KVH Industries Inc (KVHI) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the KVH Industries' fourth-quarter year-end 2009 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.

Good morning, everyone. I am Pat Spratt, Chief Financial Officer of KVH Industries and with me is Martin Kits van Heyningen, Chief Executive Officer.

This call will address the fourth-quarter earnings release that we issued earlier today. Copies of the release are available on our website and also from our Investor Relations department.

This call is being simulcast on the Internet and will be archived on our website for future reference. If you are listening via the web, feel free to submit questions to IR@KVH.com and we will answer them following this 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 quarterly report on Form 10-Q filed with the SEC on November 5, 2009. The Company's SEC filings are directly available from us, from the SEC, or from the investor information section of our website.

Now I will turn the call over to Martin to begin today's discussion.

Thanks, Pat, and thank you all for joining us today. As we have all seen 2009 was a difficult year for the economy, for consumers, and for businesses. Entering the year we knew that KVH would face challenges especially from pressure on the leisure markets.

Nevertheless, we were confident that our long-term strategic initiatives, market diversity, and careful operational management would enable us to expand our reach and grow the Company in 2009 in spite of these challenges. I am very pleased to report that we were able to do that thanks to a solid fourth quarter and strong conclusion to the year overall.

We posted our fourth consecutive record quarter of FOG sales and the highest overall quarterly revenue in the Company's history. Revenues were $26.3 million, which represents a 24% year-over-year increase from Q4 last year. We also earned a net profit of $1.8 million or $0.13 per share in Q4.

For the year as a whole, we grew our revenues 8% to $89.1 million. With the strong result in Q4 we just about wiped out the loss from a very difficult first quarter with a loss of just a penny per share for the full year.

During the fourth quarter we made substantial progress in the rollout of our global maritime broadband network and the expansion of our fiber optic gyro business. These all came as a result of long-term strategic initiatives that we kicked off over the last few years along with our aggressive investing in new product development.

In the guidance and stabilization market we enjoyed an excellent quarter with Q4 revenues up 21% compared to the fourth quarter last year. Driving this growth was another record quarter for fiber optic gyro sales which totaled $9.3 million, a 104% increase year over year. To pt this in perspective, our total fiber optic gyro revenue for all of 2008 was $9.3 million.

2009 was truly a breakout year for our FOG business with total revenue for the year up 215% from 2008 growing from $9 million to $29 million year over year.

The success of our fiber optic gyro business is the result of a multi-year, company-wide strategic initiative. We invested in [infrastructure] expansion as well as the development of innovative, affordable products that meet the functional and performance needs of commercial and defense markets.

For example, we introduced a new dual-axis version of the DSP 1500 fiber optic gyro just last week. The single-axis version of the 1500, which we introduced in 2009, is the world's smallest precision fiber optic gyro and offers a compelling combination of size and performance that makes it ideal for applications like optical camera stabilization.

With our existing product line and new developments in the pipeline we are well-positioned to continue to grow this part of our business. And despite record shipments, we continue to build backlog. During the fourth quarter we received a new $6.4 million order from Raytheon for our TGS-6000 inertial measurement unit as well as a new order for $10.2 million for gyros for use in remote weapon stations.

We expect to see a steady flow of new orders in this area, especially following the Army's recent expansion of the existing CROWS II program. In the future, the proposed CROWS III program represents a huge opportunity potentially worth $175 million in new fiber optic gyro sales.

We also continue to be successful -- we also continue to successfully pursue new sales of our TACNAV navigation system which continue to provide a strong contribution to our bottom line. Recently we received $600,000 in engineering funding which is the lead-in to an expected multi-year TACNAV order worth more than $13 million. We hope to take this letter contract authorization and turn it into a formal contract within the next few months, and we will provide more details once we do.

In our mobile satellite communications business fourth-quarter revenues were up 26% year-over-year. Contributing to this growth was approximately $3 million in airtime revenue reflecting strong mini-VSAT sales even as our Inmarsat airtime declined significantly. The fourth quarter also saw the first materials from our aviation satellite TV system with $3.5 million in shipments.

