KVH Industries Inc (KVHI) 2016 Q2 法說會逐字稿

Good day and welcome to the KVH Industries second-quarter 2016 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to John McCarthy, Interim Chief Financial Officer. Please go ahead, sir.

Okay, thank you. Good morning, everybody. Thanks for joining us today to discuss KVH Industries' second-quarter results and our guidance for the third quarter and the full year, all of which is included in the earnings release we published this morning. With me on this call is Martin Kits van Heyningen, the Company's Chief Executive Officer.

The earnings release is available on our website and also from our investor relations department. If you would like to listen to a recording of today's call, you can access the webcast replay on our website. If you are listening via the web, feel free to submit questions to ir@kvh.com.

This conference call will contain certain forward-looking statements that are subject to a number of assumptions and uncertainties that may cause our actual results to differ materially from those expressed in these statements. We undertake no obligation to update or revise any forward-looking statements.

We will also discuss certain non-GAAP financial measures and you will find definitions of these measures in our press release, as well as reconciliations of these non-GAAP measures to comparable GAAP measures. We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading "Risk Factors" in our Form 10-K filed on March 14 of this year, and the Company's SEC filings available directly from us, from the SEC, or the investor information section of our website.

So at this time I would like to turn it over to Martin.

Thanks, John, and thank you all for joining us this morning for our second-quarter conference call. I'm pleased to report KVH's second-quarter results were right in line with our guidance. Our revenues were $46 million, up 2.5% year over year from $44.9 million in the second quarter of 2015.

For the quarter, our adjusted non-GAAP earnings were $0.08 per share, which was at the higher end of our range. Overall these results are encouraging as we achieved -- as it was achieved during a period of significant market headwind.

Our key commercial maritime markets, shipping and oil and gas, continue to struggle due to low freight rates and low oil prices. Vessels are being sold or laid up and orders for new ships are being delayed. Fortunately, we've been able to add new subscribers to overcome these headwinds.

Now the Brexit decision in the UK happened late in the quarter, so it didn't have any impact on Q2, but the exchange rate did adversely impact our revenues compared to our budget and compared to last year. The majority of our training services and value-added content business is billed in British pounds. Fortunately, we also have fairly large operating expenses in the UK that are in pounds and that helps offset the impact of currency, so we see more of the impact on the revenue line than on the bottom line.

We feel our success in overcoming the various economic challenges can be attributed to our new airtime sales strategy that's gaining momentum. In the maritime markets, our usage-based airtime plans now account for over half of our overall airtime subscription. Both existing and new customers are adopting the new plan, which provides faster, higher-quality service, while also returning higher margins and ARPUs to KVH.

The number of customers using our IP-MobileCast content services also continues to grow and we have several promising initiatives underway to create new sales opportunities for our maritime training services. In the guidance and stabilization segment, we are seeing continued growth in our IMU sales, as some of our OEM customers in the autonomous platform, stabilized optics, and dynamic survey market begin to sell larger numbers of their products.

We are also successfully fulfilling portions of the large TACNAV orders we received last year, while closely pursuing the several large new orders that we've identified and believe will be placed within the next few months. John is going to cover the details in more detail shortly, but let me provide some operating highlights for each of our business areas.

Beginning with our mobile broadband business, our Q2 revenues of $36.9 million were down about 3% from $38 million in Q2 2015. As I mentioned, we attribute these declines to the commercial maritime industry's economic challenges and, on the content side, to the decline in the British pound. Our Inmarsat airtime was down 28% year over year, while VSAT airtime was flat as new activations offset layup of offshore vessels.

We are excited about the early success of our new usage-based airtime plan. You may recall that one of KVH's major initiatives in 2016 has been to disrupt the outdated practice in the maritime VSAT industry of managing consumption by limiting the connection speeds. This year we introduced new airtime plans designed to offer everyone of our customers service at the fastest possible speed, while giving them control over their consumption with a set of new cloud-based bandwidth management tools.

The new programs have been very popular, providing a significantly better user experience, while also increasing KVH's ARPUs and margins. This is helping us increase the profitability of our existing customer base by converting them to the new plan. In fact, our VSAT airtime margins were 37% for the quarter, which is up sequentially and year over year.

Given the competitive challenges and the difficult macro environment for our customers, we are pretty pleased about that. Our new plans are helping us win new customers by offering a differentiated service in the maritime market, where the fastest airtime speeds aren't limited to customers buying the very largest airtime packages, which is the common practice in maritime VSAT.

