KVH Industries Inc (KVHI) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the KVH Industries third-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. Patrick Spratt, Chief Financial Officer. Please go ahead, sir.

Thank you and good morning. I am Pat Spratt, Chief Financial Officer of KVH Industries and with me today is Martin Kits van Heyningen, our Chief Executive Officer.

This call will address the third-quarter earnings release that we issued earlier this morning. Copies of the release are available on our website at 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 August 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 would like to turn the call over to Martin to begin today's discussion of results.

Thanks, Pat and thank you all for joining us today. Following my recap of the Q3 results and some of our ongoing initiatives, Pat is going to cover the financial results in more detail and provide some color on the guidance for the remainder of the year. Then of course we will take your questions at the end.

So getting started, strong operational controls and manufacturing cost improvements helped us achieve better than expected bottom-line results for the quarter. As we expected, Q3 was a challenging quarter due in large part to an anticipated military order that was rescheduled out to 2008.

Our top line for the quarter was slightly lower than our revised expectations with total revenue of $17.6 million. That was a $1.7 million decline from the third quarter of 2006. Mobile communication revenue for the quarter was $13.0 million and that is up 1% year over year while defense-related revenue was $4.5 million, a 29% decline from last year's third quarter.

However, we achieved breakeven results on an earnings per share basis and that is significantly better than the $0.04 to $0.08 loss we anticipated in our guidance back in July. Year to date, revenue was $61.2 million and that is about flat compared to the first nine months of 2006.

Now talking about each of our two major markets starting with our satellite communications. As I mentioned earlier, mobile communications revenue was up 1% over last year. Within that, the Marine business, sales were up 5% over the same period last year thanks to double-digit growth overseas.

Domestic sales were essentially flat with last year, which we believe is directly related to the general softness in the Marine market. We are confident that we are gaining marketshare during this weak period in the US marine industry where our overall boat sales were down for the quarter, but our sales are holding constant.

Within our mobile communications business, the initial reaction to our new TracPhone V7 and mini-VSAT broadband service in the marine industry has been terrific and we achieved our third-quarter bookings goal for the product. Production of the TracPhone V7 started on schedule in late September though airtime service was not available until early October as one of our partners was still finalizing the service implementation. As a result, we didn't see any hardware or airtime service revenue from this product during the third quarter.

However, we began shipping the product during the first week of October and activating customers on our service in the US, Caribbean and South America. Airtime service in Europe and the North Atlantic shipping routes will be coming online during the next few months. We are also actively working on expanding coverage into the Pacific and Asia.

I believe the TracPhone V7 is one of our most important products, one of the most important products we have introduced in quite some time since it is not only a breakthrough high-speed Internet product for the leisure market, but it will also enable us to enter the commercial shipping market for the first time.

The product of an 18-month joint development effort, the TracPhone V7 and mini-VSAT broadband service are the result of new relationships with satellite owner and operator, SES AMERICOM, and with ViaSat, an expert in innovative modem and spread spectrum technology.

We are serving as the sole point of contact for hardware and airtime sales, activations, billing and tech support eliminating the issues other VSAT solutions encounter when they are relying on multiple vendors and service providers. So KVH is generating revenue both from the hardware sales and from recurring monthly airtime fees from recreational, commercial and government users.

The key element of this new system is our rugged, fully-stabilized V7 antenna. This compact system is only 24 inches in diameter and weighs just 60 pounds making it 85% smaller by volume and 75% lighter than competing one meter VSAT antennas that are currently available for vessels. The cost for the complete system is also at least 30% lower and installation expenses are a fraction of those required when installing our competitors' massive 250 pound antennas.

The broadband data connection, as well as voiceover IP telephone calls, are made using our mini-VSAT broadband service over the SES AMERICOM Ku band satellite network and using ViaSat's spread spectrum technology.

Data rates on the service can be as fast as 512 kilobits per second for upload, for uplink to the satellite and two megabits per second for download and at a significant cost advantage for the airtime service compared to alternative services.

Now as I mentioned earlier, TracPhone V7 is our first product that offers significant growth opportunities within the commercial marine market. In addition, commercial interest that we expect for the V7 also has the potential to carry over to our marine TracVision satellite TV system.