For the full year 2009 satcom revenue was down 17% from the prior year reflecting the economic pressure on the leisure market, including our land mobile business where sales were down 45% in 2008.

The leisure marine market was also under significant pressure in 2009 and remains a challenge as we move ahead into 2010. However, we are seeing the signs of potential improvement in the coming year including better visitor turnout at recent boat shows and a slight uptick in year-over-year new fiberglass boat production.

In order to maintain our strong market share to prepare for eventual market recovery we continue to invest in new product development in 2009. The highlight of this effort was our new TracVision HD7 satellite TV system which began shipping in late December. This breakthrough product enables boaters to receive programming from three satellites at the same time.

DIRECTV moved all their HDTV programming to two new KA band satellites, while still broadcasting the majority of their SD content from their original KU band satellite. As a result, we not only needed to create a single antenna capable of pointing accurately enough to receive KA band signals but we needed to design an antenna capable of looking at three satellites at once. Doing this in a small compact antenna and have it stabilized in three dimensions was long thought to be impossible.

We proved them all wrong with the introduction of the HD7 and our breakthrough triad antenna technology that tracks three DIRECTV satellites simultaneously even as the boat is pitching, rolling, and turning in big waves. As a result, boaters get to enjoy DIRECTV HD just like they do at home with no satellite switching and full DVR support.

It's the best tracking product we have ever built making it perfect even for high-performance vessels like sport fishing boats.

We also took an entirely new approach to the user interface that our customers and dealers will be using. The HD7 is the first KVH product to be equipped with an IP-enabled antenna control unit and WiFi interface. Now you can use any web browser to configure or control the system.

Making it even easier we also rolled out our first TracVision iPhone app, giving iPhone users the ability to check antenna status, select alternate satellites, download and install antenna software, generate a troubleshooting log and send it directly to KVH's technical support team.

We set a new standard for ease of use, installation, and field service and maintenance. Our goal is to begin expanding our IP ACU technology into other KVH products in the coming months and bring these features to all our customers.

Turning to our VSAT business, our mini-VSAT airtime broadband system is doing very well with the airtime becoming a major contributor to our revenue stream. In fact, we have now reached the point where quarterly recurring VSAT airtime revenues are greater than the hardware sales for the quarter. Customers are making the switch to mini-VSAT and taking advantage of the smaller antenna size, faster broadband speeds, and worldwide network coverage.

During the fourth quarter we announced that the US Coast Guard is now deploying the V7 as its primary communications system on its 110-foot and 225-foot cutters. The Coast Guard selection of the V7 is a major endorsement of the reliability and capability of our network and hardware. Something that carries a great deal of weight, especially in the commercial markets.

The Asia Pacific region is home to many of those commercial market opportunities, which is why we just opened a new office in Singapore. This region is the home to 13 of the world's 20 busiest ports. KVH Singapore will allow us to address these significant new sales opportunities very effectively.

We are also working on some exciting new Asian distribution and global support partnerships that we expect to announce in the near future.

Critical to the success of our commercial maritime efforts is the continuing expansion of our mini-VSAT network. Among our recent achievements is the successful activation of our African coverage area, which is allowing us to support the oil and gas industry off Africa's western coast. I am also happy to announce that the satellite supporting our planned Indian Ocean coverage has successfully completed its in-orbit testing and we expect service in that region to go live next month.

Looking ahead we plan to have satellite coverage for Brazil and the important offshore oil regions there under contract this spring with service activation shortly thereafter. So by the end of the second quarter we will have completed virtually all of the mini-VSAT network infrastructure buildout. So that means that with the activation of the Indian Ocean region our mini-VSAT broadband network will encircle the globe providing the only seamless, multi-megabit global network for ships and planes.

With the addition of Brazil, we will offer coverage for more than 90% of the world's commercial shipping lanes as well as most of the major oil and gas fields. Plus we will provide coverage for most all of the primary commercial aviation routes which are supported by our partner, ViaSat.

