KVH Industries Inc (KVHI) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the KVH Industries fourth-quarter conference call. Today's call is being recorded and now at this time, for opening remarks and introductions I'd 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 fourth-quarter earnings release that week 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 net, feel free to submit questions related to the content of today's discussion to IR@KVH.com and we'll be happy to answer them following the call.

This conference call will contain certain forward-looking statements that include 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 November 5, 2008. The Company's SEC filings are directly available from us, from the SBC 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.

Great, thanks, Pat. Thank you all for joining us today. Given the current economic environment we're very pleased with our results in Q4, growing both the top-line and the operating income line. 2008 was clearly a challenging year for all of us; KVH, like every other company, entered the year with certain expectations and strategic goals. But as we discovered, the rapidly evolving global economic conditions required us to temper our financial outlook for the year. Just two quarters ago we reported record net income.

So there's no doubt the economic situation is a challenge and that KVH is affected by it. However, I can tell you that KVH is weathering this recession better than many other companies. In Q4 we did $21.2 million in revenue and that's an 8% increase from the same quarter last year, with a profit of $306,000 or $0.02 per share. For the full year we had $82.4 million in revenue, a 2% increase from 2007, but at the same time we increased our net profit 22% to $3.1 million or $0.21 a share.

We feel very confident in our ability to grow the Company in spite of the recession while strengthening our strategic position over the long term. Our balance sheet is strong and we're virtually debt-free. Our diversified business model with innovative products, revenues from satellite communications on land, sea and air and a growing defense and commercial business has allowed us to ride out declines in one or two of our market thanks to continued strength in others.

We're carefully managing our business without being so conservative that we stifle opportunity. In fact, our financial position gives us the flexibility to aggressively pursue and invest in our major strategic initiatives with an eye towards strong recovery in the future.

At the start of the year we identified two key strategic growth opportunities -- the expansion of our mini-VSAT airtime service and the use of our fiber optic gyros and remote weapon stations. While our short-term financial expectations changes over the course of the year, I'm pleased to say that our focus on these strategic initiatives did not -- and it's now paying off. Both opportunities played critical roles in helping us strengthen the top and bottom line in 2008 as well as positioning us for the future.

Our land mobile business, especially sales of satellite TV systems to RVs, remains a challenge with a Q4 decline of 59% versus Q4 last year. At this point sales from products and services to the RV and automotive markets represent less than 10% of our total revenue and it's not nearly as meaningful as it was just a couple of years ago.

Within our marine business the increased weakness that we began to see at the end of Q3 in the leisure market carried over into the fourth quarter affecting our sales both in Europe and domestically. The TracPhone V7 and growing airtime sales helped offset that weakness and our Q4 marine revenues were only down 2% from the year before.

To help sustain our position in the leisure market we introduced the lower cost TracVision M1 during the fourth quarter. At only 7 pounds and 12 inches in diameter its fully stabilized in motion satellite TV antenna, the smallest and lightest in the market, is excellent for use on sailboats and smaller power boats. It also includes the highest efficiency antenna we've ever designed, ensuring that boaters don't sacrifice performance and picture quality in their quest for smaller and more affordable.

At the same time "smaller and more affordable" has been the key to our continued success with the TracPhone V7 and the mini-VSAT airtime service. This versatile combination of integrated hardware and our own broadband satellite service offers significant advantages in bandwidth, data rates and cost for boat owners and vessel operators. These benefits are of increasing importance within the commercial market where ship operators are now looking for cost savings and cost effectiveness in an increasingly competitive market.

With the TracPhone V7 and mini-VSAT we are able to offer lower hardware costs, lower installation costs and lower airtime costs compared to other products on the market. It's a very compelling sales proposition when you can show a fleet operator how our solution can help reduce their monthly airtime expenses by as much as 80% over the services they are using now.

