KVH Industries Inc (KVHI) 2016 Q3 法說會逐字稿

Good day and welcome to the KVH Industries Q3 2016 earnings conference call. Today's conference is being recorded.

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

Okay. Thank you. Good morning, everybody. Thanks for joining us today to discuss KVH Industries third-quarter results and our guidance for the fourth quarter and the full year, all of which was 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 a webcast replay on our website. If you're 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 the Investor Information section of our website.

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

Thanks, John, and thank you all for joining us today.

I'm pleased to report very solid third-quarter results. Revenues were at the high end of our guidance at $45.8 million, which is up 3% from $44.5 million in Q3 of last year.

For the quarter, our adjusted non-GAAP earnings exceeded our expectations coming in at $0.27 per share, which is more than double the $0.12 per share we achieved in the third quarter of 2015 and well above our guidance. The solid performance is reassuring as momentum of our growing business was able to offset short-term economic challenges. The impact of the currency exchange rates reduced our revenues by $1.2 million in the third quarter due to the fact that many of our value-added training and entertainment services are billed in British pounds.

On a broader basis, global economic issues have been adversely impacted shipping rates due to lower demand, leading to reduced investments in new services and technology by some commercial shipping customers. Low price of oil has also been a factor, hurting our mobile broadband customers in the offshore service vessel market. The good news is that we are finally seeing some signs of stabilization, if not improvement, in these areas.

The Baltic Dry Index, a popular assessment of the cost of shipping raw materials by sea, has doubled since the beginning of the year. Customers in the commercial shipping market are beginning to explore the cost-saving benefits of better broadband services, which are both considerable and wide-ranging.

We've also seen encouraging improvements in crude oil prices and have recently received sizable orders from fleets of offshore vessels and workboats, which hasn't happened for a while.

In our guidance and stabilization business, we continue to see good interest in new sales coming from emerging markets for self-driving cars and unmanned air systems like drones. We've also received strong indications that big military orders we have anticipated are still moving forward, even though we have yet to receive the actual orders.

So there's good news in each of our major business areas that I will cover with you today. Start off with a top level overview covering the highlights, and then John will cover the detailed numbers and outlook for the fourth quarter.

Starting with our mobile broadband business, the overall revenues for the third quarter were $36.5 million, which are down 3% from $37.8 million in the third quarter of last year. Our results this year include the impact of currency, which reduced our quarterly revenues by $1.2 million. So, on a constant currency basis, our revenues were incrementally higher than last year.

Unit sales of our VSAT system were up 10% year over year. We received several large fleet orders for our mobile broadband services from the third quarter from commercial shipping companies, and we have visibility of about half a dozen more promising fleet prospects in our sales pipeline.

Our existing customers are also transitioning to new usage-based pricing plans, which have now grown to account for 53% of our total VSAT subscribers, which has also resulted in an improvement in our monthly ARPU sequentially from the second quarter.

Usage-based pricing allows KVH to provide each of our customers the fastest speeds our service can deliver, which makes our service noticeably better than our competitors' services due to their strategy of constraining consumption by throttling speeds in a contended network.

Newest market data published this summer by NSR estimates KVH's share of the Ku-band maritime market at 29% of the active users, which is more than double our closest competitor, and just slightly less than the next three largest competitors combined. While we've been working diligently to ramp our unit sales above the currently quarterly rate of 200 to 250 units, the sales level is still significantly higher than any of our competitors. So we continue to gain market share. It's actually impressive that we are able to maintain this sales rate, despite the declines in some market segments.

In addition to our new airtime plans, we believe KVH has significant -- created significant competitive advantages and will help us win new customers as the maritime markets recover and the maritime broadband services start to be widely adopted. We are the only maritime satellite service provider that designs unique onboard hardware that is simpler, more reliable, less costly and specifically built for our services, making it easier to install than our competition.

Our hardware platform not only manages broadband connectivity for our customer, but also helps them manage their onboard networks using the server that's built into our integrated control unit. Having an onboard server built into every one of our systems provides great opportunities to extend our core connectivity into the management of the onboard data and Internet of Things applications, which will be the backbone of the next generation of new cloud-based services.

