KVH Industries Inc (KVHI) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the KVH Industries first-quarter 2010 conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the conference 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 first-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 risk and uncertainty. 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 yearly report on Form 10-K filed with the SEC on March 9, 2010. 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, and thank you all for joining us today. Well, it was an outstanding quarter for KVH. Not only did it exceed our expectations, but we also set new records for quarterly revenue and for net income.

On the top line, we recorded $28.0 million in sales, surpassing our previous record set just last quarter. Year-over-year that is a 53% increase in revenue.

In addition, we recorded net profit of $2.1 million, also a record result, that equates to earnings of $0.14 per share. It is also a $0.32 or $4.6 million improvement over our first-quarter results last year.

These results are due to strong contributions from our strategic initiatives in fiber optic gyros and global satellite communications. We continue to gain momentum in our mini-VSAT business, as we build credibility with the speed and reliability of our now global mini-VSAT network. This is helping us win new accounts. And as more people take advantage of our exciting new technology, we are starting to reach critical mass in important commercial markets.

In our guidance and stabilization business, revenue was up 65% from the first quarter of 2009. Sales of fiber optic gyros were roughly equal the record level achieved in Q4 last year and up 95% from Q1 of last year.

At the same time, our established defense business continues their steady contribution. As you may recall, KVH has been pursuing a large TACNAV opportunity for land vehicle navigation; and it looks like that contract could happen soon. It has the potential to be worth more than $13 million.

We've already started work on the engineering development portion of this program, working under a letter contract authorization. We hope to receive a formal production contract within the next three to six months.

In our FOG business, we continue to run the factory very efficiently, even as we ship product to our existing Kongsberg remote weapon station FOG contracts, to support those contracts, we continue to land new fiber optic gyro business like the $3.1 million order we announced in February. We have a solid backlog going into Q2 and we're optimistic that recently announced remote weapon station awards to Kongsberg could lead to additional orders for KVH.

Part of our strategy with our fiber optic business is to continue to diversify both in terms of new military customers and in terms of new commercial products. Towards that end, we just strengthened our product portfolio for the commercial market with the introduction of our new CG-5100 inertial measurement unit. Through seamless integration of three precision FOGs and three MEMS accelerometers, the 5100 offers a groundbreaking low-cost solution for inertial measurement within a single compact enclosure.

The six-axis 5100 is targeted at a number of applications like precision terrestrial surveying, navigation, and GPS augmentation for a broad array of commercial applications. For example, the 5100 is the perfect solution for autonomous vehicles that need high-quality sensors, as well as reliable backup when GPS is interrupted or unavailable.

New products like the CG-5100 IMU and our miniature single-axis DSP-5100 FOG are opening new markets and opportunities for us, forming the cornerstone of our ongoing effort to steadily expand the breadth of our FOG business to include a wider spectrum of applications and markets.

Moving on to our mobile satellite business, revenue was up 45% year-over-year in large part due to the continued strength of our maritime satellite communications products, where our mini-VSAT was up very strongly year-over-year. We also enjoyed the benefit of $3 million in shipments of our new aviation satellite TV system for commercial airlines.

Although the economy continues to act as a drag in the leisure market, our new TracVision HD7 satellite TV system is off to a great start following our Q4 launch. There is a growing demand for high-definition TV in the marine market, especially on boats 40 feet and larger.

However, providing HDTV service is a challenge after DIRECTV moved virtually all of its HD programming to a pair of new Ka-band satellites. Our new HD7 overcomes this challenge by tracking three direct TV satellites simultaneously, even as the boat is pitching, rolling and turning.

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 also the best tracking product we have ever built, making it perfect for high-performance vessels like sport fishing boats.

The HD7 has quickly established itself as the best HDTV solution available for boats. In fact, we are regularly seeing competitors' satellite TV systems being removed and replaced with the HD7, because competing systems just aren't able to deliver the quality, reliability, and performance that our marine customers expect.

So now I would like to update you on the mini-VSAT business. We have worked extremely hard to ensure that our satellite communications customers enjoy an outstanding level of quality, reliability, and performance from the mini-VSAT Broadband service. Earlier this week we announced that we added transponder capacity and doubled our bandwidth in our existing North Pacific Ocean coverage to meet growing demand and to ensure quality of service for existing and new customers.

In the coming weeks, we will implement several significant technological advancements that will enable us to double our bandwidth capacity in the US as well as in Europe, without needing to purchase any additional transponder bandwidth -- a major step in the evolution of our network, thanks to our superior technology that serves as its backbone.

