KVH Industries Inc (KVHI) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the KVH Industries second-quarter 2007 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. Pat Spratt, Chief Financial Officer. Please go ahead, sir.

Thank you and good morning. I am Pat Spratt, Chief Financial Officer of KVH Industries. With me today is Martin Kits van Heyningen, President and CEO. This call will address the second-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 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 quarterly report on Form 10-Q filed with the SEC on May 8, 2007.

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, and thank you all for joining us today. Following my recap of our Q2 results and our ongoing initiatives, Pat will cover the financial results and provide some additional details on our guidance for the remainder of the year and, as always, we'll take your questions at the end. So let's get started.

During Q2 we achieved record quarterly revenue of $23.2 million, that's a $1.2 million increase from the second quarter of 2006 and a $3 million increase from the first quarter. Net profit was $1.5 million or $0.10 per share. Mobile communications revenue was $17.4 million, that's up 4% year-over-year. And defense sales, including our fiber-optic Gyros and TACNAV military systems, were $5.7 million, up 11% from the same period last year. Year-to-date revenue was $43.6 million and that's up 3% over 2006.

Overall we had an excellent second quarter; it was in line with our expectations. We set a record for quarterly revenue and continue to build our long-term military business for 2008 and beyond. We also made great strides in product development in both the marine and the land mobile markets, unveiling the results of several of these initiatives over the last week. And while some key military contracts have been delayed out of the third quarter, we're confident in achieving our long-term goals.

As I mentioned earlier, mobile satellite communications revenue was up 4% over last year, and this growth was driven by marine sales which were up 12% over the same period last year thanks to double-digit growth both here and overseas. This growth was driven on by the recent introduction of our new TracVision M Series satellite TV products. The initial response to these high-efficiency ring fired design systems has been very positive and we expect to see the benefits of this productline as the year continues.

However, the really big news in our marine market was made public just last week when we unveiled our new TracPhone V7 satellite communications system and the mini-VSAT broadband service. The product of an 18-month joint development effort, the TracPhone V7 is one of the most important strategic announcements we've made in many years. It's also one of the largest and most complex projects in our history involving new relationships with satellite owner and operator, SES Americom, and with ViaSat, an expert in innovative communications technology.

KVH will serve as the sole point of contract for hardware and air time sales, activation, billing, tech support -- eliminating the issues created when relying on multiple vendors and service providers. We will receive revenue from both the hardware sales and from recurring monthly air time generated by leisure boaters, commercial ships and government vessels.

The TracPhone V7 hardware and the mini-VSAT broadband service represent the first end-to-end package of hardware service and support available for maritime communications. No other company offers anything close in terms of small size, data rates and affordability. Our rugged fully stabilized antenna is only 24 inches in diameter and weighs 60 pounds, making it 85% smaller by volume and 75% lighter than the 1 meter VSAT antennas that are currently available for ships. The cost of the complete system is at least 30% lower and installation expenses are a fraction of those required when installing our competitor's huge 250 pound antenna.

We worked closely with ViaSat to jointly develop the V7 which includes the new maritime version of ViaSat's ArcLight spread spectrum system. This new modem is based on technology previously available only to the military and to corporate jets. The broadband data connections, as well as Voice over IP telephone calls, are made using our mini-VSAT broadband service and SES Americom Ku-band satellite network. Data rates via the service can be as fast as 512 kbps per upload and 2 Mbps per download. No other service provider is offering those kinds of data speeds.

And thanks to ViaSat's spread spectrum technology, we're also able to send and receive at those speeds using less bandwidth, allowing us to offer significant cost advantages when it comes to air time service. In fact, we're offering an always on unlimited access with fixed monthly subscription fees that are up to 30% lower than competing 1 meter VSAT systems. And if you choose one of our flexible pay by the megabyte plans, you'll have faster service and still save over 90% over what's currently being charged by Inmarsat for their fleet service.