We manage our own network and implement innovative strategies like multicasting and background data transmissions that are fundamentally less costly, often by several orders of magnitude, to competitors who aren't able to tailor their onboard hardware and network technology to implement these types of advanced approaches. We control access to data with digital rights management encryption, so major movie studios and other companies with proprietary content allow KVH to distribute it over our network. We create content, including video and animations in our Videotel training business and audio and multilanguage new services in our KVH media group business. KVH's capabilities are unique and enable us to interface with our customers at many different levels and help solve their problems more efficiently and more completely than any of our competitors.

One major area where we focused on is our strategy for fielding our next generation network. Just like most the satellite owners are targeting the aviation maritime segments as a significant opportunity, much of the new capacity will enable us to offer higher speeds as we continue to improve our network. There's been discussions of excess capacity causing a bandwidth glut that will lead to commoditization of service and falling prices in maritime markets. That's hurt the share price of most of the satellite companies. But as one of the world's largest customers for maritime bandwidth, we see this as great news for KVH. Imagine how Starbucks would feel about falling coffee bean prices and understand how we feel about falling airtime costs. As the market share and innovation leader, we are in a great position and have every intention of staying a step ahead of our competitors with services that are both faster and lower cost.

Our leisure marine business continues to be strong, especially in the North American market where we have a dominant market share and have earned the loyalty of customers and distribution channel partners. Last month KVH again won the National Marine Electronics Association Product Awards for both our TracVision satellite TV systems, which won for the 19th year in a row, and our TracPhone satellite communication system, which won for the 14th year.

Looking at our content and training business, although revenues were down compared to last year, this was attributable to the fact that this business is billed in British pounds, as I mentioned. On a constant currency basis, this business grew about 3% over the third quarter of 2015. We are happy to see this business holding its own in light of the challenges facing the overall shipping industry, which is our primary customer base.

Although still small, our IP-MobileCast service had revenue growth of 54% year over year and is gaining a stronger foothold in the market. The previously mentioned fleet order included IP-MobileCast as part of their services, and both BW and CSPAN, two major fleets that just upgraded their mini-VSAT service to our new usage-based plans, are also using IP-MobileCast as part of their overall packages.

We are seeing traction in the market as word-of-mouth endorsements from vessels equipped with IPbMobileCast start to filter through the shipping industry.

Our digital newspaper service continues to do well as a standalone product. For example, our new distribution agreement with Inmarsat to provide NEWSLinks to their fleet broadband customers, we've already added more than 1000 subscribers this year, bringing our subscriber count to over 9000 ships worldwide. Commercial maritime markets are challenged by new, frequently changing regulations, high turnover of seafarers and smaller crews, and increasingly compensated technology onboard ships, all of which create a great need for training. We believe we are very well positioned with Videotel, our training service, to win a large share of this growing market by enhancing its delivery technology, content creation capabilities, alliances with other industry stakeholders that benefit from a better trained workforce, and relationships with new types of distribution partners. We are developing an exciting new maritime training platform, which we'll be previewing at a tradeshow in Manila later this month.

Moving onto our guidance and stabilization business, which includes both our fiber optic gyros and our TACNAV military navigation products, revenue was up -- sorry, revenue was $9.4 million for the quarter, up 38% from $6.8 million for the third quarter of last year, driven largely by our TACNAV products. The TACNAV orders we had originally forecast to ship in Q4 still have not been received. We've had written confirmation from the contractor that TACNAV is included in the vehicle specifications. We've also had extensive discussions about quantities of vehicles, cable lengths, and other critical design specifications. The vehicle contractor has built some of the vehicles and shipped them to the end customer's country. We have purchased long lead inventory items and still plan to build the order this quarter so that we are prepared to fill the order quickly.

We understand that this is frustrating that we don't have the order yet, but it's the nature of international defense sales. They are inherently difficult to predict in terms of timing. While we still could ship this order in Q4 if we received it in the next few weeks, our policy is to only include book defense business in our current quarter guidance. This order would also require an export license, which typically takes four weeks. So, at this point, it would be cutting it too close and far too risky to leave it in our guidance for Q4.