Along with enhancements to our existing network, we continue the rollout of our global service. Just days ago, mini-VSAT coverage went live for the Indian Ocean along with Guam and the region north of Australia.

It's also worth noting that our Indian Ocean coverage is unique, extending well south of the equator, while other VSAT services in the region simply hug the Indian coast. This is just one example of how we're setting ourselves apart from the competition in the maritime satcom industry.

Other legacy maritime VSAT networks claim to offer global coverage even though they don't have significant satellite capacity leased in all regions. Or they don't offer true seamless coverage and instead require multiple subscriptions to get service in different regions.

Unlike those competitors, I'm proud to say that KVH now offers the only seamless multi-megabit broadband service for ships and planes that encircles the globe.

Additional efforts are underway south of the equator, as KVH recently incorporated a subsidiary in Brazil. This is a critical step in our effort to secure satellite licenses and operate in waters off the Brazilian coast, so that we can address the offshore oil and gas industry there. We expect that service in this region will be live this summer.

Further east, our efforts in Asia are well underway, taking advantage of both our new service regions as well as strategic geographic expansion. KVH Singapore is now open, and our team there is aggressively pursuing many commercial maritime opportunities.

Our Singapore office is playing a critical role in bringing our mini-VSAT service to the commercial maritime market, as Singapore serves as one of the world's preeminent hubs for commercial shipping businesses and international maritime operators. The Asian region is home to more than two-thirds of the world's 20 busiest seaports.

To support this region we recently signed a distribution agreement with Japan Radio Company. Under the terms of this agreement, JRC is selling our TracPhone V7 within the Japanese market as well as through their established global distributor and dealer channels.

Overall, the commercial market continues to be extremely receptive to the TracPhone V7 and the mini-VSAT service. One example of this is our recent announcement that DSD Shipping selected the V7 for its fleet.

A critical element to our sales effort is to get a unit onboard a vessel for testing. Once it is there, the prospect experiences the benefits on a day-to-day basis; they almost always go on to buy the V7 and get the mini-VSAT service for their other vessels. That was the case with DSD Shipping, which concluded an extensive and successful field test of our solution on one vessel and then elected to add the V7 to the remainder of their fleet.

So in conclusion, Q1 was very successful for us with record-setting financial results, strong contribution from satellite communication and the FOG products, and major milestones achieved in our overall strategic plan. Looking ahead, we expect to complete our investment in the mini-VSAT Broadband network rollout in the coming months, after which we will begin to see the benefits of airtime margins improving later on this year.

I have every confidence that our strategic efforts and investments are paying off and preparing us for success as the year continues. Now I would like to turn the call back over to Pat to have a closer look at the numbers. Pat?

Thank you, Martin. The first-quarter results were better than our original expectations, and they show that we continue to make good progress strategically and operationally. This was achieved without the benefit of any noticeable improvement in macroeconomic conditions.

For the quarter, gross margin was 42.2%. This was up nearly 400 basis points sequentially, and it was way above the first quarter of last year. This was much better than we had anticipated at the start of the quarter.

We saw a benefit from several factors. One, supply-chain improvements and efficiencies; two, a somewhat slower pace to the ramp-up of mini-VSAT network costs; and three, an earned termination fee related to the completion of a TACNAV refurbishment program, which contributed about 100 basis points to gross margin for the Company and will not recur in future quarters.

Due to the nature of these factors, we expect to receive some ongoing benefit, but it will not be to the full extent that we experienced in the first quarter.

As was also the case in the fourth quarter of 2009, the VSAT infrastructure buildout, together with changes in the mix of overall service revenue, significantly affected the year-over-year dynamics of our services gross margin.

In the first quarter, mini-VSAT airtime services grew very strongly in absolute terms and also as a percentage of our total airtime services revenue. Inmarsat airtime services revenue declined year-over-year, as did revenue from services for nonrecurring engineering and repairs.

So, as was the case last quarter, 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 showed a year-over-year decline for the first quarter.

Our product gross margins have shown fairly steady sequential improvement over the last several quarters, in part due to the substantial ramp-up of fiber optic gyro production. For Q1, operating expenses were up 15% compared to last year.

One key year-over-year driver was reported R&D. In Q1, we had very a low level of customer-funded engineering activity, which drove up our reported number. Our total investment in engineering for the quarter was actually about equal to Q1 of last year. As a percentage of revenue, reported R&D spending was 9.2% for the quarter.

First-quarter sales and marketing expense increased on both a year-over-year and sequential basis. Increases in spending reflect both seasonality factors and staffing to support the expansion of our sales presence for the mini-VSAT business.

