KVH Industries Inc (KVHI) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the KVH Industries Q2 2014 earnings call. As a reminder, this conference is being recorded.

At this time for opening remarks and introductions I would like to turn the conference over to Peter Rendall, CFO. Please go ahead.

Good morning, everyone. This is Peter Rendall, and with me is Martin Kits van Heyningen, Chief Executive Officer of KVH Industries. Welcome to today's call.

This call will address the second-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 most recent Form 10-K filed with the SEC on March 17, 2014. The Company's SEC filings are directly available from us from the SEC or from the investor information section of our website.

Now at this point I would like to turn it over to Martin for today's discussion of our results. Martin?

Thanks, Peter, and thank you all for joining us today. This morning we reported second-quarter revenue of $40.9 million and pro forma earnings per share of $0.05. $0.05, that was about the midpoint of our quarterly guidance.

Overall results reflect good growth in our mobile broadband business. Our maritime VSAT airtime revenues continued on their trend of double-digit growth, and we are pleased to see a better-than-normal number of new activations during the quarter.

ARPU also ticked higher in the quarter, and fixed-rate plans are now just over $2,000 per month. Our TACNAV revenues were up by 15%; however, lower-than-expected FOG sales caused our guidance and stabilization revenues to decline year-over-year.

Looking at each business in greater detail, our overall mobile broadband revenue was $29.7 million for the second quarter; that is a 9% increase year-over-year. Much of this growth came from strong mini-VSAT Broadband airtime sales, which were up 24% year-over-year.

Hardware sales of TracPhone products for our mini-VSAT Broadband network were below our 250 unit per quarter run rate. But our number of activations was quite strong, with well over 300 systems activated. This could be due to some inventory coming out of the channel in the quarter and into use, and sales in July show normal hardware sales.

Maritime satellite-TV sales of $4.1 million were flat with the prior year. They were impacted by a late-quarter launch of our brand-new TracVision product line, which resulted in demand for new products that carried over as backlog into Q3. We expect to clear this backlog during the current quarter, which will result in a year-over-year increase in Q3 for our TracVision TV product.

It was a very active quarter for our mobile broadband teams in terms of rolling out new products and services and for business development. KVH became the first maritime VSAT provider to multicast a live sporting event to customers at sea all over the world, when we broadcast the World Cup finals.

This was incredibly well received, and we got an enormous amount of positive feedback from our customers. One of our larger customers, Vroon, sent pictures of their crew watching the World Cup onboard their ships to everyone in their company, to highlight their plans for rolling out the IP-MobileCast service. Several maritime industry magazines were interested in Vroon's experience, and we expect to see a lot of positive articles as a result, which will be a great way to help build awareness for the IP-MobileCast service.

Another major development, of course, is our acquisition of Videotel, the maritime industry's leading provider of e-learning services. Videotel is one of the best-known companies in the commercial shipping industry and has very good relationships with most of the shipowners and operators and other industry stakeholders. Seafarer training is a very important problem in the industry due to all of the new regulations, and we have already received a lot of inquiries and positive feedback about our strategy to deliver Videotel's training services over our mini-VSAT network.

I really believe that we are reaching a tipping point now in terms of people embracing the benefits of our global content delivery system. Adding Videotel represents a key part of our strategy to offer mission-critical services and new capabilities via IP-MobileCast, on top of our great entertainment features.

We have already begun our integration efforts between the two teams, and we are planning big customer events at upcoming tradeshows, like the one in Hamburg, the SMM show, as well as other shows around the world later in the fall. The sales teams are working on ways to bring together Videotel and KVH customers to create cross-selling opportunities.

In addition to our own training content, we have also signed up another significant partner to deliver their content over the IP-MobileCast service, Applied Weather Technology, or AWT. AWT's software optimizes a ship's route to save fuel and to arrive at its destination just in time. It requires high-resolution global weather forecast data that we multicast to ships four times a day.

Their sophisticated route-planning software answers the two basic questions on the bridge: What should our course be, and how fast we be going right now? It routes around storms and also minimizes fuel consumption on ships. These ships typically burn about $50,000 of fuel per day, so it is yet another compelling reason to buy our IP-MobileCast service.

Moving on to our guidance and stabilization business, revenue, which includes our fiber optic gyro products and our TACNAV military navigation systems, was $11.2 million in the second quarter. That is down 30% year-over-year.

TACNAV product revenues were $5.7 million, which was actually up 15% from the same quarter last year. But this increase was offset by lower FOG sales, which were down 44% to $4.5 million year-over-year. The reductions in US defense spending on programs like CROWS weapons system was a major factor in the decline.

