KVH Industries Inc (KVHI) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the KVH Industries first quarter 2008 earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn things to 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, Chief Executive Officer. This call will address the first quarter earnings release that we issued earlier this morning. Copies of the release are available on our website, KVH.com and are also available from our Investor Relations department. This call is being simulcast on the Internet and will also be archived on our website for future reference. For those of you listening via the Web, feel free to submit questions related to the content of today's discussion to IR at KVH.com, and we will be happy to answer them following the call.

This conference call will contain certain forward-looking statements that involve risks and uncertainties. For example, statements regarding financial and product development goals are forward-looking. The company's future results may differ materially from the projections described in today's discussion. Factors that might cause these differences include, but are not limited to those mentioned in today's call and risk factors described in our annual report on Form 10-K, filed with the SEC on March 13, 2008. The Company's SEC filings are directly available from us, from the SEC or from the investor information section of our website.

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

Thanks, Pat. Thank you all for joining us today. Well we just completed a great quarter, and we are very pleased with both the top and bottom line results. What is especially gratifying is that we achieved this performance in a tough economic environment. But as pleased as we are with the short-term financial results, we had some accomplishments this quarter that will have a significant long-term impact on the growth and success of KVH. We achieved three major milestones.

We made outstanding progress establishing our TracPhone V7 mini-VSAT system. We received a major new order for our fiber optic gyros from Kongsberg, and we entered the in-flight entertainment market with a $20 million antenna development and production order from LiveTV. All of these were critical to meeting our goals for the year and beyond. And I will be coming back to each of these in a minute.

For the quarter we achieved record first quarter revenues of $23.1 million. That is a 13% increase year-over-year. Earnings were $0.11 per share, and net profit of about $1.6 million, which is a huge improvement from our breakeven results in Q1 of last year. In the mobile satellite communications market revenue was up 13% over last year, and we are feeling very good about our Q1 results in this area as our mobile satellite business appears to be holding up well despite the current economic conditions. That is not to say we haven't seen any effects of higher gas prices and the weaker economy as a whole. Land mobile sales were down 9% in the first quarter compared to the same period last year. I believe the cost of gas and other economic factors slowed SUV sales which led to a significant decline in sales of our TracVision A7.

On the other hand, our sales in the RV market were roughly flat compared to last year, even in the face of a reported 33% decline in sales of new Class A motorhomes. The current general economic slowdown is contributing to slower pace of TracVision sales in consumer markets. Yet despite this, marine revenue was up 23% in the first quarter with excellent growth both internationally and in North America. In fact, sales would have been significantly higher, but a delay in shipments of our new Inmarsat TracPhone FleetBroadband 250 system from our supplier prevented us from filling our orders during Q1. These should ship in Q2, however.

What really helped drive our marine growth during Q1 was the continued success in building momentum for the TracPhone V7 and our mini-VSAT broadband service. This product is turning out to be the disruptive breakthrough system we hoped it would be. Demand continues to be strong, and we are meeting our sales and production goals. With every TracPhone V7 we enjoy the benefit of both the hardware sale and the recurring monthly airtime revenues.

The mini-VSAT airtime revenue stream is very promising with initial customer activations reflecting a run rate of about $22,000 per year in airtime fees per account. This annual revenue is roughly equal to the wholesale equipment price. Service activations are taking place about 8 to 9 weeks following the hardware shipments from our factory, but since the V7 and airtime service are a proprietary system, you can only activate and use the system on our network. Therefore, we get 100% of the airtime service revenues and no churn.

After launching the V7 in the recreational marine market, we are now beginning to make an aggressive push on sales into the commercial maritime market. Shipping and offshore oil and gas operators need more and more bandwidth, both for enterprise operations, as well as for crew morale and welfare. With its smaller size, broadband data rates, voice over IP connections and substantially lower hardware and airtime costs, the TracPhone V7 is outstanding solution for commercial communications, as well.