But commercial operators are not simply interested in reducing costs; they need to have a service when and where they need it around the world. For that reason we're continuing to invest aggressively in the global expansion of the mini-VSAT broadband network. This includes the recent activation of service in the Pacific Ocean, an area stretching from Asia and Japan to the West Coast of the United States and from Hawaii North to Alaska.

We now have successfully rolled out a unified KU band broadband service across roughly two-thirds of the world's major shipping and aeronautical routes, enabling us to offer commercial, leisure and government customers a unique mobile communication hardware and service solution. Our goal as we enter 2009 is to complete the mini-VSAT broadband network on a global basis and to support the growing demand for faster and more affordable data and voice connections for people on the move.

So the next step in this effort is the expansion of mini-VSAT coverage into the Persian Gulf, a milestone we expect to announce shortly. We're also working diligently to position the mini-VSAT broadband as a viable option for government and military applications. This is of special interest in light of the new administration's commitment to the expansion of broadband services and infrastructure which includes homeland defense and emergency services on a state and federal level.

Already one systems integrator has purchased TracPhone V7 and our TracVision satellite TV system as a centerpiece of three new emergency command vehicles for the state of Nevada. These vehicles could serve as a model for other states looking for similar mobile broadband solutions.

I believe that our focus on and investment in the mini-VSAT broadband network is justified by the continuing growth of this market opportunity. According to Northern Sky Research, maritime mobile satellite services generated an estimated $1.1 billion in retail airtime revenue in 2008, a figure that's expected to double by 2012.

To take full advantage of that opportunity we recently expanded the scope of our distribution network through our new agreement with Thrane & Thrane. Not only does it dramatically increase the number of sales and distribution points for our hardware and service, it's an invaluable endorsement of our maritime SATCOM solution as we continue to position mini-VSAT broadband as the new global standard for KU band maritime communications.

Under the terms of this agreement our TracPhone V7 system and broadband service will become Thrane & Thrane's solution for maritime VSAT communications. Thrane will private label the V7 under its SAILOR brand and employ the strength of its extensive global sales, distribution and support network to market and resell our mini-VSAT broadband service under the KVH brand.

Thrane's worldwide reach and credibility are powerful additions to our efforts to expand the use of the mini-VSAT broadband service in commercial maritime markets. They estimate that they're already on board approximately 70% of the world's commercial vessels. They will also help us accelerate the rate at which we add new subscribers to the network itself. This is critical in light of the investments we expect to be making in our network expansion in 2009 and beyond.

In the short-term KVH and ViaSat will be covering the operational cost for transponder access until sufficient subscribers join the network and allow us to reach a breakeven point on our transponder costs. We currently estimate that on average it will require about eight or nine months to reach the breakeven point once the service is turned on in each new coverage region.

Contributing to the subscriber growth will also be the airtime revenue that we'll generate from business jets traveling through our networks. And speaking of jets, I'm pleased to report that we've now completed the development for our commercial airline satellite TV system. We're now in the qualification phase and expect to begin shipping product to LiveTV this spring. With more than $20 million committed by contract, this project represents a new growth area for KVH as we begin providing equipment for narrow body jets like the Boeing 737 and the Airbus A320.

One of the major advantages of our diversification strategy is that not all parts of our business are affected by the general economy at the same time. Our defense business in particular has experienced rapid growth recently. In our guidance and stabilization business we enjoyed an excellent quarter with revenue of $10.1 million and this was a 79% increase from Q4 last year. Sales of our tactical navigation products were up 51% and we recorded our best quarter ever in our fiber optic gyro business with $4.6 million in sales.

The dramatic growth in our fiber optic gyro sales is a result of our successful qualification of our DSP-3100 gyro and the start of shipments to Kongsberg for its remote weapon stations. Even as we began shipping to fulfill our existing orders from Kongsberg, we added to the backlog with an additional $3.5 million order from a major Kongsberg subcontractor. So we're continuing to ramp our production for the product and we recently added a second shift at our Illinois facility to ensure that we're meeting the growing demand.