For example, in September, we announced that Mackay Communications would be offering the V7 as its exclusive VSAT solution. Now Mackay is the largest high seas service company in the US and has been providing marine services and solutions to the commercial marine market for more than 120 years. In addition, Mackay is also carrying our TracVision system as their exclusive satellite TV solution, so that makes this an important distribution win for us in this exciting new market.

I believe that maritime data solutions, including hardware and airtime, represent one of the biggest growth areas for the Company in the coming years. The value of the hardware sales to KVH is dwarfed by the potential value of the recurring monthly revenue stream generated by the mini-VSAT broadband and to a lesser extent to the Inmarsat airtime from KVH. In fact, we plan to expand our maritime broadband productline and capabilities further in the near future with some important product announcements next week at the Fort Lauderdale boat show.

Moving onto our land market. Quarterly revenues were down 6% versus the third quarter of last year. While our RV sales in the RV market continued to exceed the pace of Class A motorhome sales during the quarter, they were offset by a decline in the automotive market. In conversations with dealers and distributors there, it is clear look that the entire 12 [volt] audio/video market is experiencing difficulties right now due to softened consumer spending in the aftermarket.

In the RV market, Fleetwood Enterprises, one of the largest manufacturers of RV in the country, just selected our new SlimLine TracVision system for many of their 2008 model year vehicles. We are very pleased to continue our long-standing relationship with Fleetwood by connecting their customers to premium satellite TV via our new line of HDTV compatible antennas.

Now looking at our defense business in Q3, revenues, as we had anticipated in our quarterly guidance, overall revenue declined 29% for the quarter due in part to rescheduling of some tactical navigation orders. But the developing news for our defense business is the surging requirements for stabilization in a number of military applications. Applications like stabilized optics for cameras and for surveillance and drones and for stabilized weapons for applications like CROWS for vehicles are clearly driving new demand for high-performance gyros.

Militaries around the world are focusing on crew protection with new armored vehicles like the MRAP in the US, which are highlighting the need to get crews inside the vehicle so they can be protected from roadside bombs and snipers. With the crew inside, the need for a remote stabilized weapon becomes obvious.

Although Recon Optical, who was using our gyros, did not win the CROWS award, they've recently filed a protest contesting the selection of Kongsberg. Regardless of the final outcome, the net result is a delay in production from Q4 into 2008. However, given our strong market and technology position, we hope to be able to participate in this program in some capacity no matter who wins.

With the growing demand for remote stabilized weapon systems, there are several major remote weapon station contracts to be awarded over the near term. We believe that our gyroscopes will be in strong demand and represent a significant growth driver for the Company because of their excellent performance, price and reliability.

The other development that offers exciting potential for our defense business is the increasing focus by the military on mobile satellite communications. With this, we see increasing opportunities to streamline our business by focusing on products for both commercial and military that involve two-way satellite communications on the move.

Products like our new TracPhone V7 are suitable for Coast Guard and Navy applications while variants of it would be appropriate for military land vehicles. This increased focus on higher value systems also presents potential for aviation applications where we believe some exciting new opportunities could develop in the near future.

So overall, KVH is in solid shape with great products and solid market positions. We are now shipping a truly breakthrough maritime VSAT product, which represents not only a significant hardware opportunity, but also allows us to compete in the $300 million maritime communications airtime market.

On the defense side, the total market for fiberoptic gyros has the potential to expand dramatically with the military's focus on remote weapon systems and stabilized optics. These two things give us confidence that our FOG productline and our maritime data communication products represent the two most significant growth opportunities for KVH in the near future. We intend to continue to focus our strategies to take full advantage of their potential. Now I would like to turn the call back over to Pat to fill you in on some of the numbers.

Thank you, Martin. The financial results for the quarter -- for the third quarter were generally better than we had expected. Due to a favorable mix of product sales and continued progress with our low-cost sourcing strategy, we experienced better than expected gross margins and operating spending came in lower than we had targeted. Yet we also continued our aggressive investments in new product development.

Now I will cover the specific results. First, as a reminder, I will note that consistent with GAAP accounting, all financial results and projections include the effect of stock option expenses.

Gross margin was just under 40%. Although this was lower on a sequential basis, it was about 50 basis points better than Q3 last year. Compared to the second quarter of this year, revenue was approximately 24% lower. This was expected and was driven by the seasonal decline in marine sales, as well as an anticipated decline in military navigation sales.