In the second quarter, some of KVH's largest and most important customers have switched from speed-based plans to the new usage-based plan. In one of these cases the switch resulted in a doubling of the monthly service revenue, which is a $1.5 million increase in annual subscription fees from this existing fleet customer alone. We are also having good success using the plans to get long-time KVH VSAT customers to sign up for new multiyear airtime contracts.

For new business, in this past quarter we won two significant fleet deals with these new programs, one for over 50 vessels and the second for a fleet of over 100 vessels. Both of these programs are on an accelerated installation schedule, so we expect them to start impacting results as soon as Q3. Overall, usage-based airtime plans now account for over half of our airtime business.

The key to offering these services is providing excellent tools for customers to monitor and manage their own bandwidth use, which requires significant back-office upgrade which we completed last year. This investment and the competitive advantage we have overall in our ability to manage and control our own network will make it difficult for competitors to copy our approach.

And of course, our unique IP-MobileCast service keeps the big video files off the data network and off the customers' usage allowance. They can do all the video streaming they want through IP-MobileCast and it doesn't count towards their usage at all.

From KVH's perspective, a significant advantage of usage-based airtime plan is that our revenues are now directly linked to our cost. The more -- though most of the use of the network is predictably profitable.

With the old approach, no matter how much bandwidth you supply, customers will use it all plus 10%, creating a never-ending demand for more bandwidth without additional revenue. With our competitors that creates a congested contended network that everybody complains about. On the other hand, give people high speeds and great service and I don't mind paying for what they use, even if it is slightly more than they were paying before.

Looking forward, we are encouraged by the increasing availability of high-throughput satellites and maritime-focused beams coming from most of the major satellite providers. By not having huge capital investments in satellites, we can leverage the lower-cost capacity being launched to provide better value for our customers, while also improving the profitability of our existing business.

We are also starting final testing of new products that we think will enable us to offer our customers higher speeds and even better performance than they are getting today. We are in a unique position to partner with the best of the upcoming network. We have the largest installed base of maritime VSAT customers; global distribution for sales, installation, and after-sales support; hardware and software design; manufacturing and integration capabilities; and a unique data broadcasting and value-added services, with customer bases reaching large parts of the maritime industry. All of which makes us the perfect partner for any new satellite services being launched.

Moving on to our content business, our IP-MobileCast news, movie, and music service continues to grow steadily with monthly revenues up 60% in June compared to January of this year. The adoption rate for IP-MobileCast is gaining momentum and we are even seeing many of the major tanker companies adding mini-VSAT to their vessels just to be content catchers for IP-MobileCast service. There's simply no other comparable service available for keeping seafarers informed and entertained in the middle of transoceanic voyages.

In our video teletraining business, we are in the midst of a major technology upgrade that will make it easier for partner companies, educational institutions, and even commercial customers to use KVH training materials as part of their own integrated learning management systems. These upgrades will open up new distribution opportunities for Videotel, making it easier for us to use other people's content in our own system and provide a better user experience by enabling our content to play on seafarers' tablets and smartphones, in addition to the dedicated training system in the computers currently in use. Videotel training libraries are now onboard over 12,000 vessels with 328,000 seafarers completing over 650,000 training events in the second quarter alone.

Moving on to our guidance and stabilization business, which includes our fiber optic gyro and TACNAV military navigation products, revenue was $8.4 million in the second quarter and that's up 40% from $6 million last year. In our fiber optic gyro business the mix is changing as our IMU sales continue to gain traction, especially in the emerging autonomous vehicle markets where we are being integrated into the navigation systems of new platforms developed for use in air, on land, on sea, as well as underwater. These platforms are being used for both commercial and military application and are often high-end, high-precision craft where KVH products meet the customers' performance goals with acceptable size, weight, and cost constraints.

KVH continues to be involved with the leading players in the self-driving car market and we are seeing near-term opportunities as some of the early market entrants start to field larger fleets of vehicles. We began supporting the concept of the self-driving car more than 10 years ago during the first DARPA challenge in 2004. Many of the engineers leading today's projects are the same people we support in these pioneering efforts.

We now part of many of the solutions being developed that rely on inertial sensors as part of the navigation solution and we continue to work to perfect our sensors for these customers. Our goal is to get designed in and to make sure that we stay in the system as they transition from prototypes to production. Obviously, managing costs and reliability are the two key items, in addition to the demanding performance requirements.