Our new CNS-5000 navigation system also began shipping at the end of Q4. This collaboration with NovAtel combines their high precision GPS and our fiber optic gyros to create an extremely accurate nav system for industrial applications. We're receiving for positive feedback from our first customers and we're seeing a high level of interest from companies supporting a wide range of applications.

So in conclusion, 2008 was a challenge, especially as economic uncertainty grew over the last four months of the year. However, we ended the year on a positive note both on the top and bottom line; we accomplished a number of key strategic objectives during 2008 like launching our global mobile broadband partnership with ViaSat, winning our first commercial aviation contract with LiveTV and winning a key fiber optic gyro order with Kongsberg.

We now enjoy strong positions in our market versus our competition and have the financial resources to ride out the recession and be in good shape when the recovery begins. In fact, we see this as a unique opportunity to continue our global VSAT expansion and to emerge from the recession with the world's only truly global mobile broadband VSAT network for ships and planes.

Given the relatively lower level of revenue we expect in the SATCOM business, especially on the leisure side, this will put some margin pressure on us and the short-term. But the strategic benefits far outweigh the short-term challenges of the current economic environment.

Looking ahead to 2009 we'll continue to manage the Company with an eye toward the long-term health while investing as needed to support and expand on our strategic initiatives in mobile broadband and fiber optic gyro development manufacturing. I'm confident in our prospects and the possibilities ahead of us. Now I'd like to turn the call back over to Pat to fill you in on the numbers. Pat?

Thank you, Martin. The financial results for the fourth quarter were generally in line with our expectations; this is especially gratifying given the very challenging economic environment. Now I will review some of the specifics.

Gross margin was just under 39%. We had anticipated this sequential decline due largely to costs associated with the ramp of our fiber optic production capacity and the initial rollout of our mini-VSAT infrastructure. We did see some margin benefit from higher than expected TACNAV sales, but this was largely offset by further weakening of leisure marine sales.

For the full year gross margin was just under 41%, while the absolute year-over-year increase in gross profit dollars was almost equal to the growth in revenue. For Q4 operating expenses were up only 2% compared to last year. We continue to carefully control discretionary spending.

For the fourth quarter reported R&D spending was 19% lower than last year. This continued to reflect the impact of the capitalization of the antenna development for the LiveTV in-flight entertainment system. Because of this accounting treatment we reported about 17% lower R&D expense for the full year, even though our actual total spending level for engineering increased about 20% year over year. The capitalized costs for the development of the LiveTV antenna system will be amortized over the unit quantity to be delivered during the next few years.

Fourth-quarter sales and marketing expenses increased 6% year over year and were also up sequentially as expected. This reflects both the higher level of tradeshow activity that is normal for the fourth quarter and the continuing ramp of the VSAT sales, marketing and network support costs. We will continue to expand our mini-VSAT capabilities and market exposure while we also selectively reduced efforts in areas that have shown little demand elasticity in recent quarters, such as the RV market.

For the year sales and marketing spending increased 5%. Administration expenses were up just over 20% compared to last year, but declined sequentially. The year-over-year increase is due to the timing of stock and other compensation-related expenses. For the year admin expenses declined 7% marking the third consecutive year that these expenses have declined compared to the prior year.

Now turning to the balance sheet. Cash and marketable securities were $42.7 million. For the quarter cash flow from operations was substantially negative at more than $5 million due primarily to the sequential growth in accounts receivable. Capital expenditures were approximately $1.2 million. A large portion of this related to the acquisition of our first VSAT hub, which is now supporting our new coverage area in the Pacific Ocean region. For the year we invested $3.2 million in new capital equipment.

During the quarter we completed our original 1 million share stock repurchase program and our Board approved a new 1 million share program. In Q4 under the two programs combined, we purchased 111,000 shares at a cost of about $550,000. During all of 2008 we repurchased 836,000 shares at a cost of $6.7 million.

