERATOR INSTRUCTIONS). Chris Quilty.

Pat, just a quick follow-up here. I wasn't writing quick enough on the guidance that you gave. You said gross margin for the full year 2007 up 2 percentage points?

Yes, that's what I said, Chris.

And that you would limit your SG&A spending to about two-thirds the rate of growth of revenue?

Yes, ballpark. I'd say up to two-thirds, but it could even be a little bit less.

Okay, good. Shifting gears over the to the defense side of the business, you had mentioned I think previously that you had several contracts that you saw in the pipeline, specifically on the TACNAV side. Apparently you've gotten one of them, but approximately how many other large contracts do you think might be out there in the pipe?

Well, there are about two or three large ones and then there are a number of smaller contracts. So by large you mean like $10 million or more and then the run of the mill ones are the sort of $0.5 million to $1.5 million.

Okay, and scoping through the White House's budget, was there anything in there you could see that would indicate the SOCOM finally has funding in place?

No, we didn't see that, but the President did get an A7 for his personal vehicle.

Good. Can you get a press release a that?

Actually had a picture of it.

And also, you mentioned something about your first SATCOM-on-the-Move contract might be pending. Is that using an existing TACNAV program that you're talking about?

No, no, this would be a new contract for a new customer. This is now we'd be subcontractor to one of the big defense companies that's in the communications business that, a company you know. It's just one of the big U.S. military contractors in the comm space.

Okay, there are some big programs out there like WIN-T or JNN or other things. Are you talking about a program of that nature where (multiple speakers)?

No, this would be something new for L-band two-way satellite communication, SATCOM-on-the-Move.

Okay, and you said there should be something pending?

Yes, we expect to hear something soon.

Okay, great. And an update on the RV market. I think you said you're projecting about 15% growth there. Is that -- or was that for the land mobile overall?

That's for the SATCOM business overall for the year, anticipating that point of growth.

So that's the marine and land mobile thrown together?

Correct.

Okay. And did you mention specifically your expectations on the RV side after three good quarters?

Well, we mentioned that we expect that the land business, the combination of auto and RV, should return to double-digit growth for the year.

Okay.

Which we have not seen for sometime.

On annual basis. Over the last quarter -- in Q4 it was actually 32%.

Okay, and I'll do one more question, then I'll move back into the queue, but can you give us a general assessment of where you stand in the automotive market with any new developments on OEM type of agreements?

Nothing new that we can talk about, but we're continuing to work jointly with DIRECTV and automotive OEMs on some new products. But that's a long process but we're continuing to work it and we're working it jointly with DIRECTV now.

And has DIRECTV become more aggressive or more helpful now that the A7 and local content is available?

Yes, so they're attending the meetings with us now at a high-level and they seem to be serious about pushing forward.

Great, thank you.

Rich Valera. I'm sorry, we're going to go to Tom Watts.

Pat, just on the taxes, you had mentioned that we're moving up to a 12% rate for the year overall. I know that we had been assuming that at some point you'd have to begin accruing for full pro forma taxes just based on your number of quarters of profitability and likely continued profitability. And I assume that would be essentially a step function at some point in the year. Is that still possible or should we think more just about a standard 12% throughout the year?

Well, I wish I could be more specific, Tom, in terms of telling you the timing of that. The fact of the matter is, I can't be. The 12% is what we have worked into our guidance and certainly into our internal thinking for the year. During the course of the year, we expect that we will have discussions with our auditors about potentially bringing down that valuation allowance either sometime this year or certainly next year. I just can't predict for you whether we will need to do that this year, but if we do it would be a onetime item. It would be a major positive adjustment on the tax line for the Company in the period that we do take it and then from that point forward we would report normalized taxes.

But it's just the type of thing that you really can't predict exactly when it may happen because there are no hard and fast rules. It's based on how well we've done over an extended period of time, what the cumulative profits are in that period, and what the projections are going forward. But I can assure you that we will have discussions about that this year with the auditors.

Okay, and then on the R&D expenses, I know historically we've looked at sort of 10 to 11% of -- or we had been looking for about a 10 to 11% of revenue rate for 2007. Does that still seem to be an appropriate range?