The TracPhone V7 will begin shipping in September 2007 and initially offer coverage of North America, Central America, parts of South America and the entire Caribbean. Later in the fall coverage is scheduled to expand to include the North Atlantic shipping routes and all of Europe. Looking ahead to 2008 and beyond we expect that we'll work with SES to expand coverage further starting with the Middle East and the Pacific and gradually moving towards a more global solution, thereby establishing our mini-VSAT broadband service as the Ku-band equivalent of Inmarsat.

I firmly believe that the TracPhone V7 and the mini-VSAT service has the potential to be a game changer in the marine communications industry. It will position KVH not only as the industry's premier SATCOM hardware designer and manufacturer, but also as a major player in the satellite air time business. I hope you take a few minutes to visit KVH.com and visit our new website which describes this exciting new product.

Within the land mobile market quarterly revenues were down 11% versus the second quarter of last year due in part to a decline in sales of RV products versus the second quarter 2006, which was the first full quarter of TracVision R6 shipments which included the normal channel build. Now as you know, we successfully overhauled our marine satellite TV productline earlier this year, focusing on creating systems that were smaller, simpler and more powerful than anything we or our competition has ever offered.

And I'm pleased to announce that we've just applied the same dynamic approach to an all new line of smaller, simpler and more powerful antennas for the RV market with our 12 inch high TracVision Slimline family which we introduced this morning. KVH is now offering a family of 12 inch high systems that have the highest levels of quality and reliability, fully automatic switching across satellites and have built-in HDTV capabilities. In fact, our tests show that these new 12 inch TracVision systems have the highest efficiency and best signal reception available -- as good or even better than competing larger 15 inch antennas.

So with the new TracVision system RV owners can choose a small stylish antenna and still enjoy better signal quality and reception even in bad weather and experience the highest reliability. But these exciting new products are ready in the OEM pipeline having been selected by Fleetwood and Monaco, the two largest RV manufacturers in the world. We've also repositioned our 12 inch high TracVision R6, KVH's most sophisticated RV satellite system.

So the R5 is now available as two separate systems -- the R6 VX which is focused on offering integrated HDTV capabilities and it includes a free direct TV HD receiver when the service is activated through KVH. And the R6 ST which offers a complete standard DirecTV solution in one box including our exclusive 12 volt DirecTV receiver.

With as part of this productline update we took steps to make sure that the high-definition TV was as easy to use in an RV as it is at home. Our new [TriSat] HDTV AutoSwitch offers completely automatic access and control of DirecTV high-definition programming, allowing users for the first time to easily switch among as many as three satellites and HD satellite using only their normal remote control.

So as a whole our mobile satellite business is doing very well. There's good demand for our existing products and we continue to bring new technology and services to the market. We're actively pursuing several major new initiatives and have maintained our fast-paced in developing superior new products. I'm very pleased with our results thus far and we continue to prove our ability to take advantage of the opportunities that are available to us.

Now turning to our defense business, we enjoyed strong year-over-year and sequential growth, as we had anticipated. The fiber-optic Gyro revenue was up 31%, again another very strong quarter versus Q2 of 2006, defense navigation product revenue was up 43% year-over-year, but customer funded engineering was significantly lower versus Q2 of last year. As a result in that overall defense sales were up 11% for the quarter compared to the same period last year.

Our defense business still offers its share of exciting opportunities as well as short-term challenges. We're continuing to strengthen our long-term business foundation by building backlog. But in the short-term some other key military contracts anticipated for Q3 have been delayed; among them the U.S. Army CROWS contract which is now scheduled to be awarded in September, not May as originally planned. Although the schedule slip is a disappointment, the scope of the program has potentially doubled up to 6500 systems. With at least two fiber-optic Gyros per systems this represents about a $50 million program for KVH.

In the meantime we're also aggressively pursuing new other new military opportunities -- for example, the launch of our mini-VSAT product in the maritime market will help our ongoing effort to develop broadband two-way SATCOM on the move for the military.