Moving on to our military land navigation business, we continue to see very good opportunities ahead for our TACNAV system. Our new TACNAV 3-D solution works with GPS to provide assured position, navigation, and time in the event that GPS service is blocked or jammed. Reliance on GPS has now proven to be the Achilles' heel of many critical military applications.

We had a solid quarter for TACNAV shipments in Q2 and everything that's in our financial guidance for Q3 is already in backlog. We are still awaiting two additional orders for our TACNAV system, and assuming they arrive in time, they should ship before year-end. There are several combinations of programs that should allow us to meet our guidance for the remainder of the year.

The message from our TACNAV customers is still very positive and we see no indication that the orders we are anticipating and have built into our guidance are in jeopardy. In one case, the new vehicles to be provided as part of the new order have already been built and they are delivered to the customers' country, so we have high confidence that the orders for TACNAV will arrive. But, as always, the timing is uncertain and the risk for delivering in the current year increases with the passage of time, although we do have finished goods inventory on the shelf and we are managing our supply chain to enable them to quickly fill new orders.

In total, we have about $100 million of TACNAV orders in our sales pipeline so the number of opportunities continues to grow.

In conclusion, we are happy with the results for the second quarter and believe what we're in a great position going forward. We've got a good leadership position in the maritime satellite market and our new airtime programs are popular with customers and profitable for KVH. We seem to be gaining traction with our IP-MobileCast service and our training business is strong and positioned to grow.

Our fog technology is finding good niches in emerging markets, and although some of these have been slow to develop, the advancement of the technology they represent will create a wide range of new opportunities for us to pursue. And the short-term prospects for TACNAV orders have never looked better, although the timing of these military contracts is often difficult to predict. But importantly, our military customers appear to know they have got vulnerability now relying exclusively on GPS, which is exactly the reason we invented our TACNAV solution.

Now I will turn the call back over to John for detailed financial results.

Thank you, Martin. I would now like to discuss in more detail the financial results of the Company for the second quarter.

As Martin mentioned earlier, our second-quarter revenues of $46 million were right at the middle of our guidance range that we previously provided and we are 2.5% higher than the second quarter of 2015. The primary drivers for this growth were a 40% year-over-year increase in guidance and stabilization product revenues, partially offset by a decrease in sales of our mobile communications products of 2.6%.

Negatively impacting revenues by approximately $400,000, as compared to the prior-year quarter, was the weakness in the British pound. It's worth noting that the second-quarter revenues -- second-quarter 2016 revenues were largely unaffected by the further weakness in the pound that resulted from the Brexit decision because that occurred -- that Brexit decision occurred towards the end of the quarter.

Our second-quarter service revenues of $25.9 million decreased 3.7% year over year, mainly due to a decrease in revenue for both our e-learning and maritime safety media sales. The biggest driver of this sales decrease was the weakness in the British pound, which negatively impacted these revenues by $400,000. We also had a $200,000 decrease in Inmarsat service sales and a slight decrease in contracted engineering services.

Looking at our airtime subscription portion of our service revenues in the second quarter, airtime revenues were $60 million, which was down 1% from the prior year. Mini-VSAT airtime revenues were flat with the prior year; however, continuing its trend, Inmarsat fleet broadband revenues were down 28%. So when compared to Q1 of 2016, airtime revenues were up 4% with virtually the entire increase attributable to mini-VSAT airtime, with both subscriber activations and ARPUs being stronger than the first quarter.

Now moving on to product revenues, our total product revenues increased by 12.3% to $20.1 million in the second quarter and most of this increase was attributed to the TACNAV revenues, which were offset by a decrease in both fog revenues of $800,000 and mobile communications product sales of $200,000. Our guidance in stabilization hardware revenues of $8.4 million were $2.4 million higher than the second quarter of 2015, or a 40.3% increase. As we've discussed, this increase was primarily due to the higher TACNAV revenues.

As we turn to our gross profit margin in the second quarter, our consolidated gross profit margin of 43% was the same as we reported in the second quarter of 2015. Our overall service margin was 49%, both this quarter and in the second quarter of last year, while our VSAT airtime gross profit margin was 37% in the second quarter. And that was up 3% from 34% from what we recorded in the prior year and it was up sequentially 1.2%. As Martin mentioned, a key driver is the usage-based airtime plans; they are favorably impacting our margin.

For product revenue, we reported a gross profit margin of 35%, which compares to 33% a year earlier, and the increase was primarily driven by the increase in the guidance and stabilization product revenues.

As it relates to our second-quarter operating expenses, we recorded $20.4 million in the second quarter, which was up 5%, or $1 million, year over year. And of course there were increases and decreases, but the notable increases were in commissions, both external and internal, media and advertising, and payments to outside consultants.