Administration expenses increased compared to prior periods, 23% year-over-year and 12% sequentially. Costs for professional and consulting services related to the buildout of the mini-VSAT network were a key factor, as was a modest increase in support staff.

Our tax rate for the quarter was in line with expectations at 16%. However, the tax rate has the potential to increase as we go forward. We have now used most of our available tax benefits that were driven by prior-period net operating losses.

We continue to have substantial R&D tax credits available. But tax regulations, including the impact of alternative minimum tax, restrict the amount of benefit that can be used in any given period. Consequently, our 2010 go-forward tax rate could be about 30%.

Turning to the balance sheet, cash and marketable securities were $41.9 million. This was better than anticipated due to higher than expected profit margins, the timing of capital expenditures, and the timing of accounts payable.

For Q1, cash flow from operations was positive at about $1.5 million. We expect our cash balance to decline approximately $4 million during the second quarter, primarily due to continuing outlays for additional hubs for the mini-VSAT network and normalizing accounts payable balances.

Capital expenditures were approximately $1.6 million for the quarter. This was less than expected and reflects a slight change in the timing of VSAT hub deployments. We have well in excess of $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 second quarter to be approximately $3 million, and approximately $7 million for all of 2010.

Accounts receivable increased sequentially to $18.4 million. Days sales outstanding was 59.

Inventory increased sequentially to $15.2 million. This was a little higher than our expectations and reflects the staging of products for future shipments. We expect that over the next two quarters inventory will decline from the current level.

Our backlog for guidance and stabilization products and services at the end of March was $16.1 million. In addition, we have approximately $1.5 million of backlog for our aeronautical antenna system, which is expected to ship during Q2.

Now I will review our expectations going forward. We are still cautious with respect to our future expectations. Although there are sporadic signs that economic conditions are slowly improving, the pattern seems to be uneven.

For the second quarter, we expect another strong year-over-year revenue increase. Revenue is expected to be nearly equal to the first quarter this year or up approximately 25% compared to Q2 2009.

We expect to sustain, if not modestly increase, the current level of fiber optic gyro sales and to see continuing growth in TracPhone V7 sales and new activations.

However, as we indicated previously, we expect that revenue from shipments of our aeronautical antenna to LiveTV will be about $1.5 million lower than the quarter just ended. This is in line with the plan to complete the 2010 shipments by the end of the second quarter. We do not expect a material near-term change in maritime and land satcom leisure market demand.

We expect to report a profit for the quarter in the range of $0.06 to $0.10 per share. Gross margin will likely be approximately 200 basis points lower than the first quarter, due largely to cost increases related to the final phases of the VSAT network rollout. We expect a modest sequential increase in operating expenses due to seasonality factors and the deployment of resources for strategic growth areas.

This EPS guidance includes the assumption that tax expense will be about 30% of pretax profit for the quarter. Using our original tax rate assumption of about 18%, our Q2 projection would have been $0.07 to $0.12.

For the full year, we continue to expect that 2010 will show strong top-line growth while also establishing a trendline of improving profit performance, but doing so within the context of normal leisure market seasonality.

Even though we expect to increase revenue levels for fiber optic gyros, the rate of year-over-year growth will moderate as we go forward. We continue to expect to see significant benefit in our mini-VSAT business with the completion of the global network around midyear and expansion of our international sales channel.

We look for some recovery in consumer markets, but our near-term expectations for growth are quite modest. As I mentioned earlier, we do not expect to ship any aeronautical TV antenna systems to LiveTV during the second half of the year.

In summary, we expect our strategic growth businesses to continue to build momentum on the top and bottom lines and set the stage for positive long-term results.

Now we would like to take your questions. Operator?

(Operator Instructions) Hamed Khorsand, BWS Financial.

Good morning, guys. Could you provide some color here as to where you guys stand, as with how many TracPhones are deployed?

Well, as you know, we don't report specific subscribers. But we have reported unit sales last year of -- we got to 500. So certainly we have more than 500 subscribers now on the network.

Can you guys hit 1,000 in Q2?

I think that the next time we announce a milestone, whether it's 1,000 or a couple thousand, we will certainly let you know. I don't want to give specific guidance by product, so I can't answer that question for you.

Okay. As far as service revenue goes, there was an increase in Q1. Are you seeing usage increase with the incremental TracPhones that are in service? Or are customers primarily staying within the parameters of their plan?