Yes, I think it's likely to be closer to the 10% than the 11%, but still in the range of what we discussed.

Okay, and then, I'm sorry, on the sales and marketing, I hear that sales and marketing, it was going to increase about two-thirds relative to the increase of revenues?

That was me, Tom, and for the year what we're intending to do is constrain the sales and marketing and administrative expenses to not more than about two-thirds the growth rate of revenue, the topline. So our intent is to grow R&D with the pace of revenue and then constrain the other operating expenses as I just described.

Okay. Then finally usually this period is a good period -- or the strongest seasonal period for the marine market and you have some new products there. But could you give us a little bit more color of what you're seeing? I know we still have the Miami boat show coming up, I believe, but what has the reaction been and what is the overall tenor? And particularly as you're trying to penetrate that under 40 foot market, what's the progress there?

That's been going very well, Tom, and as I mentioned in the script, tomorrow at the Miami show we are introducing three new products, so we're expecting those to be in production almost immediately. So those will be available for the second half of this quarter and so we're expecting a very strong Q2 in marine as a result of those new products.

Okay, thanks very much.

[Sam Bergman].

A couple questions. First of all, ending the year how many employees did the Company have?

We had just over 300, probably about 310.

And was that an increase from the third quarter?

Very modest.

Okay, and in the defense business can you tell me, are there any particular contracts that were booked this year or the revenue booked where there were no margins or margins less than 5%?

Well, we wouldn't disclose specific margins for contracts, but generally our defense business is -- at the direct margin level is a very profitable business.

It just seems to me that the earnings per share or the cost of goods was pretty high for a flat quarter and I'm just wondering if there are some projects that did go through with very little margins.

Again, we don't disclose that. One thing I will comment on is what we call non-recurring engineering or engineering contract work. That generally is not high margin work, but that's been fairly stable over the last several years and it represents approximately $1.5 million of revenue per year.

I see, and the last question in terms of R&D, there was 10% of sales basically last year on the R&D side, yet the revenues remained pretty flattish the last quarter. What's occurring in terms of new products that's causing that to happen? Are they not well accepted?

I don't understand your question. Do you want to repeat your question?

The question is on the quarter ended December 31st the revenues were pretty flat. So what I'm (multiple speakers)

And we indicated that is primarily because on the defense side our defense revenues were down substantially year-over-year, and that is more driven by the lumpy nature of the military navigation portion of that business, which can come in spurts, and --

The communications business was up 19% last quarter, and that's where the new products were.

Okay, so in other words it's mostly defense business that dropped off and that's the cause of it?

Yes, that's why the revenues were flat year-over-year.

Christine Bae.

Jim McIlree sitting in for Christine. I just want to make sure I'm set on this guidance. You talked about the SATCOM business up about 15% year-over-year for '07.

Yes, keep in mind that the guidance that I gave was taking the midpoint of the top-line and bottom-line range that we gave for the year. And what I did was, rather than make it too complex or too confusing, take the midpoint and give the guidance to that midpoint.

Okay, so I shouldn't take that and say therefore you're expecting the defense business to be 25 to 30. You've got ranges around both the SATCOM and the defense business for the year.

Yes.

But if -- in '07 then, would you expect a wider variability around SATCOM or the defense business?

Well, we're counting on that we're going to the recovery in the TACNAV business for '07, so it's above the level of '06. On the defense side we're expecting strong growth in the bond business but, as Pat said, maybe not quite the 50% growth that we saw in 2006. Now percentage wise those are big swings, but they're a small percentage of our total revenue. SATCOM is about 75% of our revenue overall. So percentage wise the SATCOM business grew 50% last year and we're expecting that kind of growth again this year.

So the SATCOM business has been growing very well. It has been masked by the big decline in the TACNAV component. So even last quarter it was up 19%, but overall revenues were down 2% because TACNAV was down 60%. So as we go into this year, we're expecting continued strong performance in our SATCOM business, which represents 75% of our revenues. I don't know if that answered your question.

Yes, I think so. The SATCOM-on-the-Move, it sounds like you're expecting it. So that is part of the guidance that you've articulated today.