So in conclusion, we're making excellent progress in our mobile satellite business with game changing new products and services along with continued growth. And at the same time we continue to establish a firm long-term business foundation and build backlog within the defense market on the navigation side and have some potentially transformational contracts pending on the fiber-optic Gyro side of our business. These contract delays, while disappointing, are a fact of life in the defense business. Offsetting this are the potential contracts that could dramatically change the scale on our business.

And now I'd like to turn the call back over to Pat to will fill you in on some of the numbers. Pat?

Thank you, Martin. The financial results for the second quarter were very gratifying. We achieved our primary financial objectives for the quarter and we continue to position ourselves for long-term success. During the quarter we continued the steady stream of new product introductions, as Martin covered. And operationally we advanced our sourcing strategy to achieve lower product costs and expanded our internal capability and capacity in the form of selective staffing and facility expansion and improvement.

Now I'll cover the specific results. First, as a reminder, I'll note that consistent with GAAP accounting all financial results and projections include the effect of stock option expenses. Gross margin was over 42% and in line with our expectation. This was a key driver of our very strong sequential bottom-line improvement. We experienced the benefit of stronger defense sales and seasonally high marine sales which both carry relatively good gross margins.

We also realize the benefit of driving product costs lower for many of our higher volume products. Our aggressive strategy to source components and subassemblies with lower cost suppliers is showing positive results. Higher volumes also led to better absorption of fixed operations infrastructure costs. On a year-over-year basis gross margin was up about 3 percentage points.

For Q2 operating expenses were up 20% compared to last year. This was expected and it was the result of dynamics in our R&D and administration expense areas which I will cover. For the second quarter reported R&D spending was 28% higher than last year. As a percentage of revenue R&D was just below 11%. Reported R&D can fluctuate quarter to quarter as the levels of customer funded activities change. Q2 was light with respect to customer funded projects, especially when compared to last year's unusually high level. Consequently we reported a much higher level of R&D and operating expenses even our absolute level of engineering investment changed little compared to last year.

Our ongoing commitment to bring new products to market dictates that we sustain a healthy investment in R&D. Second-quarter sales and marketing expenses increased 10% year-over-year, but were 6% lower compared to Q1. The year-over-year growth is directly related to the continuation of new product introductions in the quarter, both in the U.S. and internationally. Sales and marketing expenses in future quarters will continue to reflect some variability as we grow and introduce new products and as sales patterns reflect seasonal changes.

Second-quarter administration expenses were favorable compared to our expectations, even though spending was up more than 30% compared to Q2 last year and Q1 this year. During our first-quarter conference call we indicated that the patent litigation with King Controls was scheduled for trial in June. As a result we had projected that the legal expenses related to this would equate to about $0.07 per share in the quarter.

About one week prior to the scheduled trial date we were informed by the court that the trial would be postponed until August due to an overbooked trial docket. As a consequence we have not yet incurred the full impact of legal expenses that we had expected. The delay of the trial caused some expenses to be deferred into Q3 and it is causing some incremental spending because of the start, stop and restart of the process. So although we got some spending variance benefit in Q2, we will incur additional impact in Q3 due to this litigation process.

Turning to the balance sheet. Cash and marketable securities at quarter end were $53.9 million. Cash flow from operations was positive at about $1.3 million. Capital expenditures exceeded $1.7 million. The high level of CapEx was in support of capacity upgrades and expansion in our Rhode Island and Illinois operations. At $14.2 million Accounts Receivable was about $1.6 million higher than the prior quarter. This is a direct result of the 14% sequential increase in revenue. Days sales outstanding was flat at 55. Inventory decreased sequentially by about $200,000 to $8.7 million. Annualized inventory turns increased to approximately 6.1.

Now I'd like to provide some context for thinking about the longer-term and then review our outlook for the third and fourth quarters. As you know, the performance of our business in the defense markets is always subject to things outside of our control, like contract award schedules, license approvals and shipping near-term priorities of end-users.