Well, most of the customers are on a fixed-rate plan, so the price is fixed even though their consumption might vary from month-to-month. We do have about 50% of our customers who are on a variable plan, where they pay by the megabyte. But the majority are on fixed-rate plans, so our average revenue per subscriber is holding pretty steady.

Okay. That's it. Thank you.

Chris Quilty, Raymond James.

Martin, could you elaborate for us? You made a quick mention of a doubling; it was either the capacity or the data rate in the US and some other markets, without incremental transponder costs. First of all, was it data rate or capacity? And can you give us -- is there any -- is this a software patch or is their incremental spending associated with that?

A new waveform as part of the spread spectrum technology. So it's a new waveform that ViaSat is pushing out through the hub, and we're uploading into all the modems so it will have a higher data rate capability with the existing bandwidth. So it would be approximately doubling the speed in each of the regions.

And still CDMA-based?

Yes. Still CDMA-based. They are calling it an orca waveform; but it's an improvement in the efficiency of the transmission technology. So it's a factor 2X --

Wow.

-- improvement.

That's pretty -- I mean, you are already one of the highest data rates available out there.

Right, so what we're going to do is we are not necessarily going to double the data rate per subscriber. But we're going to use the increased capacity to just have more capacity and --

Service levels?

Service levels will improve. People should be happier, all that kind of stuff. So everybody likes faster performance.

Absolutely. Pat, can you help us perhaps a little bit with the service revenue? You mentioned, I guess, this is the second or third quarter in a row where other service revenues have been down and mini-VSAT up.

Are we at the point now where it's like a 90/10 split or is it more like a 70/30?

Well, I would like to avoid giving the exact percentage, but I think you can assume that airtime services -- VSAT and Inmarsat combined -- is clearly the lion's share of the total service activity, of that total service that we reported of $3.9 million.

And within the airtime, VSAT is the lion's share of that. So I don't think I can get any more specific than that, Chris, other than to say that. That VSAT is clearly by far the biggest portion of our service base; and the other pieces have shrunk quite a bit over the last couple quarters.

Now as you know, that can be fairly variable. For example, if we get a significant NRE contract, then that could show some growth in those types of things or services overall. But recently those things have been declining while the VSAT business has been growing quite nicely.

Okay. I just wanted to confirm, Martin, you did say monthly ARPU is staying relatively steady around -- I think you had mentioned previously $2,000 a month?

Yes, they are still in that range. So we haven't seen any material changes there.

And churn issues?

No, none to speak of. We have of course some deactivations when people sell their boat, that type of thing. We also have seasonal suspensions. We allow customers -- for example in New England -- to shut the service off for a few months. But that then gets tagged on to the back end of the contract.

So within our subscriber base we do have some that are temporarily suspended. I believe the maximum is three months that that is allowed per year. So.

Not a problem for you, since your icebreaker doesn't have those problems, right?

Right.

So another question. Can you give us a sense? You had talked in the past about the fact that you've done a number of pilots with commercial operators; and then they have subsequently grown from a handful of ships up to a dozen or dozens.

Can you give us an idea of how many potential pilots you're in? Or at least a sense of -- we have doubled over the last six months the number of big commercial pilots we're involved in?

Double is certainly true. I think that I would say almost all of our customers now that we are selling to have many more ships than what they are buying for. So at one level they are almost all pilots today.

The other interesting thing is, as you know, when we started we were 100% recreational, sort of a leisure product. But as we continue to expand, in the last quarter about 70% of our VSAT sales were to the commercial market.

Okay. So how about you gave me a different metric? If you looked at your existing customer base, are you 30% or 50% penetrated with their entire fleets or their entire addressable fleets?

Well, that is a metric that I don't know off the top of my head because it's -- we have a large number of customers. But my sense is that a lot of these customers have five times as many ships as we are currently on.

So it's a very small percentage -- not only penetration of potential customers; but within the customers that we have, a lot of them have many more vessels.

Got you. Can't leave Pat out of the mix here. Receivables were up a decent amount sequentially. Anything particular in there?

Well, no issues. We had some shipments for certain products that occurred later in the quarter. For example, a good portion of the shipments to LiveTV at their request were in the month of December. So consequently, those were on the books as a receivable at the end of the year, a good amount. So consequently that tends to skew the days sales outstanding for the quarter.

Okay. Pat, I think you gave us a different (multiple speakers).

Excuse me, what I said -- when I said December there for LiveTV, I meant March. Excuse me.

Okay. Or you got some really long receivables.

No, I lost track of time.

The defense backlog? I think you gave us the whole defense and stabilization; and in the past I think you used to give us a different number. Or am I --?