The commercial side of the FOG business continues to grow, now representing 80% of our revenues. These are coming from emerging market opportunities like driverless cars, drones, stabilized cameras, as well as robots. Now, although these programs take time to develop, we believe that they represent a significant opportunity, which is why we continue to invest both in R&D and in production capacity.

We continue to see strong demand for our TACNAV systems, which was reflected by the $5.2 million order we received in May. A significant part of this order was already shipped in the second quarter.

In past calls we have mentioned other large TACNAV orders that we are actively tracking. One of these potential contracts is with a major defense prime contractor, who has now received the order from their customer for vehicles and has given us a letter contract for up to $500,000 to begin work while the terms of the overall contract are finalized. This took a bit longer than we would have liked, but we hope to make an announcement on this contract shortly.

Our product development efforts for TACNAV have resulted in the new, high-end system we call TACNAV 3D, which was introduced last month at a major military show in Paris called Eurosatory. TACNAV 3D is able to navigate using dead reckoning. Even works on hilly or mountainous terrain, which is an important capability, even when GPS is blocked or jammed.

Our TACNAV 3D is based on merging our digital compass technology with our 1750 IMU, a built-in GPS, and an iridium satellite data modem. It is really a significant improvement over anything else on the market at its price point.

We anticipate this opening up the broader high-end market for KVH's military navigation system. In fact, the letter contract we just signed with the prime contractor I just mentioned was for a variant of the TACNAV 3D and includes our fiber optic gyros.

Looking forward to the remainder of the year, we are very excited about the opportunities and comfortable with our prospects for continued success in each of the strategic business areas. For the mobile broadband business, our IP-MobileCast service, and our new relationship with our Videotel colleagues, and our application provider partners like AWT and Jeppesen, give us an exciting story to tell customers to really differentiate the KVH mini-VSAT Broadband service from all competing solutions. We will use these relationships to cross-sell and win new business for a KVH customer base that now includes more than 20,000 vessels.

We believe that this powerful new combination will change the trajectory of our broadband business. We expect to exit Q3 with our recurring service revenues to be around 60% of the entire Company revenues. The TACNAV pipeline continues to look very solid, and we are hoping to broaden the market by being able to meet the navigation requirements of higher-end platforms with our new TACNAV 3D product.

Finally, we do expect our FOG business to rebound, both with increased demand from military customers, which will undoubtedly come as vehicles are upgraded and new systems are fielded in conflict areas around the world, and, more importantly, from the many new commercial applications. The machines that move and make decisions on their own based on sophisticated software rely on advanced and very accurate sensors like our fiber optic gyros.

Right now, a lot of these sales are just for prototypes being designed into these new products. But in the longer term, the next generation of self-driving cars and humanoid robots that you read about in the paper require extremely precise sensors. These are the new markets, and they are the customers that we are targeting with our new FOGs.

Now I would like to turn the call back over to Peter for the detailed financial results. Peter?

Thank you, Martin. Now I would like to turn our attention to a more in-depth financial review of our second-quarter results.

This morning we reported revenues of $40.9 million, which was 5% lower than the revenue reported in the prior-year quarter. As Martin stated earlier, our mobile broadband revenues of $29.7 million represented a 9% year-over-year increase, while our guidance and stabilization revenues were 30% lower at $11.2 million.

Revenues from our VSAT business were $18.6 million in the quarter, an increase of 8% year-over-year. Of this amount, airtime services represented $14 million, an increase of 24% over the second quarter of 2013.

During the second quarter, our VSAT airtime ARPUs for the variable pay-by-the-megabyte plans were consistent with what we've reported in recent quarters, namely, $600 to $700 a month, while we saw a modest increase in the fixed-rate plans from $1,900 per month to a little over $2,000 per month.

All other SATCOM revenue, including TV systems, KVH Media, and Inmarsat systems and associated airtime, was $11 million, up from 10% from a year ago. Within that amount, maritime satellite TV product sales of $4.1 million were almost flat year-over-year, while land-based systems declined 11% to $1.1 million, as we had anticipated.

TACNAV product revenues of $5.7 million came in as expected and were 15% higher year-over-year. As Martin has also mentioned, the main contributor to this revenue category was an international military customer that was referenced in the press release we issued in May.