These factors don't necessarily impact the trendline of results as measured over an extended period of time, but they can certainly generate quarter-to-quarter uncertainty and variability. Given this environment we have generally included only booked orders in our next quarter's guidance, while we have included anticipated contracts when discussing our longer range expectations.

For this current quarter we are faced with this reality. In our fiber-optic Gyro business the CROWS contract award was postponed by several months by the U.S. Army. Originally scheduled as a Q2 award, now we expect it to be announced in September. At the same time, however, the potential value of the award has approximately doubled over original indications. So while the long-term potential was far better, the near-term visibility is not.

We also received notification that a large TACNAV order for an international customer has been delayed into next year. We had previously also included this in our thinking for the second half of this year. Although in a strategic sense we do not see TACNAV as a growth business for us, it is an important base of profitable business from which we will continue to strive to build long-term order backlog. As a proof point of our progress, during Q2 we had more than $2 million net additions to our defense backlog yet it is almost all scheduled for delivery in 2008 and beyond.

These delays will have a significant impact on our expected Q3 results. We think it is prudent to remove the CROWS revenue from our Q3 guidance to do the late quarter timing of the contract award. In addition we will remove the international TACNAV order and move it to next year. The magnitude of these deferrals yields guidance for Q3 as follows we expect revenue to be in the range of $18 million to $19 million or down modestly year-over-year. We expect that gross margin will fall back to approximately the level that we experienced in the first quarter. Absolute operating expenses should be about equal to the second quarter, but as high as 44 to 45% a revenue.

One key operating expense factor will be the anticipated conclusion of the patent litigation process that was postponed by the court from June to August. This income statement profile would yield a loss of approximately $0.04 to $0.08 per share. Although this is disappointing news with respect to the third quarter defense revenue, we are quite confident that our mobile communications business will remain strong and on course with our previous expectations.

With this business outlook and assuming that the CROWS contract award is made prior to the end of September and is favorable to us, we expect that the fourth quarter will show a strong rebound with year-over-year revenue growth of approximately 30% to 22 to $23 million and earnings in the range of $0.10 to $0.14 per share. We anticipate that the renewed strength in fiber-optic Gyro sales and the ramp of our new mini-VSAT TracPhone V7 offering marine communications will serve as the foundation for this.

Looking out over the next four to six quarters we expect the revenue and profit growth will be strong and that our run rate financial operating margin objective of 10% or better will be achieved. Now we'd like to take your questions. Operator, please open the call for questions.

(OPERATOR INSTRUCTIONS). At this time our speaker's line has disconnected and we will be reconnecting him in just a moment. Please continue to stand by. (OPERATOR INSTRUCTIONS). Tom Watts, Cowen & Co.

Congratulations on the good execution in the quarter. I have some specific questions, but perhaps you could just give us a more general backdrop with a discussion of changing of our military focus in Iraq and pull back there. To what extent will that affect some of the demand for your products and are there current discussions affecting any of the delays?

Well, I think that the current situation has definitely impacted our TACNAV business. So that part of our business tends to do well in buildup prior to military, conflict. Whereas our fiber-optic Gyro business is now I think benefiting from a lot of the things that have happened in Iraq and Afghanistan that are driving crude protection. So these MRAP type vehicles and vehicle -- about half of all our casualties came from IEDs in Iraq. So they're doing a lot of work to try and protect the crews by getting the crews inside the vehicle, inside a better armored vehicle and using remote weapons to operate outside the vehicle. So that benefits our FOG business, but the lack of priority for navigation hurts our TACNAV business.

Okay. And then just a little more specifically, historically TACNAV, as I understand, has been one of the highest margin products and the pushout of that to come in line with your EPS guidance suggest that we might see gross margin down in the mid 30s at least for a while. And you had also previously talked about guidance of gross margins 2% higher year-over-year going to 44% this year. How should we think about gross margins for the rest of the year?