No, the number I gave today, $16.1 million, is what we would commonly call defense.

Okay.

It's the fiber optic gyros, tactical navigation, those types of products. That number that I have historically given, we call it guidance and stabilization as a product and service area.

And then in addition to that is the aviation TV antenna for LiveTV. And the reason for giving that is just because it's a reasonably substantial number and it's not a book-and-ship kind of business.

Right. Then of course there is also the commercial FOG business that is not included.

No, I would include any commercial FOG business in that backlog number that I gave you. So the majority is defense-related, but there is some commercial FOG business in there.

Okay.

That tends not to be a particularly big number normally, Chris, because again that is more based on recurring revenue streams and booking, as opposed to larger orders at a time.

Got you. How significant is that commercial side of the business becoming? Or how fast is it growing?

Well, it's --

Continuous navigation and --

Without getting into a specific number, it is growing very nicely. Our goal is to continue to have it grow not only in absolute terms but as a percentage of the total fiber optic gyro revenue.

So we're working very hard to grow that commercial business, and it has been paying off to this point.

But we won't turn down any military orders to get the mix better.

Got you. Pat, in terms of the service costs, your service margins were better than we had projected; and I guess conversely the costs lower. Is it fair to assume that we'll see a reasonable step-up in service costs in the second quarter?

Actually, Chris, I would think it is more likely to see a step down in service gross margins in the second quarter.

I was saying service costs. So we are saying the same thing.

Yes, a step up in service costs, absolutely; and the reason is twofold. One is, in the -- most of it is the mini-VSAT business and the continuing infrastructure additions that we are putting in place there.

As you know, we just went live with the Indian Ocean region several days ago. And that is actually two beams, so it's really two regions, East and West Indian Ocean. So that's an increase in our cost in the second quarter that we did not have in the first quarter.

And then other just ongoing activities with the mini-VSAT business.

Then on the gross margin side, I mentioned this one-time fee that we earned for cancellation of a repair program, refurb program for TACNAV products with a large prime contractor in the first quarter. That was a one-time item, and it had roughly 100 basis point impact on the total Company gross margin. And since that was service related, it actually had a more substantial impact on the service gross margins in the first quarter -- positive impact.

So I would say going forward in the second quarter, costs will be up and gross margins for service will likely be down.

Got you. So when do we get to sort of a steady-state service cost? Is it after you exit the second quarter?

Any new mini-VSAT infrastructure that builds out is -- I guess Latin, South America is ViaSat's region. Do we essentially exit Q2 with a relatively fixed cost of service?

I would say as we exit Q2, it should be pretty close to done. It really is a function of timing.

For example, just take something as -- and this is not a particularly big impact, but things like this -- the Indian Ocean coming online mid-April. Obviously we don't have a full 100% quarter of costs for that in the second quarter; but we will in the third quarter.

Got you.

The Brazilian coverage, South America, will come online in the midyear, and there are some costs associated with that for us, naturally. Those may or may not have a full impact in the third. Assuming it comes midyear, late Q2, very early Q3, it may not be a full quarter even in Q3.

But I would say the majority of the costs will be in place, the large majority by the time we exit Q2. And I would say by the time we exit Q3 and enter Q4 we will absolutely be there.

Got you. So final question here. I don't know if you saw it last night, but Oshkosh got an award, like an $11 million award, for over 1,000 remote weapon station mounts on the M-ATV vehicles. So obviously you are getting some attachment there with what is a pretty high-volume contract.

Do you know or have you seen any specific specifications that would tell you -- you are going to be on all -- well, it was 6,500 but I think they increased the number to like 80-something?

Right. Yes, I don't have visibility into where all these CROWS weapon stations are going.

Kongsberg did just get another award two days ago for over NOK1 billion -- about $200 million -- that they announced. So that was probably related to that.

Presumably this is all baked into the forecast you are giving of staying around $8 million to $9 million a quarter?

Well, the order I just mentioned was new, and that's not in our guidance because we don't have an order. I mean, this is a new order for them that is outside of our current backlog.

So if we were to get another order, it would most likely be at the very end of this quarter for delivery or mostly for the balance of the year.

Okay, so it just fills the forward pipeline.

Yes. But I would say again, depending on what -- obviously we don't have an order. And if we got the order, we don't know how big it would be. But if we were to get a substantial portion or even the traditional portion than we normally get, it would be in excess of what we normally have in our projections.

So what I am trying to say is this order is new and it's bigger than people thought.