Now turning to our FOG business, FOG sales in the second quarter of $4.5 million were 44% lower than the same period last year. As it relates to this year-over-year decrease, the significant contributor was a sharp slowdown in spending under the CROWS program, as we previously noted. For the second quarter, almost 80% of our FOG revenues related to these commercial applications, continuing the trend we have seen throughout this year, where sales into commercial applications are significantly higher than those related to defense applications.

As it relates to be split of our product and service revenues, 49% of our revenues in the second quarter were service-related, the vast majority of which was subscription-based. In the second quarter last year, only 40% of our revenues related to services; included within that amount was 13% related to installation and program management services under the Saudi Arabian contract.

In the current quarter, 74% of service revenues related to airtime and 19% related to KVH Media. With the continued airtime growth and the inclusion of Videotel subscription-based e-learning services, we anticipate that our service revenues will continue to grow as a proportion of our overall revenues.

The gross profit margin in the second quarter of 43% was slightly higher than our expectations and slightly higher than the 42% we'd reported in the second quarter last year. Our VSAT airtime gross profit margin of 35% for the second quarter was in line with what we reported in the prior-year quarter.

As it relates to our second-quarter operating expenses of $16.8 million, these included almost $500,000 of acquisition-related expenses for the Videotel acquisition. On a like-for-like basis, excluding acquisition-related expenses for KVH Media last year, our year-over-year operating expenses were 10% higher.

Almost all of this increase related to having a full quarter of KVH Media's operating expenses since the acquisition took place midway through the second quarter of last year. Compared to the first quarter of this year, excluding acquisition-related expenses and third-party sales commission on the additional TACNAV revenues, our operating expenses actually declined by 3%.

So excluding Videotel acquisition-related costs and a discrete tax charge, our net profit for the second quarter was approximately $800,000 or $0.05 per share. This compares to the $2.3 million of net profit and $0.15 of EPS we reported in the same period last year.

For the second quarter, our EBITDA adjusted for equity expense was $3.8 million. Depreciation and amortization for the quarter was $1.7 million, and equity expense was approximately $1 million.

Now, moving on to our balance sheet. At June 30, we had cash and marketable securities of $54.4 million, an increase of approximately $600,000 from the end of the prior quarter.

At quarter-end, our inventory balance stood at $20.1 million, which was $1.4 million higher than that on hand at March 31. Part of this increase was attributed to components related to our new TracVision satellite TV, where orders were received in the second quarter but are shipping in the third quarter.

Capital expenditures during the second quarter were $0.8 million, making the total year-to-date total stand at $1.7 million. Backlog for our guidance stabilization products and services at the end of June was approximately $14 million, down by $3 million from March 31.

Now I turn to our outlook for the third quarter and full year. Following the acquisition of Videotel at the beginning of the third quarter, there are a number of accounting factors relating to our acquisition of Videotel that may impact our results.

Our purchase accounting review of Videotel is incomplete, which includes the valuation of intangibles and therefore the impact of future intangible amortization charges on our results. The guidance for the remainder of 2014 is based on a preliminary view of these intangibles, but that could be materially different from the final analysis.

We have estimated that total Company intangible amortization for the third and fourth quarters will be approximately $1.4 million. In addition, while we are confident about some large TACNAV orders being announced in the coming weeks, we still remain cautious as to the timing of product deliveries under those contracts. We also continue to be conservative in our forecast for sales of our FOG products, given the recent quarterly run rate we have experienced, while we expect our mini-VSAT business to show solid year-over-year growth, particularly as we did see an uptick in new customer activations during the second quarter.

Our operating expenses are expected to be higher in the third quarter, as Videotel's operations were acquired at the beginning of July. We expect our effective tax rate for the remainder of the year to be approximately 33%, subject to the effect of any unforeseen discrete items.

With this context, our guidance for third-quarter revenue is in the range of $43 million to $47 million, reflecting the contribution of Videotel, an expected decline in TACNAV revenue, and continued quarter-over-quarter and sequential growth from our mini-VSAT business. We expect our GAAP net income for the third quarter to be in the range of $0.03 to $0.08 per diluted share.

For the fourth quarter, our revenue guidance is in the range of $47 million to $51 million, while GAAP net income for the fourth quarter is expected to be in the range of $0.10 to $0.15 per diluted share.

In conclusion, with the expected growth in subscription-based services from airtime, VoIP, and content, we continue to be confident in our long-term strategic growth path. On that, I would now like to hand it to the operator to take your questions.

(Operator Instructions) James McIlree, Chardan Capital.

Yes, thank you. Good morning. Can you give us the SATCOM breakdown? You said it was $11 million total. I am talking about the other SATCOM, ex- the mini-VSAT. So you said $11 million total; $4.1 million maritime; and land about $1.1 million. What is the other $5.8 million?