For the rest of the year, as you just said, Tom, we do expect, because of the TACNAV order and the FOG -- the CROWS order being taken out of the third quarter we do anticipate the gross margin in the third quarter will be roughly in line with what we saw in the first quarter of this year which was about 37%. So I would say it should probably be between about 36.5 and 37.5% for the third quarter.

In the fourth quarter we do expect that it's going to bounce back to above 40% as the FOG business rebounds and we do have a reasonable amount of other tactical navigation business that we're anticipating for the fourth quarter. So for the full year we will probably come in right around 40%, maybe just slightly below because of this Q3 impact but we do believe that are gross margins will be back up above 40% again by the fourth quarter and then improving from there.

Okay. And then I know visibility is limited, but if we look out to 2008 would you say that your expected growth rate for 2008 is lower now than it was previously or did you have enough confidence in TACNAV coming in that we could see a higher growth rate for '08?

We would expect to see a higher growth rate for 2008, definitely.

Than you were expecting previously? Although it might be off of a lower base, is that fair?

That's true, but between the CROWS program and there are other large fiber-optic Gyro programs out there as well and our new V7 product. So we really have the basis for substantial growth in 2008.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS). Chris Quilty, Raymond James.

Good morning, gentlemen. Question, did you give a backlog number for the defense?

I did not yet, but I'll be happy to do that. I've got it right here, I believe it's $8 million.

Okay.

$8 million. Hold on one second.

While he is looking meadow, Chris, we booked about $7 million in the quarter and shipped about $5 million, so it was a net increase of $2 million. So the backlog is building but, as we pointed out, a lot of that backlog is '08 shipment right now.

Yes, and the backlog for defense is $8 million as of the end of June and, as Martin said, that's up about $2.1 million compared to the March quarter and it's actually at the highest level we've seen since 2005. So the backlog is building, it's just for orders that are scheduled for 2008 and beyond.

Okay. And you had talked earlier this year about at least two $10 million order of magnitude potential orders on the TACNAV side. Was this one of the orders?

Yes.

And the other one is still out there?

Some of those have been booked in terms of contract value. So I think in our last call we talked about we had about $20 million in orders that we had received in terms of contract value, but they weren't firm backlog to which is separate from the number that Pat just gave you. For example, we got an $11 million (inaudible) contract that allows us to buy up to $11 million but we don't have firm PO's against a yes we don't call that as part of our backlog.

Okay.

So the backlog number that I just gave is firm backlog, those are orders that are in place.

With ship states for Pacific products.

Got cha. And before we forget about this, the Convoy Communications, any update there?

We are doing some testing with a radio partner and no orders and that's not part of our backlog yet.

Okay. Fair enough. With regard to the CROWS program, I think the original contract date was supposed to be back in January. I think I saw the same contract modification saying by the end of the fiscal fourth quarter. But a question in terms of how quickly you and your partners can ramp production. And given the fact that they're talking about next year getting up to something like 10,000 to 12,000 MRAPs produced. And I'm presuming every one of those will have a CROWS. What sort of capacity do you have or capital investment might you need to meet those types of production rates?

Let me start with the MRAP. Those kinds of quantities that you're mentioning are outside of this CROWS program. In other words, currently they doubled the size of the potential program the 6500 and that's across all vehicles and that's far less than just the number of MRAPs they're building. If they did fact put a CROWS on every MRAP vehicle, as they have said in the defense news that they are planning to do, that would be far beyond the $50 million that we mentioned was our portion of the CROWS program.

As far as RAMP goes, we had been building at a $1 million a quarter kind of pace and under the normal procurement for CROWS that has stopped. In fact, that stopped after Q1 in anticipation of this large block order which now hasn't happened. So that's part of the problem we're having right now is that the base business has stopped, waiting for the large program, and the large program hasn't happened yet. But we can easily ramp instantly -- and this is a product that's in production today. So we expect to get a very quick ramp should we win.