Our initial commercial customers have been very pleased with the system, and we are anticipating a growing number of sales into the commercial and the government markets. The product is already being tested by the US Coast Guard and several Navies around the world. In addition, one of our commercial marine distributors, Mackay Communications, was recently selected as part of the $700 million GSA SATCOM II contract. Mackey included the V7 in its proposal, so our system and service are now available for easy GSA purchase by government agencies.

We recently expanded our marine sales group to include people with expertise in communications technology and business operations in the offshore oil and gas industry. We are also taking steps to make the mini-VSAT service as attractive as possible to commercial operators. Key to this is expanding the coverage areas beyond Europe and North America. We started to accelerate our plans and hope to see significant expansion of service into new regions like the Pacific and the Indian Ocean later this year. We've also added a commercial leasing program that includes KVH financing for 36 months and an extended 36-month warranty.

Our ability to offer both SATCOM and satellite TV hardware through our global dealer network is a tremendous benefit to commercial customers. By marketing the V7 to these commercial accounts we are also generating renewed interest in our TV systems. For example, we are close to securing a large order for our flagship TracVision M9 from our Russian shipping fleet as well as an order to equip the vessels of the Turkish Navy. This TV business is outside our normal channel and represents upside for the year and could offset any potential weakness due to economic conditions in the leisure markets.

But our mobile SATCOM news was not limited to land and sea this quarter. In Q1, KVH and TracVision went airborne as we announced a $20 million antenna order from LiveTV, the pioneer in the in-flight entertainment market. Under the terms of the deal we will design and manufacture the next generation of in-flight satellite antennas based on our flat-panel array technology. Our new antenna will help fill the growing demand from airlines and passengers for live television in the air. While JetBlue is the first and best-known of the airlines to add DIRECTV service, earlier this year Continental signed a deal with LiveTV to start fielding satellite television in early 2009.

Our new antenna, which we expect to begin shipping at the end of 2008, will be mounted on narrow body commercial aircraft like Boeing's 737 and the Airbus A320. As our productline matures, we expect to offer broadband service in addition to TV. Our mini-VSAT network will be a natural way to offer this service, not just in North America, but around the world.

Moving on to our defense business, the guidance and stabilization unit sales were up 17% in the first quarter compared to Q1 of last year. Our TACNAV navigation product sales were up 134% as we began to ship some of the new orders we added last year. Our fiber-optic gyros sales were actually down slightly year-over-year due to a pause in some ongoing programs. But our sales team was very busy pursuing several large orders related to new long-term programs. The biggest and strategically most important of these was just announced yesterday, when we received a significant new order from Kongsberg for our DSP-3100 FOG.

These new fiber-optic gyros will be used in Kongsberg Protector remote weapons stations. The Protector is a system that substantially improves crew safety and weapon accuracy by allowing gunners to operate, aim and fire the weapon from the inside in the safety of their vehicles. And this removes gunners from the vulnerable turret position where they are exposed to hostile fire. Kongsberg's Protector will use three of KVH's new gyros to provide precise, stabilization and weapon recoil control while ensuring the weapon stays on target whether stationary or on the move.

As you know, Kongsberg is a company that won the U.S. Army CROWS II contract last fall displacing the incumbent, Recon Optical. As we said at the time, we remain confident that we would continue to be a player in the stabilized weapon market. In fact, we continue to expand our capacity and our facilities in anticipation of significant business from Kongsberg. Our tenacity was rewarded last week when we received an initial $6 million order for our FOGs from Kongsberg. The contract is subject to the successful completion of the DSP-3100 testing and qualification prior to the start of initial shipment in Q3. But we expect most of this initial order to ship during 2008.

Ramping production for this program will be a challenge dsince deliveries are not scheduled to start until Q3, we expect the decline in our FOG sales during Q2, which is baked into our guidance. However, we do expect to make that up with large shipments in Q3 and Q4. We look forward to building our relationship with Kongsberg as worldwide demand for this critical military equipment expands, and recognizing this demand we are aggressively pursuing additional FOG, turret and gun stabilization programs around the world.