Including Inmarsat airtime and product --?

Yes, so we have -- there are other products, accessories, services.

Navigation.

Navigation equipment.

Marine navigation products, like our digital compasses.

And Headland is in there, right?

And KVH Media is in there.

How much was KVH Media?

For the quarter, revenue was $3.8 million.

$3.8 million? Great.

For Q3, you are looking at $43 million to $47 million; but that includes, I am assuming, a full quarter of Videotel. So that's -- if you ex- out Videotel, then you are down Q to Q. I am just trying to understand why that is.

You've got -- is it -- what is going down on a quarterly basis to result in that?

Well, the big thing is TACNAV. We shipped the majority of that $5.2 million order, so sequentially from Q to Q3 the major delta is a decline in TACNAV revenues.

And then the reason for the increase in Q4 is they are expecting a resumption of TACNAV?

Correct. We have backlog already in hand for Q4, and we also have other contracts that are pending. So what we have done is deferred any TACNAV revenue that is not in backlog currently in Q3; so that is not in our guidance at this point. So that is the only thing that is declining sequentially.

Okay. Then the unit orders I think that you referred to, of 250 for the mini-VSAT, how much lower than 250 was it for the quarter?

I don't want to give the exact number, but it was not materially below that number, but it was unusual. So that is why I pointed it out.

It was also unusual that we had very high activations, so it was kind of a strange quarter. We had low hardware revenues, but very high activations. We hadn't seen that before, which is why I mentioned it.

And based on what has happened in July, it was just an anomaly. So maybe some channel -- because it doesn't take a lot to move this. We are talking about it if it is 20 or 30 units, that is a change from our estimate; but that's -- it doesn't take a lot for that to happen.

So we did see a drop in VSAT hardware sales in Q2 that we do not expect to reoccur, and so far in July it has not. We are on a solid pace to do 100 systems in July or so.

So it is looking good, but it definitely caused our hardware revenues to be low in Q2, which was disappointing. But if it is coming out of the channel that wouldn't actually bother me.

Right, okay. So you are not talking about half the number of units.

No, no, no, no, no.

Just talking -- still in the ballpark, but just --

10%, you know, 10%. Yes.

Okay, I got it. Okay.

But we have been pretty consistent about giving you a range, and I didn't want to not mention it.

Then I think we are all kind of waiting and hoping for an acceleration in that number because of KVH Media. Is that still a reasonable expectation, that you can get an acceleration in the number of mini-VSAT sales per quarter?

Yes, absolutely. We think that these new services -- they are just coming online. We have got the entire IP-MobileCast network up and running now. We are just starting to deliver media servers.

We have activated people in the second quarter, upgraded their software so they could actually watch our media content on their hardware and the live events. I think that we have gotten tremendous feedback, so I think that this absolutely has to change the growth rate that we are on.

Okay, great. Thank you.

Rich Valera, Needham & Company.

Thank you. Just wanted to revisit the guidance. If you take the midpoint of your prior full year, and then the midpoints of your third and fourth quarter guides, it is actually down around $15 million, it looks like, if you assume roughly $6 million a quarter for Videotel. So first, just wanted to confirm that you are assuming about $6 million a quarter for Videotel. If not, how much?

And if that is the case, $15 million seems like a big delta to attribute to just TACNAV. So I am wondering if there are other factors that led to the lighter second half than we had been looking for previously.

Right. I think part of the confusion is that we hadn't updated full-year guidance at the end of last call; we are still within the range. I think perhaps you were assuming the midpoint of the range. But given that Q1 was not at the high end of the range, so that probably wasn't a good assumption.

So then Q2 came in light. So I think that is probably the biggest discrepancy.

In terms of where we look now versus where we were at the end of the quarter, really the only major change in our outlook for Q3 and Q4 right now is the FOG business. TACNAV is expected to be low in Q3, which was the answer to the previous question, but strong in Q4 and on plan for the year.

FOG we have taken down significantly. We have taken $5 million or $6 million out of FOG in the second half of the year in terms of our own internal forecast, based on what we just saw in Q2.

Great. Can you give a rough amount for guidance and stabilization as a whole? Any way you can quantify what you are expecting for the second half, either relative to the 2Q baseline or year over year?

We are anticipating round about $20 million or so, maybe a little higher. We have been very conservative in our FOG estimates based on the run rates. Martin said that was a big, significant contributor to the overall reduction in our annual guidance.