Finally, in the mobile satellite market our aeronautical satellite TV systems are now in flight on jets operated by Continental Airlines. This is the culmination of almost two years of development in cooperation with our customer, the LiveTV subsidiary of JetBlue. LiveTV is continuing to pursue sales with other airlines and is working steadily on its installations for Continental.

As airlines begin to recover we are starting to see renewed interest in passenger entertainment. For example, Delta announced recently that rather than buying new planes they are going to spend $1 billion on upgrading the planes they have, including adding video services on widebody jets. While this doesn't directly affect us, it's good to see that airlines are investing in improvements to their fleets which could result in some of those funds being directed to passenger television entertainment.

So in conclusion, we are extremely pleased with our performance in the fourth quarter and the year as a whole, especially in light of the economic challenges we are all facing. Our long-term initiatives are gaining momentum and are now major contributors to our revenue growth. Key markets are showing signs of recovery and new products are generating significant interest in winning new contracts.

With the anticipated completion of the mini-VSAT infrastructure buildout in Q2 we expect to see the significant benefits from the investment that we are making now thanks to increases in the per subscriber contributions to our margins. So while we are optimistic about our performance in 2010, we are not assuming that there will be any significant improvement in the economy. If that were to happen, we are exceptionally well-positioned to take advantage of that and should see further leverage from our recent investments.

Now I will turn the call back over to Pat to take a closer look at the numbers. Pat?

Thank you, Martin. The fourth-quarter results show that we are making very good progress strategically and operationally. Overall, our financial results were better than expected. This was achieved despite the continuing weakness of the global economy.

For the quarter, gross margin was 38.4%. Although this was down sequentially, it was about equal to the prior year and it was better than we had anticipated. We experienced the benefit of very good sales levels for our relatively higher-margin fiber optic gyro and military navigation products.

Ongoing investments in the mini-VSAT global infrastructure continued to put pressure on our service and total business gross margins. This VSAT infrastructure buildout, together with changes in the mix of overall service revenue, significantly affected the dynamics of our 2009 services gross margin. For example, in the fourth quarter mini-VSAT airtime services grew very strongly in absolute terms and also as a percentage of our reported total services revenue.

Inmarsat airtime services revenue actually declined year-over-year as did revenue from non-recurring engineering services and our relatively high margin repair services, especially for military reset programs.

Simply stated, our primary growth driver for services, mini-VSAT airtime, is also where we have been investing aggressively while other relatively higher-margin services have fallen off. This is why service gross margins declined significantly for the fourth quarter and for all of 2009.

Our product gross margins for 2009 were actually fairly comparable to 2008. For Q4 operating expenses were up about 8% compared to last year, but up only 1% sequentially.

The key year-over-year driver was reported R&D. In Q4 we had a very low level of customer-funded engineering activity which drove up our reported number even while our total engineering investment was about flat throughout the year. As a percentage of revenue, R&D spending was 9.7% for the quarter and 9.9% for the full year.

Fourth-quarter sales and marketing expense decreased on both a year-over-year and sequential basis. This reflects ongoing actions to curb variable spending in order to adjust to the reality of ongoing weak demand for satcom products in the consumer markets.

Administration expenses increase compared to prior periods. Costs for professional and consulting services related to the buildout of the mini-VSAT network were the primary cause.

During the quarter we recorded the full-year benefit of two favorable tax items. The first relates to the monetization of a small portion of R&D tax credits and the second relates to a true-up of service sales and costs based on a benchmark transfer price study. It is difficult to estimate potential future benefits from these.

Turning to the balance sheet, cash and marketable securities were $41.3 million. This was about equal to the Q3 level. This was better than anticipated due to higher than expected margins, the timing of capital expenditures, and an advanced payment received for our engineering services.

For Q4 cash flow from operations was negative at about $670,000, although it was positive for the full year at about $950,000. We expect our cash balance to decline approximately $4 million to $5 million during the first quarter, primarily due to outlays for additional hubs for the mini-VSAT network.