Nevertheless, TACNAV opportunities are growing, and we are very optimistic about our future prospects for this part of the business. Last month at the Association of the US Army show, we attended meetings related to the Army's requirements for position navigation and timing. We discussed the Army's new priority in addressing the vulnerability of GPS due to our adversary's ability to impede or deny GPS in a variety of ways. The US military is dependent upon GPS for a wide range of applications, from tactical navigation of combat vehicles to the timing and synchronization of mission-critical tactical communication systems.

In August, US Army Secretary Eric Fanning announced a new Rapid Capabilities Office with the specific mission to provide forces with the ability to obtain and trust position, navigation and timing information, while operating in conditions that deny access to GPS. This is exactly the benefit offered by TACNAV and its unjammable position and orientation and timing capabilities. The scope of this opportunity is a high priority, and the total long-term potential opportunity could involve equipping up to 45,000 combat and combat support vehicles in the US Army.

Turning to our fiber optic gyros business, we are continuing to see ramping sales from customers building solutions for the self-driving car market. We anticipate shipping about 250 automotive gyros this quarter, which, although still small, indicates the pace at which this opportunity is starting to develop. The annual run rate of business from the segment is currently about $3 million per year and growing.

While NDAs prevent us from discussing specific programs or end-user customers, we are working directly or indirectly with more than a dozen companies, including major automobile manufacturers, Tier 1 suppliers, and technology companies that are helping to pioneer this new industry.

We are also investing in R&D to develop the next generation technology we will need to produce high-precision fiber optic gyros that are mass producible and can be sold at an acceptable cost for automotive industry customers.

The other emerging opportunity where KVH has a very good foothold is in the commercial drone market where our fiber optic gyros are used to provide image stabilization for dynamic aerial surveying, cinematography and other applications where high resolution is essential. While the US military has used drones for many years with a current inventory of over 10,000, the commercial market for similar systems is just starting to take off. As of March 2016, 4000 exemptions had been granted to the FAA -- by the FAA for commercial drone operations. They estimate by 2020 annual sales of aerial drones will top 7 million units, nearly 40% of which will be for commercial applications. The class of higher end drones with an average price of $40,000 is projected to grow from about 1300 this year to over 50,000 in 2020.

Applications for high-end drones will include industrial inspection, agriculture, aerial surveying, and even package delivery. We have been designed into all of these applications and expect to see many of these take off in the near future.

So, in conclusion, we are very happy with our results from Q3, and we believe that we have a great foundation for each of our major business areas going forward.

The commercial maritime markets are still facing the headwinds of difficult economic conditions, but it appears that things are stabilizing. We have confidence that KVH's position is getting stronger, we are extending our market share lead, and that we are going to be in an excellent position to capture the growing sales that every leading market research report is projecting for the maritime broadband markets in the years to come. We are excited about these emerging opportunities in self-driving cars and drones, which has significant revenue potential outside of maritime or defense. And in the military markets, it's important to keep the projected defense contract delays in perspective. The important point is that GPS vulnerability that we've recognized for years is finally becoming an urgent issue for armies around the world.

And now I'd like to turn the call back over to John for the detailed financial results. John?

Thank you, Martin. I would now like to discuss the more detailed financial results of the Company for the third quarter.

As Martin mentioned earlier, our third-quarter revenues of $45.8 million were at the high end of our guidance and are 3% higher than the third quarter of 2015. The primary drivers for this growth were 66% year-over-year increase in guidance and stabilization product revenues, partially offset by a 75% decrease in our engineering services revenue, and an 11% decrease in our content and training revenues.

It's important to note that recent weakness in the British pound adversely impacted our field quarter content and training revenues by approximately $1.2 million or 14% of content and training revenues and 3% of total third-quarter revenues. On a constant currency basis, content and training revenues actually increased 3% year over year.

Third-quarter service revenues of $26.8 million decreased 7% year over year, mainly due to a decrease in our engineering services and content and training revenues. In the third quarter of 2015, we provided a significant level of engineering services that pertain to a large sale of nonstandard products that were delivered in the fourth quarter of 2015 and throughout 2016. In the current quarter, we did not have a similarly sized project underway. And, as previously mentioned, our content and training revenue decreased year over year due to the weakness in the British pound.