In spite of these factors, we achieved additional improvements in individual product costs and we were also able to reduce manufacturing overhead spending by almost 10% sequentially. These contributed nicely to dampen the effect of the volume decline.

For Q3, operating expenses were up 3% compared to last year, but were down 10% sequentially. For the third quarter, reported R&D spending was 39% higher than last year. As a percentage of revenue, R&D was almost 13%. Two factors contributed to these relatively high percentages. First, in the quarter, we reported a relatively low level of customer-funded engineering, especially when compared to Q3 last year. This drives the reported R&D number up.

Second, as we have indicated in the past, R&D as a percentage of revenue can fluctuate quarter to quarter because while we maintain engineering investments for long-term growth, revenue levels will fluctuate due to seasonality and other factors.

On a sequential basis, the absolute level of reported engineering was 11% lower than the prior quarter. This reflects changes in variable expenses that are directly related to new product development cycles.

Third-quarter sales and marketing expenses increased 3% year over year, but were 6% lower compared to Q2. The sequential change is primarily related to a reduction in variable expenses that ties to the seasonality of sales, especially in the marine markets. Third-quarter administration expenses were favorable compared to our expectations. Compared to Q2, spending was down 15%. This reduction was mostly the result of a lower level of legal fees. As you know, in early August, we won the patent litigation suit that we had been fighting for two years. We are very pleased to have this behind us.

Turning to the balance sheet, cash and marketable securities at quarter-end were $56.2 million. Cash flow from operations was positive at about $4.4 million. Capital expenditures were $1.2 million. This recent relatively high level of CapEx has been in support of capacity upgrades and expansion in our Rhode Island and Illinois operations. Those upgrades are now substantially complete.

During the quarter, we initiated the stock repurchase program that was approved by the Board of Directors. As of September 30, we have repurchased 112,800 shares. We expect to make additional purchases during the fourth quarter.

At $10.1 million, accounts receivable was about $4 million lower than the prior quarter. Days sales outstanding was 52. Inventory increased sequentially by more than $1.3 million to $10.1 million. This increase primarily reflects the staging of materials for the launch of our new mini-VSAT product, the TracPhone V7. As Martin mentioned, this began shipping in early October. As a result of this inventory increase, annualized inventory turns declined to approximately 4.5.

Now I would like to provide some context for our fourth-quarter expectations. Consistent with our normal practice, we will address guidance for 2008 when we release the final results for 2007 in February.

In July, we said that the fourth-quarter revenue level would be directly dependent on a CROWS program award that we had expected would be favorable to us. As you know, that did not happen -- at least for the time being. Consequently, we have removed all of the CROWS-related fiberoptic gyroscope revenue from the current quarter expectations.

In addition, for the short term, a key system component of our mini-VSAT TracPhone V7 configuration is supply-constrained. As a result, we have tempered our assumptions for shipments in the quarter.

Lastly, the leisure marine market has continued to be soft, especially in North America. Given these factors, we are now taking a more cautious posture for the near term. The resulting guidance for Q4 is as follows. We expect revenue to be approximately $19 million or up about 9% year over year. Mobile communications revenue should grow solidly, while defense sales will be about flat with Q4 of last year. Our defense backlog at the end of September was $7.9 million, about equal to the June level and 50% higher than the level one year ago.

For Q4, we expect that gross margin will be at or slightly above 39%. Absolute operating expenses should be lower than Q3, but as a percentage of revenue should also be about 39%. Much of this reduction in operating expenses results from having concluded the patent litigation. This income statement profile would yield a profit of approximately $0.04 per share.

Over the past several quarters, we successfully completed a number of initiatives that have improved our operating efficiencies and cost profile and now put us in a good position to more effectively leverage top-line growth.

We expect that our product and market strategies will begin to drive that top-line growth, especially in the areas of marine leisure and commercial applications and in fiberoptic gyroscope applications such as remote weapon stations. As this growth develops, we should generate very healthy returns. Now we would like to take your questions. Justin, please open the call for questions.

(OPERATOR INSTRUCTIONS). Chris Quilty, Raymond James.

Thanks, gentlemen. Can you hear me?

Yes.

Okay. First of all, just some housekeeping. Pat, can you give us what was the year-over-year growth rate for the international business -- international marine, excuse me? I think you may have mentioned double-digit.

Yes, the international marine business grew year over year about -- let me get the right number here for you, Chris -- about 20%. The North American market was about flat.