Capital expenditures were approximately $1 million for the quarter pushing the full-year total to over $5 million. This was a little less than expected and simply reflects a slight change in the timing of VSAT hub deployments. In fact, we have almost $1 million of prepayments for hubs in the other noncurrent assets account on the balance sheet which will convert to CapEx when these hubs are deployed.

We expect capital expenditures for the first quarter to be in the range of $3 million to $4 million and approximately $7 million for all of 2010. Accounts receivable increased sequentially to $15.8 million. Days sales outstanding was very acceptable at 54 days.

Inventory decreased sequentially by about $1.4 million to $13.4 million. This was in line with our expectations. Compared to December of 2008 inventory was reduced by more than $2 million.

Our backlog for guidance and stabilization products and services at the end of December was approximately $20 million. In addition, we have approximately $4.5 million of backlog for our aeronautical antenna system.

Now I will review our expectations going forward. We must still be very cautious with respect to our future expectations, especially looking beyond the next several months. The general economy shows signs of stabilizing but indicators for improvement continue to be very unclear.

For the first quarter we expect a strong revenue increase compared to Q1 last year. Revenue should be fairly comparable to our record level of over $26 million in the fourth quarter of 2009, which would mean year-over-year growth of 40% or more.

We expect to sustain the current level of fiber optic gyro sales, to see solid growth in TracPhone V7 sales and new activations, and to benefit from the recent introduction of our new TracVision HD7 system. However, we anticipate that the revenue from shipments of our aeronautical antennas to LiveTV will be about $1 million lower than the quarter just ended and we expect that consumer satcom markets will continue to be weak.

We expect to report a profit for the quarter in the range of $0.03 to $0.07 per share. Gross margin will likely be about one percentage point lower than the fourth quarter, due primarily to cost increases related to the final phases of the VSAT network rollout. We expect some sequential increase in operating expense due to seasonality factors and the deployment of resources for our new office in Singapore. Tactic spend should be about 20% of pretax profit.

Turning to the full-year outlook. Even though we do not think it is prudent to give specific full-year financial guidance at this time, we can provide some insight into our expectations. We expect 2010 to be a year of strong top-line growth and progressively improving bottom-line performance within the context of normal leisure market seasonality.

Fiber optic gyro sales should grow nicely year-over-year as we expect to sustain or increase our current quarterly level of FOG production. However, the rate of growth will not approach the more than 200% experienced in 2009.

We expect to see significant benefit in our mini-VSAT business with the completion of the global network and expansion of our international sales channel. Keep in mind that the airtime services revenue is cumulative and builds as the number of activated accounts increases.

Although we hope for some recovery in consumer markets, our expectations for growth there are modest.

One challenge we will face is an unusual shipment plan to LiveTV for our aeronautical antenna. To accommodate their installation schedule with airlines we have agreed to ship systems through the first half of the year and then resume shipments during the first quarter of 2011. The total volume for 2010 will be a little more than the 2009 level but it will all be in Q1 and Q2.

We expect that gross margin will remain under pressure through the first half of the year as we complete the buildout of the VSAT network. However, as we enter Q3 we should begin to experience airtime service margin expansion as we benefit from layering new mini-VSAT accounts on the network and generate strong marginal profit with each new account. We plan to continue to leverage operating expenses to contribute to operating margin expansion.

In summary, we expect strong results in 2010 and the improving trend for airline -- the improving trend for airtime service margin that we expect during the second half of the year will also position us very well for 2011 when our strategic growth business should continue to build moment on the top and bottom lines.

Now we would like to take your questions. Nicki?

(Operator Instructions) Ryan Rackley, Raymond James.

So looking at the aero revenue for fiscal year '10 so should we expect that to just go to zero during the back half of the year?

Yes, that is what we are assuming absent additional orders for other customers from LiveTV. As Pat mentioned, total revenue for 2010 will be larger than 2009 but it will all come in the first half.

Okay. And then when it ticks back up in Q1 of fiscal year '11 -- I am sorry of '11 -- should we expect just a quarterly run rate of $1 million to $2 million?