Accounts receivable at $14 million was almost $5 million higher than Q3. Days sales outstanding increased to 59. We anticipated an increase in DSO due to the economic challenges that all companies are facing. We will continue to closely monitor the condition of all of our accounts.

Inventory increased modestly to $15.5 million; this continues to be at a level well above normal operating targets and it reflects the impact of the rather precipitous declines in consumer demand that we have experienced over the last several quarters. We will be executing programs over the next several quarters to rebalance and reduce our overall inventory levels. We have adequate reserves for any excess and obsolete inventory exposure.

Now I will turn to our expectations for 2007. As we all know, this is a very difficult environment in which to project performance. The current macroeconomic conditions are so poor and so volatile that there is a very low level of consumer and commercial confidence. We will continue to be cautious with the outlook for our core businesses but there is no way to know if we are being cautious enough. At the same time we will be opportunistic with respect to our new market growth initiatives.

For the year, assuming economic conditions don't get much worse, we expect revenue growth of about 10%. This will be driven by expected strong growth in our mini-VSAT and fiber optic businesses and sales of our aeronautical TV antenna system that should begin in the second quarter. We assume that the current weak economic conditions will continue for an extended period of time and that our leisure satellite communications sales will show continuing substantial year-over-year declines in both the land and marine markets.

This profile poses a big challenge for the bottom line. During the year we will see a substantial increase in costs associated with the buildout of the mini-VSAT global infrastructure and support capability. This will add approximately $5 million to our cost of service and operating expenses in 2009. In addition, we will continue to invest in the development of new products that will sustain our growth in future years. These actions, coupled with the fact that we expect a continuing decline in sales of products and services to our traditional leisure customers, will put downward pressure on gross and operating margins.

During this extended period of very poor economic conditions, we will push forward with our strategic growth initiatives and invest in innovative products while managing operations to deliver bottom-line results that are around breakeven. We will take the appropriate actions to adjust to the economic realities of the day, but we do not intend to shortchange the things that are needed to drive our long-term success and shareholder value.

For the first quarter we expect sales will decline year over year by up to 10%. This is primarily due to the fact that the first quarter of last year still showed a relatively high level of SATCOM land product sales. Gross margin should be in the range of 36% to 37%. We took action in early January to reduce the Company's employee count by about 10%, but the full cost reduction impact will not be felt until the second quarter. We are projecting a modest net loss for the quarter.

Our defense backlog at the end of December was $12 million. In the near term we expect to receive significant new orders for fiber optic gyros for use in remote weapon stations and the Mark 54 torpedo program.

In spite of the current tough economic conditions we are very upbeat about our future. We have the tools and the strategy to deliver long-term success, a diversified portfolio of products and services, growth strategies that play to our strengths, and the financial resources to support a healthy level of continuing investment while weathering this economic storm.

We intend to use our financial strength now to increase the probability of strong financial returns when the economy turns for the better. Now we'd like to take your questions. Amber, please open the call for questions.

(Operator Instructions). Chris Quilty, Raymond James.

Hi, gentlemen. A couple of questions for you. It sounds like you didn't get any -- you are not yet shipping that Mark 54 from the comment that Pat just made?

That's true. We still don't have that order, the prime does have his order now which is Raytheon, so we expect to have that order during Q1 but probably not revenue in Q1.

Okay. And you had talked last year about hitting a $4 million to $6 million quarterly run rate upon exiting December for the remote weapon station FOGs. Obviously that got delayed and if you only did about $4 million or so of FOGs and you have other stuff in the mix presumably, when do you expect to get to that run rate and do you think that still is a safe run rate for full year 2009?

Well, we exited the year with a more shippable backlog than we would have liked. So we had the orders in Q4, but didn't ramp production as quickly as we had thought. And that primarily was because we had a delay in the acceptance by our customer of the products; we really didn't start ramping deliveries until I would say around November of Q4. I think the $4 million to $6 million run rate for the business is still absolutely where we see it.