So in conclusion, we just completed a very strong quarter and we are well positioned for the rest of the year. Our satellite business is quite healthy despite a very challenging economic cycle with major contributions from new products and services. Defense is ontrack with orders like Kongsberg now in hand for Q3 and beyond, and several new products are in the pipeline. LiveTV represents a new opportunity and a new market for KVH, and we are moving quickly to complete this design for start of production in late 2008.

Now I will turn the call over to Pat to go over the numbers.

Thank you, Martin. The financial results for the first quarter were very solid and generally in line with our expectations. As Martin mentioned, sales were at the low end of the range we had anticipated, but gross margin and operating expenses came in better-than-expected and contributed to an operating margin just shy of 7%.

Now to some of the specifics. Gross margin was just over 42%, showing a marked improvement on a year-over-year and sequential basis. Contributing to this were strong sales of marine products and the impact of our ongoing product cost improvement programs. Compared to the first quarter last year we also had a nice pickup in sales of relatively higher margin TACNAV products. Gross profit dollars increased by more than $2 million year-over-year and by $1.7 million sequentially.

For Q1 operating expenses were up only 2% compared to last year and were just over 35% of revenue. We have been tightly controlling discretionary spending. In fact, we have reduced operating expenses by about four points as a percentage of revenue over the last few years. And we will continue to work toward our objective of approximately 30% of revenue. For the first quarter reported R&D spending was 6% higher than last year and only 2% above the fourth quarter. As a percentage of revenue, R&D was just over 10%. We have been operating in the range of 10% to 11% of revenue, which we consider a healthy and sustainable level that enables us to continue investing aggressively in new product development.

Our renewed growth on the top line, along with new long-term business like with LiveTV, indicate that we are making good decisions and managing development projects well. First quarter sales and marketing expenses increased only 2% year-over-year and were flat sequentially. Even though the first quarter of the year is traditionally a busy quarter for trade shows, we have been very selective about how we spend our money. The result has been more focused and more efficient efforts.

Administration expenses were about what we expected for the quarter and almost $200,000 below the average quarterly rate for the past two years. As a percentage of revenue administration expenses were 7.5%, which is a full two points lower than we reported over the prior two-year period.

Turning to the balance sheet, cash and marketable securities at quarter end were $51.4 million. Cash from operations was positive at $1.2 million. We have been very pleased with our cash management. Not only have we generated more than $16 million of cash from operations over the last 13 quarters, but we have also managed our cash and marketable securities judiciously. Our primary objective in this regard is preservation of capital. While many companies have struggled with impaired investments due to option rate securities and such, we have not had any issues of that nature.

Capital expenditures were $562,000; considerably below the run rate last year when we completed efficiency and capacity upgrades to our Illinois and Rhode Island facilities. During the quarter we continued the stock repurchase program that was authorized in Q3 last year for up to 1 million shares. As of March 31, we have repurchased 558,000 shares at a cost of $4.7 million. We intend to continue with the program this quarter.

Accounts Receivable at $14.8 million was about $2 million higher than the prior quarter. Days sales outstanding decreased to 58. Although this level is a bit higher than we'd like, it is well within an acceptable range. With the current softer economic conditions we will continue to keep a close watch on credit levels and collection efforts.

Inventory increased sequentially by about $800,000 to $10.1 million. This increase primarily reflects the staging of raw materials and work in progress for what we expect to be another seasonally strong quarter for our satellite communications business. Annualized inventory turns improved to 5.5.

Now I will turn to our expectations for the second quarter and full year. For Q2 we expect revenue and EPS to look a lot like the first quarter. Revenues should be in the range of $22.5 million to $24 million. This is also about on par with the second quarter last year. As in the first quarter, mobile communications revenue is expected to grow solidly year-over-year, spurred in large part by sales in our new TracPhone V7 product and mini-VSAT airtime services.

However, we expect that defense sales will show a substantial decrease compared to last year. This is due to the fact that FOG sales for the remote weapons station market will not begin again until the third quarter, and we are still awaiting the next production order for our TG-6000 inertial measurement unit for the MK54 torpedo program. We expect this contract with Raytheon for the U.S. Navy to be renewed this quarter. But it's timing will probably limit our shipments in Q2.