That sounds about right. I think you will see another jump up, so this year the $3.5 million we shipped in this quarter was the majority of what we did 2009. So we will get an increase, maybe $4 million or $4.5 million, something like that in 2010. And then 2011 that will step up another couple of million I think.

Okay. In your comments you mentioned that you expect to sustain or maybe even increase your FOG revenue for calendar 2010.

Yes, that is right.

So that you are kind of bumping up to that $10 million range, which I think you have previously said is maybe the maximum capacity you can handle.

Well, I think the good news is that the capacity in our Tinley Park facility has been expanding. The team there has done a great job of continuing to increase the rate of production. So I no longer believe that is an absolute max for the current facility.

We have been adding incremental capacity in terms of equipment and there is additional space, floor space available in the building that we are in there. So I think as we add capacity we will do so in the context of additional orders, but we won't need to move the facility or anything like that.

Okay, great. Then on the Coast Guard opportunity, are all 22 ships outfitted now or is that still being rolled out?

There is more than that. It's a -- I don't know off the top of my head what the total number is.

I think just in the two classes that we just recently announced there is approximately 60 vessels total.

Okay. Great.

Yes, I thought you were asking how many were actually installed.

Okay. Well, that works. Thank you, guys.

(Operator Instructions) Hamed Khorsand, BWS Financial.

Good morning, guys. Just trying to figure out are you seeing an accelerated rate in deployments on your TracPhone mini-VSAT service?

No, I wouldn't say it's accelerating. I would say that it's generally going according to our plan. It's a little bit lumpy from quarter to quarter. And we also had some activations and sales that crossed the December/January boundary so we are seeing in little bit more acceleration in January than we saw in December.

But that is sort of a lumpy issue because if you sell 10 units it makes a big difference if you get to the end of the quarter because these are, as you know, are big ticket items. The average wholesale price is around $24,000.

So is it better for me to ask what is your backlog and units to be installed or activated in Q1 from Q4?

Well, as you know, we don't do the installation ourselves and we don't have any backlog. So this is a consumer type product, unlike our military business, we ship immediately. So if you order it today, you will get it today. So we don't have any backlog per se.

There are a number of units in the pipeline. In the past we have said that it seems like there is about a three- to six-month lag in general from time of shipment to time of activation. That tends to do with the distribution channel, inventory in the field, the pipeline, and also the fact that some of these are going on new construction so that they are going into vessels that are being built.

Okay. Just to follow-up on that comment, are these going in these new ships specific to the customers' request or are the shipbuilders starting to integrate the system?

Both. So some vessel owners specify at the time of construction and some boat builders put it on as their preferred communications approach.

Okay. All right.

And then in that case you also have the timeline between the time a vessel is built and the time it's sold. So that is -- all those factors account for that three to six months, which seems long but when you think about it in that context it actually makes sense.

Okay. And then I am just trying to get an understanding here. You guys made this comment about Inmarsat revenue declining in Q4, being offset by the mini-VSAT service revenue. But isn't that your optimal goal is to get all your customers on the mini-VSAT service?

Yes, absolutely. We were just commenting so that when you do a year-over-year comparison or a sequential comparison we just wanted to make sure that you understood that the mini-VSAT airtime revenue was growing very strongly. If you just look at the total number, you have to remember that in that number that we call service is also airtime from Inmarsat and also non-recurring engineering and repair services. Anything that is not a product.

So we are just pointing out that within that we have two categories, product and service. There are other things in that service category besides mini-VSAT and we are just making sure that you understand the mini-VSAT portion is growing very quickly.

Okay. And my last question, could you explain how many minutes of usage are on the network or what the increase is quarter over quarter?

Well, we don't sell it by the minute so it's a subscription model where people pay for -- it's a monthly service for the most part. There is about a 15% or 20% of the people who pay by the megabyte, but we don't charge the service by the minute.