And if I remember correctly, last year, you had a really strong or relatively decent North American -- up low teens?

I don't -- the last year's growth rate you mean?

Yes, in terms of the comparable you were going against domestically. Not as important. I can circle back on that.

I don't have -- if you are asking what was the growth rate in '06 compared to '05, I don't have that information right in front of me.

No, that's fine. And can you just give us a sense in terms of the domestic boat market what you think the outlook might be in terms of demand over the next year or so? Is this still kind of a flat market, which is where you are trending towards for full year '07 results?

Yes, this is Martin, Chris. The marine market -- it seems like there is more softness at the lower end of the market than at the high end. Now most of our business is targeted at the high end, so that helps us, but for the smaller boats, products like our M3, we are still seeing good sales, but the boat sails themselves are way off. So that is why we feel confident that we are doing very well in the US marine market by sort of having steady sales compared to a year ago even though the market is significantly weaker than it was a year ago. Now how long that is going to continue, we are not really sure, but it is certainly baked into our guidance going forward.

Okay. And what do you attribute as the primary difference between the strength that you have continued to see in the international market versus the weakness domestically?

Well, maybe a difference in the European economy. I think we are also getting a benefit from the exchange rate as a seller in dollars. Our products are very competitive internationally and a lot of the business that we do in Europe is with the larger boat builders and those boat builders tend to build boats 80 feet and up, 60 feet and up, which is at that end of the market that even in the US is still doing well.

Okay. Switching over to the CROWS opportunity or fiberoptic gyro, can you give us a sense of how much you took out of your fourth-quarter assumptions for that program?

Well, I don't want to give a precise number, but it was well over $1 million.

Okay. And what is your expectation in terms of the impact of the protest and the timing of when you might hear something definitive from either Recon or Kongsberg on some solid orders? Is that really an event out in the first quarter of next year or is it something before the end of the year?

I think we would have better visibility during this quarter. I think these protests can go by law up to 100 days minimum -- sorry, maximum -- before they have to give a response. So I am not really familiar with the exact process, but as far as I know, that would mean that they would have to give some kind of response fairly soon and there is also -- if the program is deemed to be urgent, there is also an opportunity to allow work to continue. So there's -- it is unclear when it is going to be resolved, but I would feel that by the end of this quarter, we would have much better visibility on the status of both the timing and the outcome.

Okay. And you had previously indicated sort of a five-year $50 million opportunity on the CROWS program. As I understand it, if it shifts over to Kongsberg and you participate there, it might be a little bit larger?

That is a possibility. I think that the -- it has to do with the number of gyros and total quantity of the program has increased so right now, the total potential program is for 6500 systems with three gyros per system, which is round numbers 20,000 fiberoptic gyros. So that would be a significant revenue opportunity for whoever wins on the order of $60 million to $70 million.

Okay. And outside of the weapon stabilization, you have indicated in the past that non-CROWS, non-weapon stabilization fiberoptic gyro business was growing at a pretty good pace. Has anything changed there?

No, we continue to see a lot of interest for stabilized forward-looking infrared cameras, applications like IMUs that are used on everything from predator drones to stabilized forward-looking cameras for mapping, terrain mapping, things like Google Earth type applications. So a lot of continued interest in the whole fiberoptic gyro business and a lot of these applications are requiring higher and higher precision, which helps us because that is our strength.

Okay. And I don't want to monopolize the time here, so I will ask one more question and then circle back. But for Pat, I think you had indicated coming into the quarter about $0.03 to $0.04 of legal costs. Did it turn out to be about in that range?

Yes, it turned out to be about $0.03.

Okay. Awesome. I will circle back. Thank you.

(OPERATOR INSTRUCTIONS). Rich Valera, Needham & Co.

Thank you. Just related to the CROWS award, if Kongsberg retains the award, can you shed any light on their situation with respect to a FOG supplier? Did they already have one and would you be looking to displace them or become sort of a second source?

Well, we would look to do either. They certainly already have a source as we understand it. Had Recon won, we feel we were designed in. On the other hand, we were presenting our solutions to all the prime contractors for the CROWS award and being in that business, there are only a few fiberoptic gyro suppliers in the world.

Right now, we are in a situation where we are actively marketing our products to companies like Kongsberg and Recon, [Rafael], a number of other companies. In addition to this program, but there are a number of other programs, so I can't -- I don't want to speak too much about what we are saying to each specific company because that is really not appropriate.