Our defense backlog at the end of March was $6.5 million, and we have added $6.6 million to that since then, bringing our current defense backlog to approximately $13 million. For Q2 we expect that gross margin will be about 40%. The expected decrease compared to Q1 is due to the low level of relatively higher margin defense product revenue. Operating expenses should actually be a bit lower sequentially.

As for items that are below operating margin, we see another quarter of lower interest income, primarily due to lower rates. Net interest income in the second quarter will be about $130,000 lower than the first quarter and $370,000 lower than Q2 last year. The EPS impact is about $0.01 sequentially and $0.025 year-over-year. For the second quarter we expect EPS to be in the range of $0.08 to $0.12 per share.

For the year we continue to expect that revenue will grow in the range of 14% to 20% compared to 2007 and that EPS will be in the range of $0.36 to $0.44. With respect to topline growth we are pleased with the initial success of our mini-VSAT offering. We are encouraged by results in the leisure marine business, especially internationally. And we are excited about the long-term business potential with Kongsberg for FOGs and with LiveTV for satellite systems.

The guidance profile for 2008 gross margin and operating margin remains in line with our original expectations. EPS generated from interest income will be about $0.10 less than in 2007, due primarily to dramatically lower interest rates. We are very pleased that the first quarter results reflected the operating improvements that we have been making. We expected that as we achieved stronger topline growth we would see a leverage effect on operating margin and that was the case. We will continue to work diligently to sustain this type of improvement as we move forward.

Now we would like to take your questions. Operator, please open the call for questions.

(OPERATOR INSTRUCTIONS) Rich Valera, Needham & Co.

Pat, first just a housekeeping. Could you give me the depreciation for the quarter?

Yes, Rich. Depreciation was $571,000.

Great. Thank you. And then with respect to the LiveTV award, I think you made some comments in the prepared remarks with, about plans for broadband being added to this at some point. Can you elaborate on that? Would it be on essentially the same platform you are developing today for LiveTV for the TV reception, or would that be sort of a fundamentally new antenna and system to do the broadband?

Well, it is really more a general comment about directionally where we see that business going. In terms of the specific hardware, obviously, we are designing it now with that general direction in mind. But it would be a different antenna because it would be transmit received system more similar to our V7 than to our TV products.

Have you gotten any indications from LiveTV that that is something that they are considering or that they might want this product or this program to evolve towards?

Yes, in general I think there is a lot of interest in broadvand services now for aviation, both for the picocell BlackBerry, cellphone support, as well as for Internet use. So there is definitely pull coming from the market there.

Great. And with respect to the Marine, or the V7 service revenue, you are saying, I guess you collect 100% of that it sounds like. Can you say how much of that you end up paying out, how much of that do you ultimately retain after your partners, etc., take their cut?

It varies by region, and in terms of the overall system. Right now the margins, if you think of it in terms of gross margin it's a little bit less than the hardware sales. But depending on the specific region, whether we own the transponder or lease it or do a variable cost scenario. But I think you should think about it the margins on the service will be a little bit less than the margins on the hardware.

That is helpful. And in terms of the outlook for the year, I think you mentioned unchanged. It sounds like there may have been some puts and takes here. It sounds like maybe I don't know defense a little bit stronger and maybe marine a little bit stronger and land -- I think you've been looking for flattish and looks like maybe now that is maybe a little less than that. Is that a fair characterization of maybe the puts and takes in the three major businesses?

Really the puts and takes I think a little more of timing than variation. The land business is performing pretty much as we expected, so we expected auto to be down and RV to be flat and that is really what we saw in the first quarter. I think the big thing that has changed is that we've gotten this big Kongsberg order and it is all for delivery basically this year but it is in Q3 and Q4. The exciting thing is that we are ending the year at a very high run rate. And if that continues we could be looking at substantial FOG revenues on quarterly basis. So we don't have those orders yet but that is the anticipation that this is just the initial order and it basically represents a run rate of what normally would be about one quarter's business. So it is a very big ramp for us that starts in Q3 and accelerates as we exit the year.