Okay. And can you also just comment -- I mean when you talk about much larger volumes if I remember there's a fairly manual process in the assembly of the DSP 3000. Does that present any sort of capacity constraints for you?

We just doubled the size of our fiber-optic factory and that just came online this quarter. So there are always capacity constraints in terms of capital equipment but we feel we have the ability to ramp quickly certainly to do more than -- a lot more than what's in our current guidance for Q4. That probably we'd look forward to having.

And totally shifting gears on the land mobile side of the business, what are your expectations there on the RV side in terms of gasoline prices impacting the growth there? Do you expect a -- I think last quarter you had talked about a slowing rate of decline in the end market. And can new products and marketshare get that business to grow again?

I think so. I think that with these new products we expect to see good OEM penetration. As we announced this quarter we picked up Monaco as a key customer, they were the number two largest OEM -- sorry, RV manufacturer in the world, we already had Fleetwood. That's going to help us going forward as they ramp their production starting now. But the RV Class A sales, what we saw before was a slowing rate of decline them those of now it is actually reversed into a small positive; I think it was up 3% for Class A RV sales so it is heading in the right direction. And there have been some articles in the press about people saying the price of gas is just not that big a factor in the RV industry right now. People have gotten used to the price of gases seems to be more and issues when the price changes rather than what the absolute value of the price is.

God it. I'll back into the queue so I don't hog all the time.

Okay, Chris. Thanks.

Mike Hickey, Janco partners.

Just curious -- two questions. One, what was your stock option expense for the quarter? And then secondly, I think you guys estimated $0.07 in litigation expense which was baked into your guidance. You qualified that as a little bit lower because the trial was delayed, but what was the actual expense for the quarter and what are your expectations if you could quantify that for Q3?

Sure, Mike. First to answer your first question, the stock option expense for the quarter was about $313,000. And through the first six months, just to give you that sense, it's about $525,000. The rough numbers in terms of the legal expense, as you said, we estimated $0.07 would be the impact in the second quarter, that was assuming that we went to trial and got through trial. We probably -- actual numbers we're probably closer to $0.05 in terms of impact in the quarter.

And because of the fact that the trial is now postponed and the way these things work it's going to wind up not only costing us the $0.02 we didn't spend in the second quarter, but probably another penny or two. So in the guidance that we gave we're making the assumption that we've got about a $0.03 or $0.04 impact yet to be seen that will occur in the third quarter.

Okay, thank you.

James McElroy, Unterberg Towbin.

Good morning. Could you give the split in revenues between marine and lands? I think you do that sometimes as a percent of the total SATCOM reference.

In terms of the absolute numbers?

Yes.

The marine revenue for the quarter was approximately $12.3 million and the land revenue for the quarter was approximately 5.2.

Okay, terrific. And maybe I missed it, but I didn't hear any commentary on the auto market. If you did give it could you repeat it and if you didn't, could you make some?

We didn't talk about it specifically. The auto revenues were up slightly for the quarter, but they're bundled in that with the RV number so the net land business was down about 11% for the year.

Okay. And for the fourth quarter you're expecting the CROWS order to be let for you to get some of it and then to actually start delivering on it, is that correct?

That's correct.

Okay. And Pat, I think you also said that Q4 includes some benefit from the mini-VSAT as well as the TracPhone V7. Can you just, order of magnitude, what those two are expected to contribute? Is it more than $1 million for Q4?

More than $1 million combined?

Yes.

Between the CROWS and the V7?

No, the TracPhone and the mini-VSAT.

The TracPhone V7 is what we call the mini-VSAT.

I see, okay. Excuse me.

So in the fourth quarter the two things I mentioned were the CROWS program and then the new Marine product that is the TracPhone V7. And certainly the combination of those two we expect to be in excess of $1 million in the fourth quarter.