And this is probably getting ahead of us, but is it too soon to say if you would expect any FOG revenue related to remotely operated weapon systems in the first quarter? Just wondering if you are willing to take a stab at that.

Well, as far as expectation goes, the answer is yes, absolutely. We have been generating remote weapon station revenues. It has been one of our biggest applications, so we definitely expect to have continued revenue from that. I am not saying which program, but we absolutely are counting on those types of revenues going forward. And given all the various programs, I would be very surprised if we did not have remote weapon stations business of some sort starting in Q1.

Okay. And just with respect to the auto antenna market, which you mentioned was down year over year, what are your thoughts on that business long term? At one point, this was thought to potentially be a mass-market item with OEM involvement. Does it now look like this is sort of a niche market or do you still think that there is the potential for this to at some point be a mass-market item?

I think the product in its current configuration and price point I think is a niche-type product. The mass-market application requires a next-generation product. So the product we are selling now is four-year-old technology, so to get to the next level, products need to be significantly smaller, lighter and less expensive. So this product I think is great at what it does, but if you want to get to the next level, there is -- you really need a different technology and a different product.

Are you investing the resources to develop that next gen at this point?

We are working on new technology all the time and that type of product is in our roadmap.

Any timeframe?

No, it also requires the active participation of the service provider. So if you look at what -- the business model would be similar to what we just did with SES for the VSAT market. In other words, we couldn't design a new antenna without creating a new service and we couldn't design a small antenna if we just replicated the services that were being used today.

So by moving into a spread spectrum format, working with ViaSat, designing a new modem for us, building new hubs, dedicating transponders, we are able to create an overall product architecture that was radically different. So the same type of thing has to happen in the automotive market in my opinion in order to really reach that next sort of breakthrough type of product.

Great. Thank you. That's helpful.

Tom Watts, Cowen & Co.

Good morning, gentlemen. You made some nice progress on the gross margin front and I know you had hoped longer term to move towards the 44% range. Clearly some of that is going to be volume-related, but how should we think about gross margin increases over the next few quarters?

Well, as I said, Tom, we are not quite ready to give guidance for next year, which that would be a subset of that partly because we expect that a number of things could happen over the next couple of months that will have a potentially significant impact on our 2008 year. But we still believe that we are heading toward a gross margin that is in the low 40% level. 44% is the actual target that we have established for ourselves.

Yes -- Martin was just pointing out that last quarter we were at over 42%. Some of it is a function of mix certainly. A little bit of it is tied to growth. As I mentioned, we have got now the operating structure in place we believe that has positioned us really well to leverage top-line growth and some of it is related to continuing to work the product cost side of the equation, which we are doing very aggressively with our sourcing strategy.

So I think that, and again there is seasonality involved, but we should -- my expectation right now is that we should be looking at better gross margins in 2008 than we have seen in 2007. I am not prepared at this point to say anything more specific about what we might see in Q1 and Q2.

Sure. And then also could you give us a little bit more detail on what we saw in taxes this quarter and what that is likely to be next quarter?

Yes, the tax situation for the third quarter -- we did get the benefit of -- as we completed our actual 2006 return, it came to light that we were actually accruing a bit more than we needed to for tax purposes and so we made an adjustment for that. That's what the benefit was that we got in the third quarter.

In the fourth quarter, I expect that the pretax, based on the guidance I gave, that the overall Company pretax tax rate will be closer to about 10% and that for the year the pretax rate will be closer to 19% when you take the whole year and look at it in total.

Okay. And then just finally, you had mentioned in passing the convoy communications products. Is there any more information there and do we have the [time] on when revenue could materialize from that?

Yes, we just finished a major trade show, the AUSA, the Army tradeshow in Washington. So our strategy with that product now is to team with one of the radio providers, one of the major military radio providers, to integrate that with their product more as an OEM supplier. So that is our sourcing strategy or go-to-market strategy for that right now. So we expect that product to be something that we would sell to one of the major radio players rather than market it as a standalone product like we were thinking before.

And is there any way to predict the timing of that or is it subject to --?

Yes, we don't have any near-term visibility on that, Tom, so I can't give you any guidance there.

Great. Okay. Thanks very much.

(OPERATOR INSTRUCTIONS). James McIlree, Collins Stewart.