So in general, the usage is measured in gigabytes per month so it's [a very] large quantities of data that get used which is why our service is very attractive compared to services like Inmarsat where you actually are metered by the megabyte. So if you are using gigabytes and paying in megabytes then it's like $10 to $13 a megabyte on Inmarsat. You can see there is a big economic advantage to our system.

Great. Thank you.

[Aaron Edelheit], [Salvo Value Management].

Yes, I was going back to your comment about the delay for the activations. So back in July you announced that you had shipped over 500 of the TracPhone B7s but that didn't mean that you had activated them, correct?

Correct.

Okay. And so you are saying that it's a three to six months in general for you to actually have them activated and charged up. Can you say how many of those -- are all of those kind of activated by now or could it still be that some of them still from that number haven't been activated?

Well, I think you are thinking about it in the right way. I don't want to give you a specific number but, yes, if you put those two statements together it gives you a good sense of where we are in terms of activations.

Okay. Is your average monthly revenue still staying the same per customer?

It is staying generally the same. It's still running around $2,000.

Okay. And in terms of the first quarter or the second quarter, when do you expect the TracPhone V7 service revenue to finally start showing itself to such a level that the other non-recurring or lumpy aspects that are not TracPhone V7 service are minimized. Do you think that that happens in the first quarter or later on in the year?

Well, I think it's happening every day as we add subscribers. So this part of the business is growing very quickly and the other parts are declining. I think pretty soon what we report as service will be a very good proxy for what the VSAT airtime revenue is.

Obviously our goal is to make that grow as quickly as possible. We expect that in 2010 VSAT airtime revenue to be a significant portion of the total company revenue.

Got you. And my last question is I was listening to the ViaSat conference call last night and they specifically mentioned that in their broadband business that their maritime business specifically -- and they highlighted KVH -- was their fastest growing division.

I am getting a sense just from the conference call and the press release that a lot of cautiousness. I am just -- I don't know if I can -- if you can help me reconcile the two statements. Are you just trying to be -- temper expectations or what am I missing in the two kind of views?

Well, we are giving guidance that we expect revenues to grow at 40% next quarter. So normally I wouldn't say that is being overly cautious.

Okay. Okay, thanks.

Rich Valera, Needham & Company.

Martin, is there -- I know you don't want to give specific numbers, but is there any qualitative commentary you would be willing to give on V7 subscribers, perhaps on a year-over-year basis? Would you expect to see some acceleration of net subscriber additions in 2010 versus 2009 for instance?

Yes, we absolutely do. The key point to remember here is that we still don't have the completion of our global service. So for lot of the companies that we are targeting that require a true global network we won't have that in place for another couple of months.

And we fully expect that once we have that -- we have the coverage now in Africa and the oilfields off Nigeria and we are adding Brazil. A lot of demand from our customers now to have coverage in Brazil because the major oil discoveries that have happened there recently. There is a lot of work boats and oil supply vessels. So all of that.

And of course the Asian market in general, which is why we are opening an office there. So we absolutely expect to see an acceleration both in terms of unit sales and in terms of subscriber activations.

Okay, that is helpful. I just wanted to make sure I was clear on the LiveTV revenues. So you are expecting this year is it $4 million to $4.5 million in quarters one and quarters two?

Right.

Okay. And then with respect to the FOG business, I don't know if you gave the number but I calculated around $9.5 million for FOGs in the fourth quarter. I don't know if you can confirm that is about right.

Yes, $9.3 million. (multiple speakers)

Okay. Wondering if you would be willing to share how much of that is CROWS at this point.

Not specifically, but it is more than 50%.

Okay. And what do you feel your visibility is to the CROWS business beyond the next quarter or two?

Well, it has gotten a lot better in the sense that the program itself has been increased. So six months ago the CROWS II program was being used up at a faster rate than originally anticipated so just recently the Army has increased the scope of the total contract for Kongsberg, who is our customer. They didn't quite double it but almost doubled it. They went from 6,000 to an increase of 50% anyway; 10,000.