As you know, we don't like to talk about specific product sales for competitive reasons, but one of the dynamics here he is that -- as you know, we had talked about two programs being shifted. We feel that right now the track phone is going to be offsetting some of that loss from the TACNAV business so that's why we're still pretty bullish on Q4 with this new product.

It sounds like you're not going to require any major capital expenditures in order to fund that service, is that fair?

That's a fair assumption.

Yes.

I think that's all I have. No, that's all I have. Thank you.

Rich Valera, Needham & Co.

Thank you. Good morning. Pat or Martin, is there any way you can put any balance around sort of the run rate you would expect from the CROWS program lets say in the first order when it hits stride exclusive of any MRAP incremental business there?

It's a little bit difficult to put a number on it because it will depend on the rate of delivery. So we can build probably faster than they can build CROWS systems. So I think approximate if the thing were a straight line and spread out over five years it would be say $10 million a year and $2.5 million per quarter just for that one program. And there has been some discussion that there would be a faster ramp, that the Army was looking for faster deliveries but we haven't seen any kind of production schedule.

And your previous run rate with CROWS, I think were you saying it was around $1 million a quarter before things shut down in advance of this program?

Yes.

Okay. So that would be a significant increase in your run rate per quarter?

And we had expected that with the new contract the run rate would step up, as Martin just mentioned.

So I was just giving you a linearized over five years what that would be and we're hoping it would be faster than that.

Okay. Another product that we hadn't heard about in quite a while, the TracNet 100, what's going on with that product and how has that ramp gone?

In many ways that product was a bit of a placeholder for us in then it was our entry into the broadband service. We did that in anticipation of the TracPhone V7 which was still in development. So it was really part of our strategy to diversify out of just television and into broadband services. So to that extent it was an effective move for us. It's not a big revenue generator for us. It's a good placeholder and the product works great, but it's not a big part of our revenues nor was it really expected to be.

Okay. And as far as the King litigation, is there any chance that you guys could still settle prior to this? Is that something -- has there been any talks between your attorneys that might bring this to a settlement before it goes to trial or do you think at this point that's very unlikely?

I think our position has always been that we'd settle for something less than what it would cost us to go to trial, but we weren't prepared to settle for more than it was going to cost us to go to trial. So unfortunately as the money gets spent and there's interest on either side in settling -- especially given the confidence we have in our position in this case. So is it possible? Absolutely. Is it likely? I would say probably not.

Okay. And I think is has sort of been addressed indirectly, but taking the midpoint of your prior full-year revenue guidance range and then the midpoints of your third- and fourth-quarter guidance, it looks like there's a delta of about $5 million in the back half. Is it safe to say that's all from the push outs of these two defense programs you've discussed?

Yes.

Okay, that's all for me. Thank you.

Right. So the rest of the business is really on track and sort of the parts that we're managing are on track. Just as another comment on this, we are a small portion and even though the Gyro is an important part it's probably less than 1% or less than 2% of the value of the system that it goes into. So we're not really driving that procurement. And the same with this other program, it actually is a multibillion dollar vehicle purchase where we're on that vehicle. If the vehicle program gets delayed our component gets delayed. But the parts of the business that we're managing under our control the day to day stuff is going very, very well for us right now.

Chris Quilty, Raymond James.

Guys, in the past you gave us sort of a breakdown of the traditional marine market North America versus Europe, and you also had some efforts starting up in Asia. Could you give us some color there?

Sure. I think in terms of growth rates what we saw this quarter I think -- I may have the absolute numbers for you in a second here. But in terms of growth rates, what we saw this quarter is that the U.S. and Europe were almost identical in terms of year-over-year growth and that's an improvement over Q4 and Q1 where we had strong growth in Europe but we're just very, very modest growth in the U.S. So with the new product launch we're seeing good growth in North America and in Europe.

So would you say you're sort of out of the woods? Back after you reported the third quarter last year is when you started to warn about some softness in North America and now it looks like those numbers are recovering?