Looking at the airtime subscription portion of our service revenues in the third quarter, our airtime revenues were $17.1 million, which was flat from the prior year with the prior year. VSAT airtime revenues were slightly up from the prior year; however, continuing its trend, Inmarsat fleet broadband revenues were down 17%.

So, when compared to Q2 of 2016, the airtime revenues were up 7% with virtually the entire increase attributable to VSAT airtime, with both subscriber activations and ARPUs being stronger in the second quarter, and this continues a positive trend for us as our second-quarter airtime revenues were up 4% compared to Q1 and our second-quarter subscriber activations and ARPUs were also higher than Q1.

Now moving onto product revenues, our total product revenues increased by 22% to $19 million in the third quarter, and most of this increase was attributed to TACNAV revenues, which were offset by a decrease in mobile communication product sales of $200,000.

Our guidance and stabilization hardware revenues of $8.9 million were $3.6 million higher than the third quarter of 2015 or a 66% increase, and as we have discussed, this is primarily due to the high-end TACNAV revenues.

In the third quarter, we reported a consolidated gross profit margin of 36%, which compares to 44% in the third quarter of 2015. This increase correlates to the increase in TACNAV revenue which generally carry higher margins and, of course, drove our higher product margins for the quarter. Our product margins for the third quarter were 42% compared to 34% in the third quarter of last year.

Our overall service margin was 49% for this quarter and 50% in the third quarter of last year, while our VSAT airtime gross profit margin was 37% in the third quarter, up 1% from the 36% that we reported in the prior year. And, as Martin mentioned, usage-based airtime plans are favorably impacting our margin.

As it relates to our third-quarter operating expenses, we recorded $18.2 million, which was down 7% or 1.4 million year over year, and of course, there were increases and decreases. But the key driver was the reduction in incentive compensation resulting from the lowering of our financial outlook for the remainder of the year.

For the third quarter, net income was $2.9 million compared to a net loss of $0.5 million recorded in the same period last year. The GAAP EPS for the third quarter was $0.18 per share compared to a net loss of $0.03 per share recorded in the same period last year.

The non-GAAP EPS for the third quarter which excludes discrete tax items, intangible amortization and stock-based compensation expense was $0.27, which exceeded the guidance we provided last quarter of a range of $0.08 to $0.13. That was primarily due to our increase in net income. Our adjusted EBITDA for the third quarter was $6.7 million compared to $4.2 million recorded in the same period last year and exceeded the range of $3.8 million to $5 million we 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.

Concerning backlog for guidance and stabilization products and services at the end of September, it was approximately $9.2 million compared to $13.7 million at the end of the second quarter, and we expect to ship and recognize roughly $7 million of this backlog this year.

Okay, let's turn now to our outlook for the full-year guidance. We are revising our revenue guidance down for 2016 to $174 million -- to a range of $174 million to $176 million from our previously reported guidance of $190 million to $210 million. We are estimating fourth-quarter revenues to be in the range of $42 million to $44 million. Given that we do not yet have the anticipated TACNAV orders in backlog yet, we are removing them from our fourth-quarter guidance. If these orders were to be received and shipped in the fourth quarter, they would add at least $50 million of revenue.

And now let me turn to our forecast for earnings, EPS, EBITDA and non-GAAP measures. There are a lot of numbers here, and if it's helpful, all these measures are also included in our earnings release.

For the fourth quarter, net loss is projected to be in the range of a net loss of $1 million to a net loss of $0.2 million, and for the full year, we are projecting a range of net loss of $1.7 million to a net loss of $0.9 million. The GAAP net loss per share for the fourth quarter is projected to be in the range of a $0.06 loss per share to a $0.01 loss per share, and for the full year, we are projecting a net loss of $0.11 per share to a net loss of $0.06 per share.

Non-GAAP adjusted EBITDA for the fourth quarter is projected to be in the range of $2.4 million to $3.5 million and, for the full year, $13.6 million to $14.7 million. The non-GAAP diluted EPS for the fourth quarter is expected to be in the range of $0.05 to $0.10 of income per share and $0.36 to $0.41 of income per share for the full year.

As a reminder, a portion of our revenues and costs as we've discussed are denominated in pounds Sterling, and we've seen significant currency fluctuations over the past year. This updated guidance that I just provided assumes that there will be no further fluctuations in exchange rates.