Oh, good. Awesome. Well, great. Guys, keep up the good work and can't wait to hear that 1,000 number on the next conference call.

Okay.

Thank you.

Rich Valera, Needham & Company.

Thanks. Good morning, guys. Unfortunately I actually got dropped right as the question about the 1,000 subs was asked. So could you repeat your answer to that one, Martin?

Well, my answer was evasive. I said that we haven't said that we would announce when we got to 1,000. I did say that we have more than 500 subscribers now on the network and that sales are going well.

Okay. So the last comment about hearing that on Q3 was not from your words, from your lips?

That's correct.

Okay, just wanted to clarify.

That was a question -- is it possible that we would announce that during Q2?

Oh, during Q2? Okay. Got you. Okay.

Just with respect to your recent increase in capacity in the North Pacific, I was kind of surprised to see that. Because I was under the impression that when you had suggested you were building the network, getting all these regions deployed, and that you thought you could scale your subscribers by almost like an order of magnitude from where you were today without any more fixed expense.

So just curious what's going on in the North Pacific. Have you seen greater uptake than you thought? Or are things not as efficient as you thought? Why the need to buy bandwidth at this early stage in the North Pacific?

Right, well actually we deployed more bandwidth. This bandwidth we had under contract, so this doesn't have an impact on our cost.

We had a full transponder available to us. We have been running with half a transponder, and we were originally planning on experimenting with some video broadcast services in the Pacific. So.

And sales in Alaska, the fishing boat market, have gone well. We're doing some trials with some oil tanker companies on the West Coast, and it was just a good time to bring on the rest of that capacity.

Okay, well I guess with respect to the rest of the network, it sounds like obviously your upgrade to double the capacity should certainly help with respect to the number of subscribers you can support. But what would you view your future needs in terms of adding additional transponder capacity as you scale? Are you set now to increase your subs by an order of magnitude before you have to meaningfully add additional transponder costs?

I think you are thinking about it the right way. I am not sure it is truly an order of magnitude; but it is closer to that than doubling.

So in other words, could you get to 5,000 subs without any additional capacity? Maybe not, but you would get pretty close. So it's a pretty robust infrastructure that we've put in place.

Okay, that's helpful.

Yes, so the costs are right now as bad as it's going to be; and it will get better with each subscriber we add for the foreseeable future.

Right, okay. That's helpful.

I don't think you said whether -- you mentioned how strong the V7 airtime revenue was year-over-year. Can you confirm that it was actually up quarter-over-quarter?

Yes.

Yes.

Okay, great. Then, Martin, just a little more color if I could on this award that Kongsberg got. You mentioned if you had gotten -- if you get your traditional allocation that would be above your projection.

Are you referring to -- you're not referring to the second quarter presumably; you are referring to more the second half of the year? Is that fair?

Yes, I think that's fair. I think that we don't have long-term contracts in place so we tend to get -- we are in their MRP system, their material planning system. So they place orders according to our lead time.

So we traditionally don't have a year's visibility or six-month visibility. We just get purchase orders that come out on a regular basis just the same way we give purchase orders to our vendors when we build something.

But we have to make assumptions in order to give you some general guidance for the year. And the general assumptions and guidance we had for the year did not include an order as large as this. So this would be generally better than what we thought for this one customer. And since they are a big customer, it would be upside for the whole Company if this were to happen.

That would suggest at least maintaining if not possibly increasing the current FOG run rate in the back half of the year?

Yes, it would be an increase if this were to happen.

Okay, got you. When do you expect to know what -- get the order for your portion of that? Is that a matter of days, weeks typically?

Yes, usually it is a matter of weeks. As you know we are not the sole source on that program, so they have another vendor. So there is not a guarantee that we get that order.

Got you. Do you have any -- I know you don't know exactly where your FOGs go in terms of where those systems are shipped. Kongsberg has talked a lot about the fact that they are shipping now their Protector system to 17 countries besides the US.

Do you have any sense of how much of that is driving the demand that you are seeing? You know, their diversification. And any sense to the growth coming from non-US applications for them?

Well, I think all the other countries put together are still smaller than the US.

Sure.

That is my sense. But that diversification certainly helps. And I think that over time maybe all the other countries put together would equal the US, which would be a great thing.

Sure, okay. That's helpful perspective.

With respect to the completion of the footprint, it sounds like maybe the Brazil deployment has slipped a little bit from your prior plans.

Anything going on there that we should be worried about? Are you pretty confident now that that is going to get done around that June time frame?