Our non-GAAP EPS for the second quarter, which excludes discrete tax items, acquisition-related costs, intangible amortization of stock-based compensation expense was $0.08, which was at the higher end of our range which we provided last quarter. Our adjusted EBITDA for the second quarter was $3.5 million compared to $4.1 million recorded in the same period last year, and that was within our $2.5 million to $3.7 million guidance we previously provided last quarter.

For a complete reconciliation between GAAP and non-GAAP measures, please refer to our earnings press release that we published this morning.

Capital expenditures during the second quarter were $1.3 million and then backlog for our guidance and stabilization products and services at the end of June was approximately $17 million, which was consistent with the amount at the end of the first quarter. And we expect to ship and recognize roughly $13.5 million of this backlog this year.

Now I turn to our outlook for the third quarter and update for the full-year guidance. Similar to what we experienced in 2015, we still expect TACNAV shipments to be skewed significantly towards the second half of 2016. In addition, a portion of our revenues and costs, as we discussed, are denominated in pound sterling. And although we have seen significant currency fluctuations over the past year, this guidance assumes there's no further fluctuations in the exchange rates for the remainder of the year.

With this context, we are reaffirming our full-year revenue guidance for 2016 to be in the range of $190 million to $210 million and we expect our GAAP EPS for 2016 to be between $0.12 to $0.42. And we also expect our non-GAAP EPS to be in the range of $0.66 to $0.96 and our non-GAAP adjusted EBITDA to be in the range of $21 million to $28 million.

For the third quarter, our net loss is projected to be in the range of a $0.5 million loss to a net profit of $400,000, with GAAP net loss per share being in the range of $0.03 loss per share to net profit of $0.02 per share. Non-GAAP adjusted EBITDA is projected to be in the range of $3.8 million to $5 million with non-GAAP diluted EPS for this quarter expected to be in the range of $0.08 to $0.13 income per share.

And wrapping up my thoughts, even though we experienced continuing headwinds in the commercial maritime sector, overall we are still pleased with the solid results that we recorded in the second quarter.

And with that now I would like to turn things back to the operator for the Q&A portion of this morning's call.

(Operator Instructions) Ric Prentiss, Raymond James.

Thanks. Good morning, guys. A couple questions for you. First, on the two additional orders on the TACNAV side, you mentioned that if the order arrives in time you can ship it before year-end, but you are watching the clock.

How much flexibility do you have in that? How late could the order show up and still be able to ship and make the year?

One of them we have had especially high confidence and specificity on the quantity, so we actually have the product built and sitting on the shelf. So that one, even 30 days before the end of the year, which is all we need to get the export license, would be able to ship.

The other one I would say would probably be -- the timing would have to be early in the fourth quarter. So absolute minimum, I'd say first two weeks into the fourth quarter in order to ship.

That make sense, okay. It's good to have one on the shelf though.

Second question, I think you mentioned the TACNAV; $100 million in the pipeline. Does that include at all the AMPV potential?

No, not -- that's a more out-year type stuff, so this is -- for the AMPV was a solid win for us. The long-term prospects there, depending on how much they build, could be another $30 million or so for us.

Then any update on what you are seeing in the M&A environment out there? There's been transactions and partnerships forming all around the space. Just wondering what you are seeing on the M&A side.

Yes, I think that there has been consolidation, especially with some of the smaller players. I think the market -- there were probably too many players in this space, so I think that we think that we are continuing to increase our market share. I think that we are adding about, even at the pace, a little over 1,000 per year run rate right now where that's significantly higher than anybody else.

But in terms of M&A, I think that you probably have better visibility into that than we do. It just seems like there's a lot of consolidation.

Okay. Thanks, guys.

Rich Valera, Needham & Company.

Thank you. Martin, just wanted to follow up on the commentary on those two TACNAV orders that are in your sort of short-term forecast. Can you give us a sense of the relative size of those two orders, the one that's on the shelf and the other one that you are pending the sort of final order?

Yes, I don't want to get too specific about individual orders, just for competitive reasons; these people figure out our pricing. But roughly on the order of -- it's in the $10 million to $20 million range that we expect to get.

Is that total between the two or is it --?

What we have in our guidance actually assumes even a partial shipment, so the order might be larger than that, but in terms of what would be shippable this year would be in that range.

Okay. And that's the total for the two orders or for the one that you're hoping to get?