With that, 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.

Next question.

Jim McIlree, Chardan.

Thank you and good morning. Martin, you talked about a big growth rate in the IPbMobileCast in percentage terms. Can you frame how big IPbMobileCast is right now in dollar terms?

We are not going to talk about revenue until it's material. So it's a significant part of the product offering, but it still small in terms of total revenue. So we are not going to break it out for competitive reasons. But what we are seeing is that it's a big differentiator when people are selecting the service. And also it's encouraging the people who don't buy it, a year later they do buy it. So people are coming around even after-the-fact, which is also very encouraging.

One thing we've done just recently with it, which the Company has really appreciated, is we've been able to multicast out corporate videos. So, in one case, one of our better customers had an important safety video that they prepared. They wanted to send that out to their entire fleet. We ended up multicasting that out, and then people could watch it on their iPads or on the TVs in the common areas. That's a really unique capability that the people appreciate.

Okay. You mentioned the self-driving or the autonomous vehicles, and I think you said that you are like at $3 million annualized run rate, is that correct?

Yes.

Okay. Can you discuss how you think that might roll out for you? Is this a market where it's going to be modest growth until -- modest growth through, let's say, a couple years, and then you get a big hockey stick, or is this something where you are close to getting a big deployment and that we could see a big step function upwards in revenues? Just trying to kind of understand how the market might develop for you.

Typically, with these kind of market changing innovations, it's very difficult to predict the adoption pattern. So sometimes there is a step function where all of a sudden nobody wants to buy a car they don't have the feature, and other times it's a slow growth and a lot of pilots and trials and it takes years to roll out. We are not really sure which one this is going to be, but in terms of scale, for us even when major automotive car companies start doing pilot production or limited release, these are still big, big numbers as far as we're concerned. So tens of thousands or hundreds of thousands is still huge for us, even though that's tiny compared to the 90 million or 100 million cars that are produced every year.

And along that track, it seems like this is the kind of products that would follow the typical automobile introduction to where they deliberately or they put it on the high-end vehicles and then migrate it downwards as prices and demand -- prices (multiple speakers)

I think that's true, but then you've also got car companies and independent startups that have different ideas. Obviously the startup companies are doing it from day one, and it's just part of the product. And you also have the ridesharing market where people are going to not necessarily sell cars per se but sell rides. So that's a different business model. So I think there are so many moving parts here it's kind of hard to predict the take rate, but it's definitely an exciting place to be.

Okay. I get it. And I know you didn't say Uber, Lyft and Tesla, but I'll just say it. So it sounds like if you get those disruptive either manufacturers or providers trying to come up with a new model or to change the market, then that could have a different kind of implication for you versus if you are just selling it to (multiple speakers)

Yes. So I think at a high level, the new entrants don't care about disrupting their current business because they don't have a current business. The entrenched incumbents would like to add this feature so they can continue to sell cars as opposed to nobody owning a car but just buying rides. So it's -- and this could be a mix. So I don't see why anybody would not want this feature in the future, if it is safer and better than doing it the old-fashioned way.

Got it. And have you -- can you either bracket or help me understand kind of what type of dollar content per vehicle we would be -- it would be reasonable for you to get either in the early stages of this if it's a traditional rollout or in the latter stages of this when it's a ubiquitous product?

Well, there are different approaches. Some customers are putting in a full INS system; some are putting in their IMU, which is three axes of fog and three axes of rate. Other customers are putting in single axis sensors but then putting in two of them for redundancy. Most of these systems, the system architecture involves two of everything, if you have for safety reasons, two steering mechanisms, two braking mechanisms.

So there's all different approaches, but in general, while you're in the prototype stage, the unit prices are still fairly expensive and more than $1000, but our goal is in production, in high rate production. In quantities of high hundreds of thousands or low millions, it would be in the $200 range.

Okay.

Per axis.

And then the number of -- going to get my plural wrong, the number of axes would be dependent on what it is the customer is trying to accomplish?

Right. So, if they are putting a three-axis system, obviously it would be three. If they were doing a single axis, it would be one, unless they do redundancy, in which case it would be two per vehicle.