Yes, we're pretty close to our original schedule. The only holdup is it's a very difficult regulatory environment for licenses. So I would think -- I would have to say it's probably one of the most difficult in the world that we have seen.

Okay.

So that just takes a little bit longer. But that's where we stand on Brazil. But even without that now, you can literally sail around the world and not exit our footprint.

Right, right.

Broadband coverage the whole way.

Sure. Just one more for you, Pat. The tax rate you mentioned, it sounds like 30% probably for the balance of this year. Is that then the rate we should assume longer term, into 2011 as well?

No, actually longer term, Rich, we still have -- we have very sizable valuation allowances remaining on the balance sheet. The challenge we have in the very near term, as long as those exist, is they are primarily now related to R&D tax credits. And the tax laws are such that AMT actually caps the amount that you can use in any given period.

So that is what is causing the tax rate to move up to the 30% for the next several quarters. Once -- when we either have consumed all of the valuation allowances or we take them through the P&L, then our go-forward long-term run-rate tax percentage will probably be around 38% to 40%.

Okay.

That in turn will be a function of whether the US government continues to renew the R&D tax credits that can be used on a yearly basis, which they tend to wait until the very end of the year every year before they decide whether to renew that or not.

Great. So where would your tax rate be if in fact you did get the R&D tax credit on an annual basis?

It would be at the lower end of that range I just gave you. So --

So 38% probably.

Yes, 37.5%, 38%, up to 40% or possibly even a shade above. But that would be about the bandwidth of the -- with and without the R&D tax credit.

Great. I'm sorry, one more for you, Pat. Just OpEx relative to say Q2 run rates. And I am sorry, did you say that you expected Q2 OpEx to be flat or slightly up? Where do you expect them to go beyond that?

I expect it to go modestly up. Then I think through the rest of the year we will probably have a little bit of an increase, but I would not expect too much. So over the course of the year, I would expect to see modest increases in OpEx on a quarter-over-quarter basis.

Okay. That's helpful. All right. Thanks very much.

Aaron Edelheit, Sabre Value.

Hi. All of my questions have been answered. Good quarter, guys.

Okay. Thanks.

Jason Nelson, Roumell Asset Management.

Hi, guys. This is actually Jim. Martin, could you talk? As the VSAT market has developed and attracted more participants, as global footprints have been created that can really compete with Inmarsat, can you give some color -- say compared to a year or two ago when you rolled out VSAT -- how the competitive landscape has developed and changed? How is it different today than it was 18 months ago?

And what are the pushback you are getting from potential commercial customers? Specifically I'm wondering if you are getting any pushback regarding the proprietary nature of the KVH VSAT solution and a customer's concern that, if they sign up for VSAT rather than say one of the iDirect VSAT solutions, and in a year or two, or after the contract expires, you can jack up their service revenue, and they don't have an alternative service provider to go to.

Where if they go with Ship Equip or any of the other guys and they try to screw them, so to speak, on the service side, they can go to another iDirect platform.

Yes, I think that the -- let me start at the beginning. The competitive landscape hasn't changed. You still have a number of small players on iDirect hubs all sharing the same satellite footprint, same bandwidth, just cramming as many customers as they can onto tiny slices of bandwidth.

Competing with each other with identical antennas; trying to compete on price; and delivering poor quality service that customers hate. So, that was the situation when we developed our alternative, and that is still the situation today.

So what we offer customers is an end-to-end solution that is engineered. It is managed. We don't have contention. We have a very desirable quality of service, which is what people want.

And we are the alternative to those other solutions, so we actively position ourselves against that alternative.

As far as airtime price stability goes, it is really the same situation as with the Inmarsat. So you have -- we sell airtime, but we also wholesale airtime to companies like Thrane & Thrane. We have probably about half a dozen other wholesalers around the world now selling our airtime, including SP-JSAT in Japan is an airtime sales agent.

So we have a number of alternatives even though they all run through our network, so that there is at least the perception of price competition.

Which is exactly the same situation that Inmarsat has. They have one service and they have a few ISPs and DPs selling the airtime. But in fact it's all from one source.

Well, so are you saying that the proprietary nature of the KVH solution is not coming up in the field as an obstacle to making a commercial sale?

On the contrary, it's a big benefit. People like the fact that we know it works and it's an end-to-end solution. So it is a huge selling point.

So, because some of the people I have spoken to, the commercial customers do have some concern about signing up where they basically don't have announced an out down the line, if they wanted to exercise it, as they do with the others. You are not seeing that?

Did you hear that from a commercial customer? Or did you hear that from an expert in the industry?

A commercial customer.