And that also, I think, gives us a lot of visibility over the next year or two while they are working on the CROWS III program which is for another 20,000 CROWS weapons systems and there is three gyros in each one.

So as far as total visibility, we only have purchase orders that cover typically 13 weeks at a time sort of on a rolling basis. But in terms of overall visibility in the program, the program has just expanded enormously so we feel very good about the total program.

Great. And do you have any sense of how much of Kongsberg's demand has been driven by the MATV deployments?

I don't know specifically but I know that the acceleration and deliveries that we were asked to provide was in anticipation of the Army taking units from their inventory and using them for MATV. Then those would then be replaced for the Army inventory.

So we actually don't know -- the gyros that we build are sent to a couple different factories at two or three different locations around the world. Where they end up we are not quite sure. Even the prime doesn't know because they are coming out of an Army warehouse and being shipped to different locations.

Okay. Just looking at the defense business for this year, and I know you don't want to give full-year guidance, but do we think it's reasonable to assume that business -- it sounds like you guided sequentially flat in the first quarter. Is it reasonable to assume sort of sustaining at that level throughout the year?

Yes, I think that overall we see the business growing year-over-year because we weren't at that accelerated pace because each quarter was a record, which by definition means it was increasing all year long. So we do expect significant year-over-year top-line growth if you compare full-year 2010 to full-year 2009.

Right, understood. Pat, I actually think I missed the CapEx in the quarter, in the fourth quarter. Could you just fill me in on that number?

Yes, it was just a shade under $1 million, Rich. It was $995,000. But as I mentioned, we have made some prepayments for hubs so we have got about another $1 million that is in other non-current assets, not CapEx yet. It will be when we deploy those specific hubs.

Right. And what was the D&A for the quarter, Pat?

It was $782,000.

Great. That does it for me. Thank you.

Hamed Khorsand, BWS Financial.

Just a follow-up here, could you just explain to me on those new installs on ships for your service is this optional from the shipbuilders who are basically giving the option to the customers or is this going to be installed and shipped and the customer basically has the option of activating the service or not? Just give me a little bit more details on that.

Yes, for the most part things get specified by the vessel owner if it's being built for a specific vessel. There are cases, especially in the leisure market, where boat builders build the boats on -- think of it like a car manufacturer on an assembly line where they are building the vessels and then the vessels are sold to dealers and then the dealers sell them to consumers.

In that case a lot of the time the boat comes with a lot of equipment on it that the owner there may not specify himself. In those cases, I suppose you could have a situation where Sirius radio or XM radio in your car where you decide not to subscribe to it but that would be a very rare event.

And what percentage of new builds are you seeing you guys get incorporated in these ships?

Well, I don't do what the percentage is. I think the split between new and used is changing over the last year or so. Far fewer new boats have been sold whereas, say, two years ago the majority of our sales were going to new boats. I would say in the last calendar year the majority were retrofit to existing vessels.

Okay, thank you.

Jim Roumell, Roumell Asset Management.

Thank you. Good morning, guys. Going back to the VSAT for a moment, Martin, you made a comment that the average wholesale price now is $24,000. And I am wondering if I am recalling correctly when the V7 was rolled out, was that $30,000.

And so my bigger question is in terms of emerging VSAT competition, are you finding that any prices have been reduced either on the antenna side or the service side from a year ago because of VSAT competition coming into the market?

No, the difference is retail versus wholesale. So we don't sell direct to boat owners, we sell through dealers. So the difference between those two prices -- the $33,000 is the MSRP, the retail price and $24,000 is a typical price that a dealer would pay and he would mark it up and sell it for a profit. So those prices have not changed.

Okay. And has there been any increased deal making, so to speak, competitive-wise on the service side of dropping the $2,000 to $1,800 or something like that?

Well, in general we always try to be competitive on larger fleet sales. But if you look at the average revenue per subscriber we haven't seen any significant difference, so I would have to say no on average.

Okay. In term of -- just two more questions -- in terms of V7 sales, if you pull out the government sales to the Coast Guard can you give a general sense of how the remaining sales breakdown between commercial and leisure?