Thanks, good morning. I would just like to -- on the CROWS side, I would just like to understand why -- you seem to be very confident that something positive is going to happen for you and what I would just like to understand why you -- well, am I wrong in thinking that you have that confidence and if you do, why you have it?

And then secondly, if you could just briefly walk through what the potential scenarios are and obviously one would be Recon wins the bid -- or excuse, wins the protest and everybody's happy, but there are some other ones out there and I was just wondering if you could walk through what the potential scenarios are? Thanks.

Right. Well, again, I don't want to be too specific here in talking about other companies and what their internal plans might be or might not be. We have confidence in the fact that we have the best products at the best prices. We are a US company; this is a US program. We have more fiberoptic gyros on stabilized weapons than any other company in the world by a lot. We are designing this application from the beginning. We have a lot of field experience. So from a product point of view, we feel that we have a great product.

Does that mean we are going to win? Absolutely not. Does it mean that we have a good shot at being a supplier? Absolutely. So depending on how the protest goes, if Recon wins, we are definitely designed in, so we should get that business. If they don't, then we feel that we have a good shot at becoming a supplier. But it is just that. It is -- at this stage, it is an opportunity.

Okay. And just to clarify, CROWS is just a part of the remote weapon stations market, correct? So Martin, I think you said earlier that your supplying into that market kind of seems irrespective of CROWS.

Right. So there are dozens of companies building stabilized weapons now, so this is really a major new trend. I think that is a good point is that the weapon stations now are all becoming stabilized. For example, the Stryker vehicle had a remote weapon, now there is initiative to turn that into a stabilized remote weapon that is not part of the CROWS program. Anything related to MRAP would not be part of CROWS.

In Europe, I noticed that Kongsberg just did a joint venture with a UK company, I think it was Thales, to do remote weapon stations for the British market. And in France, I believe there are eight separate companies building stabilized weapons. So there is definitely a trend amongst the militaries to do crew protection by putting the crews inside the vehicle.

Once you do that, you have to have remote weapon because otherwise you have to get back outside of the vehicle and you are no longer protected. So this is really a fundamental shift in the way all these light weapons and medium weapons are being operated in the military, not just in the US, but around the world. So it is a very large market, it is a big opportunity and the CROWS program is the biggest contract to be let so far. We don't think it will be the biggest ever.

Okay, and Pat, on the operating expenses, are we going to see a further decline in G&A in Q4 because Q4 should be pretty much absent of litigation costs, right?

Yes, we should see an absolute reduction in G&A in the fourth quarter compared to the third quarter and reduction as a percentage of revenue as well because Q4 is also a busy quarter for us for trade shows, especially marine. The Fort Lauderdale boat show is coming up next week I believe and at the same time, as I mentioned in the guidance, the gross margin we expect to be modestly below the third-quarter level and we won't have that tax benefit that we picked up in the third quarter, but administration spending will certainly be down sequentially.

Okay. Terrific. Thanks a lot.

Mr. Spratt, at this time, there are no further questions from the phone audience. I beg your pardon. We do have one further question from Chris Quilty.

Thanks, guys. Am I on?

Yes, you are.

The TACNAV program, you had indicated back last quarter that one big order shifted to the right in '08. Obviously you haven't provided guidance, but any indication that that program -- is it still a real contract or is it just continuing to shift to the right?

As far as we know, there are no additional shifts in that program. So as far as we know, it is still on track for 2008.

Okay. So we should eventually see that in the '08 guidance and you had also indicated that before year-end there were a couple of other sort of seven figure, eight figure contract opportunities out there for TACNAV.

Yes. There are still several programs that are out there that I think will be part of our guidance when we -- when we give our guidance for '08, we will give an update on what we expect for the TACNAV bookings for '08.

And fair to assume most of these are international sales?

Yes, that is a correct assumption.

Okay. And on one US Army program, the whole land warrior situational awareness and they have got the mounted system and I know that involves some navigation situational awareness, is that a program you are targeting?

It is not one I am familiar with, so I can't speak for our sales guys, but I have never heard that one brought to my attention.

I will shoot you some e-mails. And a question on the RV market. I haven't checked the RVA website, but I know last quarter, the Class A sales were actually up if I remember quickly. Do you know where they finished out the third quarter?

The last numbers I saw I believe they were up about 4%, something like that. Our sales were up a little bit more than that, so we felt good about that in terms of making progress in the RV business.