We also have this contract which is starting, so we are going to start to see some engineering revenues as we begin work on this other contract that I mentioned.

So we are really -- just to recap, if you want to look at the difference between our outlook today and our outlook at the end of the last quarter, it is FOG. That is the big difference. We were expecting to see a rebound in FOG; and at this point, we are taking it out of the forecast.

Got it. Can you just say what you are roughly expecting for Videotel in the second half as well?

Subject to all the purchase accounting process that is happening, we are estimating between $11 million and $12 million.

Great. So you are not losing, you don't think, much revenue to like deferred, loss of deferred from purchase accounting at this point, you think?

We have assumed a similar pattern that we had with KVH Media, based on similarities of the business.

Got you. Then just wanted to confirm the $1.4 million of intangible amortization. That is for the entire second half, so a $700,000 per quarter run rate? Is that what we would assume going into 2015 as well?

No, no.

That is per quarter.

Oh, that is per quarter? Okay.

That is baked into those -- into the forecast.

Got you. Do you expect to be presenting your results with that kind of pro-forma-ed out as well? Since I think that is the way we would probably like to look at them.

We talked about that a lot internally, Rich, and I think that the answer is probably yes, next time. We didn't want to do it this quarter, but I think probably next quarter we will take a look at whether we should take out the amortization of intangibles and (multiple speakers).

Yes, I mean rough numbers it is like $0.09 per quarter, which is clearly very material in the context of your business.

Right, exactly.

Seems like it would behoove you to clarify that. Then we can probably back into this, but can you say roughly how much incremental OpEx you expect from adding in Videotel in the third quarter?

Excluding any acquisition-related cost, we are anticipating something in the order of $3 million.

Per quarter?

Yes.

Okay.

That includes the --

That includes the amortization? That is a GAAP number?

That is a GAAP number.

So it is really about half that, if you were to back out the amortization?

No, it's -- we are assuming amortization of a little under $1 million for that. Because don't forget we have amortization for KVH Media and Virtek.

Okay. I thought you said it was $1.4 million per quarter of amortization from just Videotel.

No, no, for -- that's Company.

Oh, for the entire Company? Okay, I'm sorry.

Total. So about $1 million of that is Videotel, and (multiple speakers).

Okay, I appreciate that clarification. Okay, well, that's it for me. Thanks, gentlemen.

Chris Quilty, Raymond James.

Thank you. First, just a cleanup. Peter, can you give us the breakdown of antenna sales by antenna type?

It is still approximately 60% V7, V11; and 40% V3.

I'm sorry, 50% V3?

40% V3.

Okay. And 50% V7, and then the balance is V11?

Yes, he was combining the 7s and 11s just as the -- sort of big antenna versus small antenna. The reason we group it that way, Chris, is that the V3 is a metered plan and the V7/V11 are both on fixed-rate plans, so they are different ARPUs.

Okay. Got you. Have you seen any, at least between the fixed rate, any shift between V7 and V11 or any impact in terms of large fleet orders?

No, it has been relatively consistent, so no surprises there in the mix.

Okay. Peter, you gave us a service breakdown, and I just didn't catch the numbers I think in the quarter for KVH Media versus referring services. Can you give that again?

I certainly can. For Q2 it was 19% KVH Media; 74% airtime, both VSAT and Inmarsat.

Okay. And then the balance was what?

We had some final installation services under the Saudi contract; and we had some other NRE that we incurred as well, but relatively small amount.

Okay. The TACNAV contract that you are working, fair to assume that that is one of the $10 million to $15 million size contracts that you had talked about previously?

Yes.

Yes.

And again, you are reasonably confident that you would see hardware shipments by the fourth quarter?

Well, we are confident that we will see hardware shipments on other programs. We don't have that in our guidance for Q4 from a hardware point of view, no. Our guidance does not include hardware shipments under that particular contract.

Okay. Can you give us a sense of what you are seeing in terms of customer uptake for IP multicast services or package types? Whether you've got people on 30-day, 60-day trials, and what the conversion rates are. Some sort of a sense, because you expressed some pretty strong optimism that it would be a big uptake. But can you give us any nuances on what you are seeing?

Yes. What we are seeing so far is big fleet customers are interested in packages that are in the $500 to $700 a month range, which is where we expected. Some of the fishing offshore guys are surprisingly interested in more the high-end packages, what we call our platinum package.

We have done a lot of free activations where we upgrade people in the background, and then tell them that they have a new capability that they didn't know about, and get them to try it. Too early to tell what the conversion on that is. Those are people that we're -- aren't in the sales process; we are just letting them know they've got a new capability.