For remote weapon stations alone or overall FOG?

I think overall FOG would be at the $5 million range is a reasonable estimate for the upcoming quarter.

Okay. And within the defense business was there -- obviously there was a decent portion of TACNAV in there. Did you have any specific large orders that contributed or some of those delayed foreign orders expected to come in this year?

Yes, there were no big orders there; there were just a bunch of smaller ones. It was a little bit more than we expected. We still do expect some big orders on TACNAV for Middle East orders through US primes hopefully in the first half of this year. And that would -- depending on when that happens, as you know, that has a big impact on our profitability. But we tend to forecast based on orders in hand rather than expected orders.

Okay. And Pat mentioned about an increase of $5 million; I assume that's annualized?

That is a full-year number, Chris.

Okay. (multiple speakers) cost of Mini-VSAT. And does that include the additional rollout into the Persian Gulf?

Essentially, yes, it includes the support costs and the infrastructure costs for essentially getting global coverage by the end of the year.

Okay. And did you give a CapEx forecast for '09?

I didn't give a forecast per se, but it's going to be a fairly substantial year for CapEx because we'll be acquiring several more hubs. I expect that we could see CapEx in the range of $6 million to $8 million for the year.

Okay. And spread out fairly evenly?

Pretty match. I'd say that the majority of it will probably be spent by the end of the third quarter, but otherwise reasonably evenly.

Okay. And Pat, while I have you, the tax rate assumption, have you burned through those NOLs yet?

We have not, Chris, and actually as a result of the -- given our results for calendar 2008 and given that those NOLs are mainly related to US-based -- the US parent company based profits we didn't chew into a significant portion of them during the course of the year, some but not a big portion. So we still have a fair amount of NOLs and valuation allowances related to those that are on the balance sheet.

And so for the time being, and given that right now we're projecting -- because we have no better visibility we're projecting roughly breakeven performance for the year. We're expecting that for the foreseeable future our tax-free will continue to be at a fairly low level and mainly driven by the profits that we earn in our Danish subsidiary.

Okay.

I'd expect the taxes, in terms of absolute numbers, should probably look something similar to 2008 as a percent of profit before tax assuming if our about breakeven comes to play the percentage may look a little odd.

Okay. Now if you talk about breakeven for the full year as a working forecast, obviously you're going to lose some money in the first quarter, Q2 is typically your most profitable year so you'd make some money there, and then the back half of the year is a bigger question as to how that plays out?

I think that's a fair set of assumptions.

Right. And I think baked into that, too, Chris, is that we're moving a bit faster than we had planned say six months ago in terms of rolling out new regions. So that's kind of working against us in the back half of the year so we'll be adding more regions faster. So the way to think about it is all the regions we're in are now profitable and above breakeven with the exception of Pacific which just came on board. So, we're seeing that the pace of that rollout is accelerated a bit from what we thought and that will be a little bit more skewed towards the back half of the year.

Okay. And rolling that out, clearly -- or accelerating the rollout -- there's clearly an advantage to being able to go out to shipping customers and say we've got a near global coverage pattern which significantly enhances the attractiveness of the service --

Right.

-- alone. But do you have hard customer indications that would lead you to get that aggressive, large shipping fleets or navies or something that you could say to yourself there are some 100 unit or 200 unit ship orders out there?

Yes, yes. I mean, we're talking to fleets and have been trialing one in particular for over a year now, which would be more than 100, closer to 200 vessels, another one was over 100 vessels. So the pay off is big when you get a fleet like that. But of course they can't choose a system that doesn't work in most of the areas where they operate.

Now it [does] need to work in 100% of the areas because they already have Inmarsat onboard. So the trade-off for them is not that they lose communications completely, it's just that they don't save as much money if they're operating in a region where they don't have any coverage then they have to use the old system. So it really is an economic question.