Okay. And any of that related to some of the new product introductions or specifically the sort of integrated GPS mapping, local, TV capability? Has that gotten traction with the dealer channel?

I think -- our new products, which are called SlimLine, are lower profile. They are better looking products than the ones that we replaced. They work better and those products are also being picked up by the OEMs, which is really helping to drive the growth too with Monaco and Fleetwood. And we are also seeing a move towards HDTV, which helps us because our products are higher-end. It helps us differentiate. We have got a really elegant solution for HDTV in RVs, so I think those things are helping us as we go forward.

We are also seeing a move towards in-motion products versus stationary, which again helps us because, as we have said before, the stationary products, in other words, an antenna, just finds a satellite while you are parked at a campground. It is a pretty low threshold of performance. Even if it takes five minutes, usually people don't care that much, so it is hard to show why your product is better. But the in-motion products, it is easier to differentiate performance and we are seeing a bigger percentage of our units now being the in-motion variety.

Okay. And shifting over to the marine product category, you announced in the K, but would you expect to have other announceable distributors or large end-market customers or is this just not the type of channel that will develop in that manner?

Well, we probably will have others that are announceable. But you are right. A lot of our distribution work -- you can see them on our website as to who the retail channel partners are, but not all of them are of the magnitude that we would do a press release on. So if you are interested in how we are expanding the distribution to address this new product, new market, you can see the retail outlets on our website.

Okay. And geez, I was going to ask the question of whether you expect to see, with this type of product, any channel fill that might kind of buttress the numbers in the next couple of quarters, but I guess given the supply constraints, that may not be a real factor?

Right. And also I think because of the price of the product, we don't see a lot of inventory units being taken and put into inventory. Most of them are sold. Because it is a $30,000 retail product.

Okay. And actually on the pricing there, I was looking at some of your similar products that you sell and I guess the closest thing in at least in terms of size and price is the M9 on the television side. That is about half the MSRP, but when you look at those two products, how mechanically similar in terms of building materials and cost to produce is it from a product like the M9?

Let me just correct one thing. Probably the closest thing we have in terms of price would be our Fleet 77 product and that is about a $22,000, $24,000 product, something like that and it is a communications product.

But that is something you are distributing not building?

Right. And from a building point of view, this is closer to the M7 than the M9. From a platform point of view, we started with the M7, but it is significantly different in terms of parts and a two-way product is very different from a receive-only product. So there is not a lot of similarity other than the basic architecture and antenna.

Okay. And in terms of the supply constraints with the modem provider, is this due to the fact that they just don't have a lot of established production for that ArcLight modem or are there other requirements or other customers that they are currently shipping to that you just haven't gotten priority?

No, this is a new product for them; it is custom-designed for us. I think they got it into production perhaps a little bit later than they would have liked and they are now in the process of tooling up. So we expect this situation will get resolved. It is going to constrain us during the beginning part of this quarter and hopefully by the end of the quarter, this will be resolved.

Okay. And since I think your original announcement on the V7 was after the last conference call, can you just give us a sense in terms of you have got some good marketing materials on the website, sort of scale of the opportunity here in terms of number of antennas? Is this the type of product where you are going to sell 20 or 200 or 2000 a year once the product gets established in the channel?

Well, I think our goal would be for first year to be selling hundreds not tens. Thousands would be nice, but it is a new product for us. We don't have any history and that is always difficult to project. We do a much better job of protecting sales of products once they have been out for a while to have a little bit of history.

But the other key component of this is the service plan, the service revenue, which we expect to be more significant over a two or three year period than the actual hardware sales.

Right. And we are obviously far away from that, but I guess for Pat, in terms of the accounting for service revenue, which is not a large component of KVH's revenue, you will just kind of deal with that when you get to the 10% threshold for segment reporting or will you do something earlier?

No, most likely, that is the approach we would take, Chris is that as service revenue grows as a component of the business and it becomes a more material item then we would start to address it specifically.

Okay. Thank you very much, gentlemen.

Thank you, Chris. Justin, are there any other questions?

Sir, there are no further questions in the audience queue.

Okay. Well, thank you all very much for your participation and don't hesitate to give us a call if you have further questions.

Ladies and gentlemen, that does conclude our presentation for today. We thank you very much for your participation. You may now disconnect. Have a great day.