And as part of every new proposal, obviously, we're pitching this hard. I think the exciting thing is that we are now -- with Videotel and Headland Media, I think we are selling to the same customer. I think the challenge we had a little bit in the past was when we were trying to sell VSAT to NEWSLink customers, they were selling to the HR group. We are selling to the IT group, and we didn't really get much of a cross-selling benefit.

The training and the media and the news products are all being sold to the same person or department within the organization. So that is why we think this is going to be different this time, because we really didn't do a good job of cross-selling a year ago when we got the NEWSLink and the KVH Media Group onboard.

So I think that was a bit of a disappointment. Now we are targeting a different customer, and we think that we are going to get a very different result. So that is why we are (multiple speakers).

That customer is on the HR side or the ops side now?

It is on the HR side. So the HR department typically handles crew welfare, crew entertainment, crew retention, hiring, and training. So that is a key difference.

The IT department typically isn't thrilled about any kind of entertainment running on the network. So it is a different purchase.

Got you. All right. Thank you, gentlemen.

James McIlree, Chardan.

Yes, thanks again. Peter, any acquisition expenses in Q3?

Yes, there will be. We are anticipating that they will be lower than Q2.

Peter, are the acquisition expenses included in the EPS guidance?

They are included, yes.

Okay, great. Then in response to Rich's question, I think you said $20 million in guidance and stabilization revenues in the second half. But it sounds like it will be Q4 loaded; that is, Q3 will be lower than Q4. Do I understand that correctly?

Yes, that's correct.

Okay. It also sounds like TACNAV is going to be a very small number in Q3.

Yes, it is going to be pretty small. That is the sequential decline, and we have significant backlog for Q4 shipments in hand, in fact signed. But it does not include some of these other contracts that I mentioned.

Understood.

Because we don't expect those to ship in Q4.

Right. Then lastly, on the FOG revenues, are the FOG revenues at a stable level now, but just lower than what you thought they would be? Or are you thinking that FOG revenues are going lower versus Q2?

We don't think they are going lower. We do think they are going higher. But at this point we are trying to be much more conservative than we have been, because we have been wrong for two quarters in a row.

Okay. So it is not that FOG has gotten worse, it is just it hasn't gotten better at the pace you expected.

Right. Right. There are a lot of positives here. We keep talking about FOG because it missed the revenue number, but the new products are performing incredibly well. We are getting designed into some incredibly cool projects. So we do expect to see an uptick here as these things go into production.

And the short-term benefit that we are already seeing is that the margins are getting better, because the new products are more sophisticated systems sales, like the 1750 IMU which carries a higher margin. The products like the CROWS were a very low-margin product because it was a high-volume product originally.

So there are some benefits here, and we do expect to see things improve. We just don't want to count on it in Q3.

Right. Okay. Finally, I think at times, or usually, you give backlog for the guidance and stabilization business. What is the backlog?

The backlog is --

He is rummaging; he will be with you shortly.

$14 million, which is $3 million down from March.

Okay, so one-four million? Did I hear that?

That is correct.

All right. Thanks a lot.

Rich Valera.

Thank you. Peter, I was wondering if you have convenient your expected net interest expense per quarter, given the increased borrowings for the Videotel acquisition.

I'm sorry, can you repeat the question, Rich?

Net interest expense you expect in 3Q and beyond, given the increased borrowings for the Videotel acquisition.

The net will be probably $250,000 expense.

Okay, perfect. Thank you.

Chris Quilty.

Sorry, one more on the commercial FOG products. At least on my pencil, those revenues have been running $3 million to $5 million a quarter for the last year and a half or so. Is there anything in the pipeline that you see that would maybe double or triple those revenues? I am not saying in the next 12 months, but over the long term, is there that type of growth potential in the product run in the customer base?

Yes. Yes, I mean we are being designed into some programs that have the potential to be very large. In fact, we have invested millions of dollars in factory expansion. So we think that there is significant potential here, which is why we continue to invest.

We have completely revamped our production line to go to a one-piece flow line. We think there is opportunities in automotive that will be significant.

Automotive would be larger than stabilized cameras or robots?

Yes. Yes. Yes.

Got you. I'm ready to have my autonomous vehicle.

You and me both.

All right, thank you.

We have no further questions at this time.

Great. Well, thanks for listening, everyone. And as always, feel free to contact Peter or myself directly either via phone or email and we will get back to you promptly. Thank you.

Once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.