But you're absolutely right, we have to get above the threshold where you're perceived to be a global system and a viable alternative. It's not something that you can say, well, let's do it later if we get an order -- that type of thing. We really have to push ahead with this and, based on the feedback we've gotten, we're absolutely convinced we've got the right approach.

Okay. And given the fact that Thrane & Thrane was actively promoting their own in-house SAILOR 900 VSAT system as recently as December, how long have you been in discussions with them about a potential V7 branding strategy and what do you think pushed them over the edge? And your guidance I'm assuming includes some large orders that they think they have in their pipeline.

Well, to be honest the Thrane thing happened fairly quickly and I would say the impact of that is probably not yet fully baked into our projection. So there could be some upside there. We have to see how that plays out, is it going to be 100% additive? Probably not.

In other words, there might be some shipping companies that would prefer to buy from Thrane because they're already a Thrane customer and that might be an order that we were planning on. On the other hand, we expect the vast majority of their sales to be incremental.

And then the second part of your question is I think why did they switch? I think the answer is that they came to believe that the -- that our technical approach, the spread spectrum, smaller antenna, the whole architecture is the winning architecture. And they didn't want to be on the wrong side of a standards war.

And presumably they took a hard look at what [Cobbum] and Furuno and all these other VSAT providers that are bubbling out of the woodworks are doing here?

Right, and they had that solution in hand and had started to market it, they've been testing it. They had a product that was ready to go and I directed even then a press release saying that Thrane was going to be in their camp. So for them to reverse there had to be a compelling reason, and that reason is that it's a better solution and it's going to be global.

I think from a market point of view we almost don't care how many they sell. The huge benefit is that it now is becoming the de facto standard. This is just the one to use, the global -- we're trying to be like GSM. So this is the standard and let people get on the network. Also gives shipping companies of the perception that there's some choice here, they could buy the service from KVH or they could buy it from Thrane. So at least there are two different companies now, which is important, again, in terms of helping a global shipping company to make this kind of important decision.

Right, awesome. I'll circle back in the queue.

(Operator Instructions). Rich Valera, Needham & Company.

Thank you, good morning. Pat, just wanted to clarify with respect to the increase in OpEx year over year, the $5 million. Should we just look at the total OpEx number for '08 and essentially add $5 million to that for '09?

Well, actually it's a good question, Rich, and I'm glad you asked it because that $5 million is not -- the majority of it is actually going to be in cost of service. So it's going to be above the gross margin line. I'd say -- just to give you a ballpark I'd say probably 80% of the $5 million is going to be in cost of service and about 20% of it will be in operating expenses. And I'd say that in both cases you can think of it as reasonably additive to the base infrastructure cost to the Company.

Okay. And I guess that leads to the next question with respect to gross margin. For the year it sounds like you're going to have this type of pressure, the sort of V7 rollout cost pressure on the gross margin line for most of the year, but the margin perhaps swinging around on better marine sales say in the second quarter. But how should we think about gross margin overall for the year? Is the first quarter a low watermark and maybe the year as a whole should be somewhat higher than that -- if there's any color you could add there.

Yes, I can add a little bit of color. I'd say that the way we're thinking about this, and we would suggest that you think about it, is that gross margin is probably -- for one, don't think of Q1 as necessarily being the low watermark for gross margin. It could go a little bit lower than that before it begins to trend back up again.

For the full year I'd say that it would probably be more appropriate to think about gross margin as being in the mid-30s. And I would expect that beginning in 2010 we would, as we have built out the global infrastructure for the initial round, I mean over time we fully expect that with a lot more VSAT accounts getting on the network over a number of years we'll have to add more capacity, but we'll be at a point then when it's not going to have nearly the impact on our gross margins that we expect it to have over the next four quarters.

In 2010 and beyond we would then begin to see the gross margin climb back up again and I'd say probably to the high 30s percent which is probably more along the lines of the top of model that we'll be looking at long-term because of the change in the mix of business, airtime and products. So that's the way I would suggest to think about it.