Yes -- no, I have never heard that before.

Okay. No; it was absolutely a commercial customer.

The second question which is related to this is -- well, related but a different potential pushback is the commercial customers belief that the 60-centimeter can give them the robustness of what they need. Any pushback there?

That even with the attractiveness of the easy-to-install and whatnot, that they believe that the 1.2 is just what they need given their bandwidth demands. Is that coming up as a pushback?

What I am really obviously trying to get at is just how the VFAT industry is emerging among the competition. Is it intensifying today versus 18 months ago or so when you first came out with this?

Yes, the antenna size puzzles people because they don't understand how we can deliver such a high-quality service and such high data rates with an antenna that is so much smaller than the competitors'.

So we do have white papers. And in part of our sales presentation we do have to explain to customers about spread spectrum technology -- why it's better; why it is more resistant to noise and interference; why the military uses it; why CDMA and the next-generation cell phones are based on spread spectrum technologies.

So once you compare it to things they know like the new 4G or UMTS, cell phones, wideband CDMA which is a spread spectrum technology, you get better noise immunity -- so once you explain it in that context, they are able to understand it.

Okay. Thank you.

Chris Quilty, Raymond James.

Yes, first of all, this is a first for me, but I just want to clarify since I was on the heels of Rich's question about the 1,000 units, that I was in fact pulling your leg, Martin. I think I am only modeling less than 780 units in the second quarter. So if you can do that, my price target is too low.

But actually just a follow-on, on the question just there from Jim. I think is the question he is getting at really driven around the issue that a lot of your competitors are trying to do the same thing as you? Which is get to a small antenna; but their modem technology is depending on having a big aperture or a big diameter. And so that they don't work.

They are trying to do a me-too in terms of the size, but they don't have the modem (multiple speakers).

That's exactly right, Chris. That is a good point. It is not just the modem but it's the entire hub.

That's why if you look at our network people say, well KVH can't do that because they have to put this giant network in place in order to use this spread spectrum technology. They can't just take little slices of bandwidth like everybody else is doing.

And that's true. But we have done that now, and we have the subscriber base now to support what we've done. And the advantage is that we get this wonderful system which has smaller antennas and higher data speeds, it's more resistant to noise, and it has the ability to improve as technology improves through software. So like we just said, we can double our bandwidth.

If you try to do the same thing with a small antenna using a traditional hub and a traditional modem that is non-spread, you get poor performance, and you get signal fade, you get rain fade, you get small footprints. And that's just the way it is.

So it does require some education. But the good news is that people try our systems. They say, okay; if it is horrible, give it back. And nobody gives it back because they love it and they buy more.

Good. So the only other area I forgot to ask about was Japan, inking deals with JSAT and JRC. I think as we all know you have to have Japanese partners to get into that market.

What do you see there as the opportunity both near-term and longer-term in terms of number of newbuild vessels or fleet operators, and how aggressive you think your partners can be at penetrating that market?

Well, the Japanese market is a very large market. I think they are number one or number two in terms of largest vessels, registered vessels.

And as you point out, it's a very closed market. In other words, they like doing business with Japanese companies. You need to be a Japanese company to have a license, period. So we have partnered with one of the largest satellite providers in Japan, which is where we are getting our satellite coverage from.

But even so it's a long process, so we don't expect quick success in that market. But it's a market that is too big to ignore, and we are going to be focused on it for the next couple years.

Okay. I lied; final-final question, just because we never mention it here. The RV market -- you seeing any signs of life?

Coming back strong. We sold more RV products to OEMs in the first quarter than we did all of last year. Which isn't saying much.

But it is coming back. It is still not a material part of our business, but we do -- we are seeing recovery in that market, finally.

You didn't give similar metrics for your traditional leisure maritime satellite TV. But boat registration (multiple speakers).

Marine satellite TV is up, which is good. We normally report -- we throw in our Inmarsat hardware into that mix; and if you do that I think it might be down maybe 1% or something. But the satellite TV business is actually up.

I see both of there's markets as upside now. In other words, if that market recovers we will do very well because we have great products and excellent market share. So that's really the way we are focused on it, is we are in good shape there. If the market recovers, we will do well.

Very good. All right. Thanks, gentlemen.

Okay. Thank you.

(Operator Instructions)

Okay. I think we will wrap up then. Operator?

Absolutely, sir. There are no questions in the queue. I will turn it back to you.

Okay. If anybody does have any follow-up questions, please feel free to give Pat or me a call directly. Thank you.

This does conclude our conference call today. We would like to thank you for your participation.