And so if you would anticipate having additional FOG business on top of the Kongsberg order, hence you would have a higher than historical FOG run rate exiting the year. Is that your point?

Much, much higher, yes, yes, so that the run rate would be double our normal, our annual FOG business on a quarterly basis. So it is a big ramp and then if that gets sustained going into Q1, it would be very substantial.

Right, okay. That's it for me. Thanks, gentlemen.

Tom Watts, Cowen & Company.

Good morning. You had mentioned in terms of the guidance for Q2 could you just remind me the numbers on the margins that you mentioned, Pat?

Well we hadn't given guidance for Q2 previously, so -- but I will give a sense for the second quarter. We are looking at a gross margin that will probably be right around 40%, maybe slightly above. We expect operating expenses as a percent of revenues to be down a little bit sequentially, and operating margin should be right around 6%.

Okay, and then on the LiveTV, of the eligible aircraft for that product at the airlines where they are, what portion does the original contract cover, and what is the long-term potential for that?

Are you asking in terms of units or --.

In terms of units and aircraft.

I think there are a lot of aircraft in the target market, the 737, the A320 are the two largest, most popular, single aisle aircraft in the world. I think there is something like 14,000 aircraft out there. So this quantity for this contract is in the hundreds, not thousands. So there is a lot of upside potential here going forward.

And this contract, is it, is anything live already? Has JetBlue wired, and is this primarily for Continental or how should we think about that?

They have a number of customers that they are targeting, and Continental is the first one that they have announced. So that is why I was talking about Continental. So they announced that one a couple months ago.

And then you suggested that while land mobile was down at the RV was actually flat. Presumably those are all for retrofits of existing RVs as in new sales?

Well, no.

What is driving --

We have OEM, as you know we do OEM and aftermarket. And the OEM sales are obviously impacted by the lack of new vehicles sales, and which I mention we are down 33%. So our OEM sales were not down by that amount. So you would have to conclude that we are gaining market share quickly just based on the overall market.

Okay, so that is more a function of -- so it is more a function of gaining share rather than aftermarket sales?

Well it is aftermarket sales, but we are gaining share in the aftermarket.

Okay.

In units -- maybe this will help -- in units we had a little bit of a shift in units toward the aftermarket in the quarter compared to what we had been averaging. But the sales and units again measured in units to sales in the first quarter were just under 50% of the total units. And therefore obviously the aftermarket was just over 50%. And that is a little bit of a shift from prior quarters but not dramatic.

Okay.

And if a vehicle leaves the factory without a satellite TV system there is still an option for us to pick up that sale from the consumer in the aftermarket. So even the aftermarket can be impacted by lower OEM production.

Okay, thanks very much.

Chris Quilty, Raymond James and Associates.

Congratulations on the results. Martin, I just want to circle back to something you had said earlier about the FOG orders. Did I hear you correctly in saying that you are going to ship 6 million in the back half of the year but you think that could be your quarterly run rate by the first quarter of next year, if you get follow-on orders and that production ramp continues?

Yes, that would be, if you look at our monthly production exiting this year that would be our normal -- that would become a new normalized level if we get continued orders from Kongsberg and some others. So what I am saying is that our monthly production rate is ramping every single month starting in Q3 per this contract, and they have asked us to put capacity in place to sustain that kind of production ramp. So they anticipate additional orders, as do we. We don't have those orders yet; and my comment was that if things go according to plan starting in Q1 we will be starting in January at the rate at which we are exiting the December 2008 numbers. So it would be a very substantial increase in our FOG quarterly run rate.

Now if I run the numbers correctly here for the CROWS II program which was 6500 units over five years was sort of how that contract was originally configured, it would seem that -- and I do not know where else FOGs are going but you must be specked into that contract at least in order to support those types of volumes.