The other thing I would say is, as you know, this environment is one where it's so difficult to project what's going to happen because things are just so dynamic and they've been more negative than positive in the macro economic sense. If things begin to turn in our favor, if the economy begins to show any kind of strength and leisure markets and commercial markets begin to show some strength later in 2009, then clearly we're in a position to be able to do better than the guidance we just gave. But for the moment we think the prudent thing to do is to be as cautious as possible.

Great, that's very helpful. And then in terms of the defense business, you've made out a pretty good baseline it sounds like for FOG, pretty good visibility there for it sounds like the balance of '09 at least. Can you give us a sense of the TACNAV? You had a pretty strong fourth quarter, is that type of level sustainable? Historically that's been pretty lumpy. Would we think that's sustainable up there a $5 million level or should we model that somewhat lower as we look at the whole year?

That $5 million that you just referred to is actually the combination of TACNAV product sales plus repair services, mainly refurb and refit programs as units come back from the field and to get refurbed. And it also includes the nonrecurring engineering element of our service expense. And I'd say that if you look at the combination of all those things over the course of 2009, I don't think you should be thinking in terms of us being able to sustain a $5 million level each quarter.

As you said, that is a lumpy business, it tends to be up and down, especially the tactical navigation product portion. And we're being, again -- and we're trying to look at all of our businesses with the exception of FOG and VSAT and the aeronautical -- the new TV antenna for aeronautical applications, we're trying to look at everything else in a conservative way.

And so I'd say that for the non-FOG portion of the defense, with the true defense businesses, probably ought to be thinking more like maybe $3 million a quarter. And the other thing on top of that would be -- which is not part of our defense business per se -- is the aeronautical antenna system for LiveTV that we expect to start shipping in the second quarter.

Right. And we know that has a $20 million total value and I think you've said over multiple years. Any sense of the contribution in '09? Could that be a $5 million type of contribution, is that --?

Yes, that's a very estimate. So that's sort of what we're looking at. And we had a few little plus ups in that, so it's probably closer to a $21 million total backlog now. And we also see some other opportunities there, internationally bidding on some projects right now for other airlines both in South America and Europe. So we're looking at other opportunities there beyond the $21 million.

Great, that's very helpful. Just one final bookkeeping one, Pat. The depreciation and amortization for the quarter?

Sure, Rich. The depreciation and amortization was $557,000.

Great, thanks very much.

You're welcome.

Chris Quilty, Raymond James.

Martin, you answered my question about possible new aero customers. But do you have a name for this product yet?

That's a very good question, Chris. We do not have a name for it. We'll have to come up with one. It will be in the TracVision family.

Get that by next quarter.

The J5.

Also, we hadn't heard much about the -- is it the CNS-5000?

Yes.

Give us a sense of what kind of market potential you think is there. And is that just dead on arrival due to the economy or is that something that's compelling for people in the agriculture industry? And is it compelling because it's a good return on investment or it's just a heck of a lot cheaper than whatever the alternative is?

It's one of those products where it's kind of usual because we're selling the finished product and NovAtel is as well. So they have their set of customers and we have our set. And our customer groups are things like robotic applications, their customers -- I'm not really sure. I think a lot of them are for precision road mapping where they go drive roads and do a Google or Earth kind of thing or street views.

But the product itself has been incredibly well received; we were kind of surprised by it. So I think it's going to be a sleeper product for us. It's a pretty good sales price, like $25,000. So it's a high dollar item for us which is great. And yet it's still a lot less expensive than the alternative. So customers view it as very affordable compared to what they're doing now. It's non-ITAR controlled; a lot of the alternatives are military systems that you can't export even to Canada without licenses. So there are a lot of nice things about the product and I think it's going to do very well for us.

Okay. And obviously good margins. And on that thought, with the FOG production ramping are you at what you think are steady-state EBIT margins in that business or are you planning for continued margin expansion through the balance of the year?