That's total for the two. And when I say two there's probably -- there's four different programs and any combination thereof. So it is -- what we are trying to say is that there's -- we have an amount in our guidance that is predicated on achieving at least two orders, but that's out of a pool of four potential orders that could happen.

Got it. So I wanted to ask a few around the mini-VSAT airtime revenue. One actually could you give the -- I know you said it was flat year over year, but can you give that actual number of what the mini-VSAT airtime revenue was in the quarter?

Yes, I think John has that number. Yes, 15.5, so it was up sequentially from Q1 and it was about flat with last year, so --. But the ARPUs were up sequentially.

And also, I didn't mention it, but the unit shipments are up, so we are up over 250 back in that -- so in positive territory there. So it seems like that's -- and that's always a good predictor of how the airtime is going to grow because our hardware was locked to our airtime service. It was 100% of the product we sell gets -- has to be activated on our network.

Right, that's good news on the unit shipments in the quarter.

Now, last quarter you talked about maybe growing that I think mid single digits this year, but I think you've had a couple quarters now sort of flat in the first half, which would appear to make mid single digits a stretch goal. Do you think we can get back, though, to maybe mid single-digits growth for the back-half quarters or how should we think about when that business starts growing again?

Right. So after another quarter being flat it makes the full-year goal that much difficult. I think that we do expect to return to growth here and partly it's market-dependent. We have seen the bulk drygoods index increase. It was down to lows of 200s; it jumped back up to around 600, so that's a good sign that the market is starting to recover a little bit, which is really -- which should really help us.

The oil price has been bouncing around, but generally it's more stable and better than it has been at the beginning. So it's really those macroeconomic things that will help us. We feel that our market share is good and growing, so a little bit of help from the overall market would be required for us to get back to the single-digit growth for the full year.

Sure, understood. On to your media businesses. One, can you give us the number -- the revenue from the media businesses in the quarter? And also, if you can give a constant currency growth for them. I know they were, I think, hit by about $400,000 from the pound, but sort of what they would've been on a constant currency basis.

On a constant currency basis, I don't have the number in front of me, but it's relatively flat. So those businesses in pounds were flat. John is looking up the number as we speak. But, round numbers, $9 million for the quarter.

It was hit by about $400,000 which is -- impacted by about $400,000 of currency negatively.

Right, yes. So on a constant currency basis it would have been call it $9.5 million.

Right, okay. That's helpful color. Sort of a separate topic, but you mentioned -- you alluded to some technology upgrades you're working on, Martin, which would increase it sounds like the throughput of your system and the speed to your customers. Anything else you can say about that? Is it presumably still Ku, but some enhancement to your Ku modem or antenna technology?

Yes, it will still be Ku, so it's really -- we are working on sort of next-generation technology, so we probably have something more to say about that toward the beginning of Q4.

Got it. And then just one more on the bookkeeping side. For guidance and stabilization, can you give the split between TACNAV and fog?

The revenue split for the quarter?

Yes, please.

Yes, fog was around $4-ish-million, $4.2 million maybe, off the top of my head.

$4.3 million.

$4.3 million John says. Then TACNAV was the balance. It was $4.1 million. $4.3 million for products.

Got it, okay. Thank you, gentlemen. Appreciate it.

(Operator Instructions) Chris Quilty, Quilty Analytics.

Martin, you talked about the benefit of new HDS satellites that are coming online. Have you yet contracted for any capacity? And if not, should we be modeling a step up on the cost of sales as you bring in new transponders?

I didn't say specifically HDS, but I did say that -- well, overall what I'm -- our position is that all this new capacity is good for us in terms of our cost side so I don't want to talk specifically about contracts. But we see the opportunity to reduce our costs overall, as opposed to increasing our costs, certainly on a per-subscriber basis.

Now, there are always times when, if you add capacity in a region or capacity on a particular satellite that you might have an increase in cost, but given that we already have a global network it should be, more or less, within the normal course of business as opposed to a step function increase. So we shouldn't be modeling any increases in cost over the balance of the year, for example.

Okay. In terms of antenna sales, are we seeing the traditional split between the V3, V7, and V11?

Yes. In any given quarter it seems to jump around a little bit, but overall the V7 is the most popular. Then the V3 and then the V11 in terms of units, but in terms of dollars, V11 is probably larger than V3 just because the cost per unit is much higher.

Got you. And when you talk about an improvement in ARPUs, can you give an order of magnitude? Is this kind of single-digit or double-digit type year-over-year improvements?