I could but not off the top of my head. So I think I can give you qualitatively that, again, going back to the product inception it was 100% leisure. Now I would say the majority is commercial. So you can see that over time we are selling more and more to the commercial market and that, of course, is because we have more commercial distribution including our new office in Singapore so we are putting more focus on that. But also it's because we are expanding the coverage.

So when we started we only had the US and Europe, which are our traditional leisure markets. We didn't have any service in the other areas. So as we expanded service and as we expanded distribution no surprise we are getting more traction in the commercial markets. And we expect that trend to continue. We expect, going forward, the vast majority to be commercial not leisure.

Got it. In terms of the commercial side, any more color you can give to another -- several months ago you announced the deal with the 22 ships with, I can't remember the name of the company offhand. But another kind of robust commercial sale of size that would suggest real success in competing in a material way in the kind of larger fleet commercial side of the business?

Well, I think we will certainly announce that when we get it but we are working on some larger fleet deals. I think we are very competitively priced. I think we have a great service and we have good coverage so there is no reason that we shouldn't be successful going forward.

In each of those situations we are competing with other players, but we really like our competitive position and our competitive advantages. ViaSat has been doing a great job in terms of improving the network and the technology and new software and new features. We have got the new infrastructure things that we are rolling out that could expand our data speeds.

So I think we are in good shape competitively. We just need to continue to do what we are doing which is market the product to the commercial markets, expand the coverage, and provide a great reliable service.

Got it, got it. And then on that point then, Martin, my last question is can you give any color as to your own sense of the inflection point where VSAT service revenue would hit the $12 million to $15 million annual transponder expense? I mean is there a sense of [when you] guys are kind of targeting that? 2011, do you expect it -- anything you can add on that inflection point.

Well, I think in terms of when the inflection point starts is really Q2 because at that point you have got all your infrastructure costs in. Then you will see a big disconnect between additional subscriber revenue and additional cost.

So right now what we saw last year was actually the inverse. You saw costs going up that weren't related to increases in subscriber but in a negative way, meaning you are adding Australia but you don't have any subscribers in Australia. You are adding Africa, same story.

So now I think starting in Q2 you will see the opposite where we are adding subscribers but you are not adding any material costs to your infrastructure base. So that inflection point really starts in Q2.

Got it. Okay, thank you.

Rich Valera.

Thank you. Martin, could you give any commentary on your land leisure business? What did that do maybe quarter over quarter in the fourth quarter from the third quarter and what are your expectations for that business year over year in 2010 versus 2009?

For the land business I think Pat had a number for that in his section. The Q4 land business was a little bit stronger than it had been.

Yes, I didn't actually mention the land business in my points. Rich, say again, what was your question?

Just wondering, a few quarters ago you said you kind of thought that business' bottoms couldn't get any worse. Just wondering do you feel it has bottomed and maybe could bounce a little here in 2010 or just what are generally your expectations 2010 versus 2009 for that land business?

It does seem like it has bottomed just in terms of the total land revenue, which was fairly modest in the quarter. It was about flattish year over year, down slightly, low single-digit decline year over year.

For 2010 we are expecting -- our expectations are very modest. We are expecting that overall that business probably won't show much change from where we are today.

Okay. How about on the leisure marine side? Any thoughts there on a year-over-year basis?

Again, our expectations are fairly modest there as well. We expect a little bit, some growth in the leisure marine partly because of our new products, specifically the TracVision HD7. And as Martin said, we have seen some indications from recent boat shows that attitudes of buyers may be improving a little bit.

But the indicators that we see some times are mixed. They are certainly not all that clear and as a consequence, for the moment anyway, we are taking a fairly conservative posture. But we do expect the leisure marine will show a little bit of year-over-year growth.

Okay, that is helpful. Thank you.

Gentlemen, at this time there are no further questions. I will turn the conference back over for any additional or closing remarks.

We want to thank you very much for your participation and at this point we will close the call. Thank you very much.

That does conclude today's teleconference. Thank you all for joining.