Yes, I think based on what we've seen over the last two quarters it seems like the trend is positive for us and we've got great reception to our product. So every single marine product now is new so we don't have anything that's older than probably eight or nine months. So we've got all-new brand-new products, best in their category. We've got all the price points covered, best performing product so we're in really great shape there. And then we've got the new V7. So I think that's going to have some halo effect across our productline where people are going to want to sell that product and be part of our program.

And can you give us a sense, the new M series of antennas, how well they're contributing?

Well, they've replaced their predecessor, so the growth is coming from those products.

Okay, let me say specifically; is it the M3 for the 25 to 40 foot boat market? Are you seeing some penetration of that because that's all sort of totally unpenetrated?

Absolutely. It's by far our best-selling product in the marine market and it has not hurt the sales of our other product. So it's done exactly what we wanted, it's opened up a new lower segment.

And have you gained any interest on the OEM side from that product or just from your other existing products?

No, we have -- in fact Cray is offering the M3 now. They're one of the largest boat builders. So we are getting some OEM pick up there as well.

Great. And with regard to the TracPhone V7, as I understand it you haven't done any real customer testing or beta testing with that. So it begs the obvious question how confident are you that the product works and works as advertised. And then, second of all, how confident are you about the September shipping dates and the ability to produce the product?

We've done a lot of testing with the service and also we have partners who have similar services up and running. So ViaSat, they make the Wild Blue modem, they've got 500,000 of those out there. So they have a lot of experience in building modems so we're very confident in their technology. It's also the same technology that is being used in business jets right now and for some military SATCOM on the move. So the system is up and running and the technology is proven. Having said that, it's a new product for us and anytime you launch a new product there's always risk in schedule delays. But right now we're very confident in a September date.

Okay. And given this is an entirely new product offering and go to market strategy, you've given yourself a several month lead time in terms of promoting it. But what are your expectations on how fast the up take rate may be and are there any special measures you're taking to sort of highlight it to your existing distribution and integration partners?

We have, as far as promotion, normally we don't preannounce product. So for example, like today we announce the TracVision SL to the RV market, that product is shipping today. And we do that when we have products that are replacing or competing with products that we're already selling -- if you know what I mean. So in this case we did it a little bit differently because it's a new product and new service and we have to go out and build backlog and customers and establish our market position here and some of these vessels are under construction so there is leadtimes involved in giving this into vessels. That is the recently announced the product approximately eight weeks prior to shipping.

As far as the marketing goes, if you go to our website we have a dedicated website now called miniVSAT.com. We've got great promotional material. We did a teaser mailing campaign to all the top dealers, that's being followed up by a very elaborate binder with DVD and PowerPoint slides, price sheets. There's really white paper. A very, very thorough marketing launch is being done on this product. So I think that we'll be able to build orders and we're already taking orders now it's going very well so I think the launch is underway and it's going great.

And if I can ask, what would be your expectation for by the end of '08 if there's 80,000 commercial ships out there how far along you could be in penetrating that type of market?

I know you're asking that question without expecting me to give you a number so I won't disappoint you. I'm not going to you give a specific number, but the market opportunity I think you've clearly identified where the market is. If you look for example at Inmarsat, they're doing about $250 million to $300 million in air time revenue in the marine market. On top of that you've got the VSAT service providers that are out there using the conventional technology.

So it's really a big opportunity for us how many of those vessels we get -- we really don't know. There are about 14,000 Inmarsat fleet products out on vessels right now. So I think that gives you sort of a sense for what the addressable market is. I'd say it's closer to that number than the 80,000 number you mentioned.

Okay, great. Thanks a lot and good luck with that initiative.

Thanks, Chris.

And there are no further questions. I will turn the call back over to Mr. Spratt for any additional or closing remarks.

We want to thank you very much for your time and your interest. And if you have any further questions, please give us a call. Thank you very much.

And that will conclude today's call. We thank you for your participation.