Well, actually with these military contracts, our forecast methodology is a little bit different than what we do in SATCOM. So we have a number of different contracts and some of them are [probableized]. So there is a component in our guidance that has this contract, but it's not at the full value. So but then, that's how we model these things. The answer is sort of but not at the full value.

I see where you're doing that. Okay, terrific. And I wouldn't want you to get away without hearing the question -- any news on the acquisition front?

No news, but we continue to be interested in that. As Pat pointed out, we're building cash and we feel we've got a strong management team in place. We're very lucky in that respect. So I think our managers have more bandwidth, so if something comes along we'll definitely take a look at it, but in the meantime we've got a lot of opportunities in front of us, so we're trying to stay focused on that as well.

Okay, thank you.

Andrew Spinola.

It's Andrew Spinola for Rich Valera. Pat, I have a question also about the tax rate, it's going from 9 to 12% in '07. And just curious, are you basically using up some NOLs in some of your non-U.S. markets and that's the increase in the tax rate? And thus can we think of the sort of cash tax rate as 12% in '08 and beyond until you use up the U.S. NOLs? Is that what's happening?

Yes, that is what's happening, Andrew. We're seeing that in certain states within the United States. We used up NOLs that we had in those states, so we're moving back to a more traditional tax rate. Another factor is as our European operations grow, we don't have any NOLs that relate to that operation, so that as that operation grows and becomes more and more profitable, that becomes a portion of this as well.

So the modest increase that we're seeing from 9% to 12% is really a combination of those types of things. Down the road, as I mentioned before, at some point we still have fairly sizable valuation reserves against the tax assets on our balance sheet. And as we'll consume those, some of those over the next few quarters as we expect to be nicely profitable. And at some point during the course of the year we will have discussions with our auditors about potentially taking that valuation allowance down to zero. But we just can't predict the timing of that. That's going to be -- it's in many respects a subjective call as to the specific timing.

Got you. On the RV sales you were talking about redirecting resources away from the bigger chains and more towards the independents, could you maybe help me understand what percentage of your RV sales just roughly magnitude wise that are coming for the chains versus independents right now?

We really had one big chain which 3 to 5 years ago was a big customer. Recently they're down -- like 1% of our revenues come from that customer. So it's really, we've been in the process of refocusing it throughout the last 12 months and now we've just made it a formal policy. So in Q4 where the land sales were up 32%, almost a negligible amount came from these chains. So really the process is well underway. We don't expect that to have any impact on revenues other than positive impact.

Right. Martin, I didn't hear you mention anything about the BGAN terminals that you were working on. Any update with that program or anything you could provide there?

Did you say BGAN?

Yes.

Well, we're working with our partner Thrane & Thrane on the -- so we'll be introducing marine products. But those products will be launched probably late in the year and it's really a function of the Inmarsat, the whole service being launched. So -- but that's not the new product that we'll be launched tomorrow in Miami. Those require satellite ground station changes and new transceivers from Toronto, so they'll be announcing those products later in the year.

Okay, great. Last question. I know you said you expect to rebuild your backlog in defense by midyear. If I'm thinking about the second quarter, can I think about defense sort of increasing linearly throughout the first half and then stronger in the second half, is that generally what roughly you're saying?

You're asking the question about defense?

Yes, you were saying that you're going to rebuild your backlog in defense throughout the first half. So I'm thinking that it's going to be -- the first quarter clearly is not going to be as strong as the second half and I'm just sort of thinking about the second quarter, and I'm thinking second quarter is probably somewhere between the first quarter and the second half. Is that probably how the revenue is going to trend?

All I can do is give you a general perspective, since we didn't give specific guidance for the first quarter and the year. But the fiber-optic gyro business, we do expect that that is going to grow pretty nicely throughout the year and that will see year-over-year growth on a pretty consistent basis as we go. On the military navigation side, which is mostly TACNAV types of products, we expect that we'll see a step up in the second quarter and then we'll see a more significant step up in the third and fourth quarters in terms of actual sales based on what we anticipate to be the timing and the profile of orders.

Thanks, that's very helpful. That's it for me.

There are no further questions in the queue at this time.

Okay, then we're done. Thank you for listening.

That does conclude today's conference. We do thank you for joining and have a wonderful day.