It's not year over year, it's sequential. So what we are seeing and that's -- so what we are starting to see now is two things.

One is that we did see sequential improvement from Q1, which was good, but more importantly, the new open plans are significantly higher. They are like double, almost double the average ARPU, so that's a big improvement. So as we transition more people to those plans, we are optimistic that the ARPUs will continue to increase.

I know one nice feature, I guess for the vessel operator as well as yourself, of those new plans is they can basically offload to the crew; if they want extra megabits a month or gigabits a month, they can purchase that independently. Have you seen any of that activity contributing to the ARPU?

Yes, but it's not a huge -- the overages are not a huge part of the benefit of the plan and actually that's a feature of the plan. So the reason in the past that nobody wanted these kind of plans is they got big surprises at the end of the month. We call it bill shock in the industry.

So part of our whole methodology here is to try and manage so even though that's good for one month, it's actually bad for business, so we actually try to manage it so that they don't get that. And so they manage the crew usage themselves, so typically, we're looking at something on the order of a 10% overage on a monthly basis, which is good.

Okay. The content business doesn't seem to have grown in the way that I thought it might have of vessels buying movie packages and whatnot. You've got -- with the recent acquisitions you've got a much bigger installed base in which to sell those services. Can you give us a sense of how you are going about trying to upsell customers and what's working and what isn't?

Right. So a little bit of it is there's a bit of a -- we have a pretty large installed base, the DVD library installed base, which is between 1,000 and 2,000 vessels. So some of that is -- when those move to IP-MobileCast that's a little bit of a zero-sum game. We're trying to move those customers to the new service, but you don't always see it in the revenue.

But all of our sales pitches include IP-MobileCast. The Videotel customer base is much larger than our VSAT installed base at 12,000 vessels, but that's kind of a different sale. That's a sale to a different customer than the customer that's buying the IT connectivity for the vessel.

So we see a better alignment with the Videotel product and the media product than we do with the Videotel and the mobile broadband product. What we are doing is we are transitioning our Videotel onboard library into a feature that's available within our media server and eventually within our antenna control unit for the VSAT product itself, so that the product will come with IP-MobileCast and Videotel capability inherently built in. So I think that is something that should help increase the sales across -- and help cross-sell.

Is that something that could be retrofitted or is this for forward-fit only?

That's for forward-fit only. The retrofit is getting a media server. So today the Videotel content library is on what's called a VOD box, which is like a media server, so that's installed on the vessel. Then if you wanted IP-MobileCast you would have another server that's required, so this would at least consolidate those two. And then eventually, when we have our new product out, those two will both be eliminated and just be a standard feature within the core product.

Got you. And final question, your Inmarsat revenue was down quite a bit sharper than their revenues were down. Can you give us a sense of whether there is something specific to the markets you are selling into or the general relationship on the Inmarsat line?

I think that a lot of our Inmarsat business is leisure in the yachting market and their pricing policies have been particularly unattractive to that customer group. So I think the price increase is for people who don't really use the product much and have it more as a backup have caused them to deactivate.

Is that a market you can address with something in your product line?

Yes. Our V3 is a perfect solution for those guys. We have plans that start as little as $49 a month, so it is an easy switchover.

Have you had any success switching over?

Yes, the leisure market continues to be strong for us, so I think we've got very, very high market share in leisure. So that's kind of our core business and about 40% of our total sales are in the leisure market.

Great, thank you.

Ric Prentiss, Raymond James.

Thanks. Wanted to circle back on something from the press release. You had mentioned that you came to an agreement to upgrade a customer with a large fleet to the broadband 2.0, so I think that was not in the quarter. What are the thoughts on the magnitude of the timeline? And how successful are you being at other of those upgrades?

That was kind of a nice example of a fleet customer and it's going to end up in doubling the ARPUs, which would be approximately $1.5 million incremental revenue on an annualized basis. And because they are an existing customer, there's no installation required, so that's just changing the rate plan so that should start this quarter.

Great. And how long is that sales cycle? Obviously, not much cost to upgrade them, but just the sales cycle to get others to see the benefit of doing the upgrade.

It takes a fair amount of convincing just because it's different and people are -- so on that particular one we actually did do a trial for a couple months and they loved it. They didn't get any surprise bills and so they decided they wanted to make the switch. Even though on a per-vessel basis it was almost a doubling of what they were paying; they just feel they are getting a lot more value for their money.

Okay, thanks.

You have no further questions at this time.

Great. Well, if anyone wants to talk to us afterwards, feel free to contact me or John directly. Thanks for your time.