The Kongsberg has a number of different products. The Protector is their series of products; U.S. Army is buying that product for CROWS II. So they also have other customers that they have announced. They also have a Protector Lite, which is a two axis version of the same thing. So this product is intended to be qualified for all their systems so that it could be used on any program that they have.

Okay, and to do you know who you are currently competing with for other sources of supply?

It is my understanding that [Litaf] is the incumbent.

Okay. Good news there. Circling back to another item you mentioned for the TracPhone V7, you mentioned that the gross margin is less than the hardware sales, but clearly you don't have a heck of a lot of costs associated with delivering those services. Can you talk about the EBIT margin contribution of the two product versus service?

I don't have a detailed model here in front of me, Chris, but you're right. The cost below gross margin for the airtime services are much lower than the cost that typically we would see with product sales. Because we don't have to put in the same energy in terms of sales and marketing to get that recurring revenue. Engineering expenses are obviously generally for the product. And then administration. So we would expect that if you look at, as you said on an EBIT basis that the margin should be quite good for the airtime services.

Okay, and are you still planning on eventually breaking out service revenues once you hit the sort of 10% level?

We will break out services separately once we hit that level, which we have not yet. But keep in mind we have not yet concluded whether we will segregate the airtime services piece specifically. When we report services what we collect in that total bucket of things is airtime, sales as well as repair services, as well as non-recurring engineering. So all of that collectively we will certainly break out. How much granular we get below that, we have not decided yet.

And can you give us in order of magnitude how many ships you are installed on or how many you think you could be installed on by the end of the year?

As you know, we don't report unit sales for a specific product. So I'm going to pass on giving you a specific answer. But you should think about it in terms of our goals this year are measured in hundreds, not thousands, not tens. So just to give you a general sense for it. It is a high value, a big-ticket item. The retail price is over $30,000. So it is not thousands.

Okay. Was the service revenue and I think you said $22,000 annualized per vessel, is that on par with what you we expecting, or better or worse?

A little better.

Okay. And any feedback in terms of product quality, customer satisfaction, follow on demand from the same customer?

We've had a number of customers who bought one, then bought two, then bought more so we've had great feedback. The hardware quality has been absolutely bullet proof. As we initially ruled out the service six months ago there were the inevitable glitches; getting things like voice over IP faxing to work that have since been resolved. And right now the system is rock solid stable, it's fast and people really like it. And compared to the other things that are out there it is a dramatically better product.

And your decision to go out and hire specific channel manager to sell this product, was that somebody who came to you or an active search that you did for finding someone, and what will be the top priorities?

Our plan all along was to launch a product in the market that we were already established in, which is the leisure market. And then make sure the service is bulletproof, before we go after commercial. And that is happening exactly on schedule. So we are now going after the oil and gas and shipping. And we are pacing that really with the expansion of the service. So in other words right now we can go after the oil and gas services in the Gulf and the North Sea, but we can't yet go after the oil in West Africa or the shipping markets in the Pacific. So we are planning our rollout for their sales effort to match the rollout in our service and adding satellites and transponder capacity.

Okay, and some housekeeping questions for Pat. Can you remind us of where you sit on the taxes with your NOLs and when you expect you will probably transition to being fully taxed and what tax rate we should use.

Yes, in a general sense yes. At the end of calendar 2007 I recall that we had valuation allowances that were close to $2 million remaining on the books. We've obviously worked that down a little bit in the first quarter with the profit that we generated. And we look at the valuation allowance on a quarterly basis as we need to, both internally and with our accountants to determine when and if we should take that down.

At this point in time we have left it on the books, and we will assess it at the end of the second quarter. And if we were to continue at this rate based on the guidance that I've given, we would pretty much consume what is left of the valuation allowance by around the end of this calendar year. As a result I would say that you should continue to assume that our tax rate will be about 10% to 12% for the year, which is what it was in the first quarter. I think it was 11% in the first quarter and we are expecting the second quarter will be fairly comparable.

Okay, and looking ahead to next year?

Next year I would expect that then we would be at a fully taxed rate and a blended rate for the company is probably going to be somewhere between 35% and 40%.