The big challenge for us is getting production up because it's a very, very technical, difficult to manufacture product. We've been investing all our time and energy, including a lot of my own personal time recently, trying to figure out ways that we can make it easier and faster to build these, because we have more demand than we can meet which is really ironic. Sort of the stuff that you can sell you can't build and the stuff you can build you can't sell in this market. So we're trying to fix that. And I think you'll see that throughout the year our efficiency and hence our margins will improve each quarter.

Okay. And just to drag something out of the closet. Given all this talk about smart electrical grids and whatnot, are you dusting off the old fiber optic gyro current sensor?

Current sensor, yes, (inaudible). If you look at the list of things that they want to spend money on with the stimulus, there are a lot of things in there that relate to broadband, electrical infrastructure like you say, smart grid. So there are a lot of applications. We're taking a look at that, I'm not quite sure what the process is going to be, how they're going to hand out all this money. It's probably going to go back into each department.

Direct check to Chris Quilty.

Then maybe we'll write the proposal to you.

Very good. All right, good luck with that one. And I guess that's it for me. Thank you.

Jim Roumell, Roumell Asset Management.

Thank you. Hi, guys. Can you just give a little color that went into the thinking of basically private labeling the V7 to Thrane? So when I go now to Thrane's website they have their SAILOR picture up there. So is this going to be replacing their existing SAILOR or is it just another kind of product that will be under the SAILOR name -- KVH guts?

And similar, on the McKay arrangement, is it a McKay name on the product? And what I'm trying to get at is what was the thinking through that on the one hand this is another distribution channel, but on the other hand it undermines the KVH brand name a bit. And I know there are pros and cons. So I was just interested in how you thought that through in terms of this does seem to be a terrific new mouse trap. And are we undermining its value so to speak in the marketplace by creating an arrangement like the Thrane relationship? And then secondly, just anymore to comment on the Coast Guard situation?

Okay. First of all you should understand that we've been working with Thrane & Thrane for about 10 years, so we've been actually private labeling their products, all their Inmarsat products, the mini-M, fleet broadband, so we have a long relationship. And we've seen how that can work well going in the other direction. So, and that hasn't hurt their brand on a global basis.

So the decision to do this deal was based on the fact that there's sort of a standards war going on right now where there's -- Inmarsat is out there but the VSAT is a very fragmented market, a lot of different players, each one trying to establish some kind of coverage or some type of technology.

Our number one goal is to establish our technology path as the new global standard. So by having Thrane convert from the other technical approach it's like the HD DVD versus Blue-Ray, get them to convert to Blue-Ray, if you will, was a big step, number one. Number two, we make the money on the airtime. So they're now coming on our network, we're selling them airtime, the airtime is branded mini-VSAT broadband by KVH, so we don't lose our brand identity.

Got it.

And they are discontinuing the SAILOR that's on the website now. So they'll no longer be offering that. And just to recap, McKay is a distributor/dealer, they're not any OEM, so they don't brand name the product.

Okay, okay. Makes perfect sense. And then anything more -- any more color on the Coast Guard situation and any kind of announcement that they might be making or is this just a -- they're happy with what they purchased in the past, they'll be buying a few more? Or will there be such an announcement where they make a formal -- you can make a formal announcement that the Coast Guard has decided to move forward with the V7 as a solution to its smaller boats or whatever?

Yes. No, what they've said publicly was simply a contract announcement and a [CVD] for a small number of units that were bought through McKay. So there's nothing big related to that.

Okay. Okay, thank you.

There are no further questions at this point. Mr. Spratt, I'll turn it back over to you for any closing or additional remarks, sir.

Okay. Well, we just want to thank you all very much for participating in the call and do not hesitate to give myself or Martin or Chris Watson a call if you have any follow-up questions. Thank you very much.

And that concludes today's conference. We do appreciate your participation. Everyone, have a great day.