Okay, haven't had any experience with that in a while?

We have not.

On the stock buyback program, can you give us the actual number of shares outstanding at the end of the quarter?

Well, the number of shares that we use for calculating diluted stock I think was in our earnings release. That was 14,672,000 shares but that is an average. We are a little bit below that. I want to say it is around [14,000,500] and change. I don't recall the exact number.

Maybe I'll circle back for you on that and final question here --

Excuse me, Chris. We will be filing our proxy within the next 48 hours. It will be there.

Okay, so the final question was with regard to the aeronautical, how that will be broken out and reported once you start shipments for that end of the year.

Right now we actually are planning to start production this year; we actually don't have revenue for it in our '08 guidance. So if that -- there is a chance that we actually make revenue in Q4 for that. So just to be clear on that. So we are planning to start production, but it would be very close to the end of the year. So that could be some upside for Q4. But it would be reported as -- that's a good question; we hadn't thought about that. We can't put it in land.

Can't put it in marine.

Yes, so we will have to start a new category.

Okay, very good. Thank you, gentlemen.

Jim McIlree, Colin Stewart.

That was great. Thanks. Good morning. The guidance that you have for the second half, if I take the midpoint you would have revenues greater than the first half but earnings lower implying lower margins. What is the margin hit coming from?

I don't know why you would conclude that necessarily. I mean, the midpoint of guidance range for the top line and the bottom line -- for the top line you are right, the second half would be a little bit higher than the first half, but not by much. We are expecting roughly 50% of the company's revenue in the first half and the second half. And as far as the bottom line, again, the midpoint of the guidance we gave would put us right about 50% of the earnings in both the first half and the second half.

The things that are the dynamics that are going on are as we mentioned in the prepared remarks, the fiber-optic business is going to be very strong in the back half of the year. Whereas the second quarter is going to be relatively low because it is a period, second quarter being a period where we don't have any remote weapons station sales in the quarter. The other factor is that we are seeing a little bit of a shift in our marine business, not dramatic from prior periods but a little bit of a shift because of the fact that the TracPhone V7 and the airtime services are new. They are gaining momentum in the marketplace with leisure customers, but also just beginning with commercial customers. So that is another change in the profile of the company as you look at us this year compared to prior periods. So that is I would say in summary a couple of the key things that are ongoing. This year that we hadn't seen in prior (technical difficulty). As far as gross margin, we are holding our guidance for the year. We did a little better in the first quarter than we expected. We still expect that for the full year we will be probably in the 40% to 41% range. That is consistent with the original guidance we gave. And in terms of the overall performance of operating expenses we think that that profile will be about consistent with the original expectations, as well. So really from the original guidance we gave for the year not much has changed, other than as Martin said earlier, a little bit of a shift in timing, but not dramatic.

Okay, could you talk a little bit about the qualification process for the Kongsberg order? And secondly, are the margins on that product expected to be similar to what your prior FOG margins were?

Well the qualification process is typical for any government product. So there is no unique qualifications and requirements different from any other FOG product we ship. So I would just describe that as standard procedure, nothing special. And as far as margins, you know we don't comment specifically on customer margin. But if you look at I think Pat's general comments about how margins for the year are shaping up, it is consistent with what we expected. So from a modeling point of view I think if you used the normal margins that you have for FOG, that would be reasonable.

Okay, and can you comment on what your TACNAV expectations are for the second half or whether or not you think the strength you saw in Q1 is sustainable through the rest of the year?

Keep in mind the strength we saw in the first quarter was compared to a relatively weak Q1 of 2007. So we are comparing to that. We had started the year with an expectation that the TACNAV revenue would actually be down on a year-over-year basis or flat to down, slightly down year-over-year. And we are still holding to that expectation. So that hasn't changed from the original guidance we gave.

Great. That does it for me. Thank you.

We have no other questions at this time.

We will wrap it up now. So if anybody has any last-minute questions feel free to contact us directly or to email those question at IR at KVH.com. Thank you.

That does conclude our call. We would like to thank everyone for their participation. Have a great day.