Right, okay. Great. That's very helpful, thank you. And, John, I just want to make sure I understand the guidance for Q4. It kind of sounds like the entire change in guidance is just pulling the TACNAV order. And so when we look at Q4, the guidance and stabilization business is down a little bit versus Q3? And is there anything in the mobile broadband business that I need to be aware of, either on a seasonal or a year-over-year basis that is special this quarter versus, again, either -- versus Q3 or Q4 of last year?

I think at the top level how I'm thinking about it is sort of the TACNAV came out, and then we have a little bit more currency impact, and that sort of will get you to the whole decrease in the revenue guidance. Everything else is sort of like pluses and minuses. Those would be the two big items I would point to.

Okay. Is there any significant change to the OpEx line in Q4 versus Q3?

No. Q3 we had part of -- a little bit of a reversal of incentive comp that we won't have in Q4.

And so that means that your -- that the Q4 sales and marketing for the G&A, which wherever that came from, is going to be a little bit higher than Q3 because you don't have that reversal. Am I hearing (multiple speakers)?

There's lots of pluses and minuses, but that's true on that (multiple speakers)

Okay. And so as far as that $15 million TACNAV, maybe this quarter it seems like it's a long shot, but maybe it's this quarter, and is it -- are you confident that's a first half next year thing, or we just don't know, it could be first half, it could be second half, and (multiple speakers)?

I'm pretty sure I've lost all credibility in this, so. We definitely expected it by now, and we certainly expect it -- our level of confidence includes buying the parts and building it. So we have a high level of confidence; otherwise, we wouldn't done those things.

Fair enough. That's good. And to be fair, this is a difficult customer. This customer set is very difficult, so I think we are all kind of aware that things frequently get pushed to the right. So I wouldn't be so harsh on yourselves.

Anyway, thanks a lot. Appreciate it.

Rich Valera, Needham & Company.

Just wanted to ask a question on the mini-VSAT airtime growth, which was described, I guess, as very modest. I'm assuming it is kind of low single-digit. My question is that's coming off a quite easy comp last year, which was already heavily affected apparently by the oil and gas pressures and really suggests if you're looking at minimal growth year over year on a subscriber model that you've added minimal net new subscribers on an annual basis. I'm just wondering sort of what is driving that? Understood we had some pressures last year from the oil and gas situation, but we are now a good three quarters into that. And I would've thought by now most of those would've already churned off and wouldn't be necessarily creating incremental churn. So what's going on in that business, and why can't you grow it when you are adding 200 to 250 or more gross subs per quarter, why isn't that business growing?

Well, I think if you look at the sequential, we had pretty good growth sequentially from Q2, both in terms of total dollars, which was off the top of my head I'm going to say double-digit growth sequentially. ARPUs have been up this is now the second or third quarter in a row. So we are seeing improvement sequentially as we move through this period. But the whole industry -- it is not just oil and gas. The shipping industry is also pretty heavily affected. You see the major shipping companies, look at Maersk reported (inaudible) results today I think. So the industry itself is in top shape. So we think we are doing well. But the ARPUs being up sequentially is a good sign, the gross adds is a good sign, but as I said, we are not saying that things are getting better yet, we are just saying that it looks like things have stabilized. So that's -- for us, that's good news.

Can you give us what that revenue number was, (inaudible) airtime revenue just for my own modeling purposes?

It's -- the third-quarter 2016, it's $16.6 million.

Got it. And then just with the overall guidance, your old range was $190 million to $210 million; your new range is, call it, $175 million-ish. So, if you get the $15 million order, that brings you $10 million shy of the midpoint of your old range. I understand there's some currency impact there, but hard to believe there's $10 million of currency impact within one quarter. So can you bridge the rest of that shortfall relative to the midpoint of your old guidance for me?

Yes. As far as the TACNAV goes, the $15 million is what we recently purchased at risk, but the orders themselves was more than double that size. So not -- so going in back in July, we weren't sure whether we would get the total amount of the order or whether we would get part of it, so we chose to build some of that risk. And that $15 million represents about 20% of one order and 100% of a smaller order. So that's -- so those two numbers aren't exactly correlated.

Also what happened in the intervening period is that the customers decided to buy one of our newer products, which added about to the total order was to add about $10 million to it. So the overall scale of the order is larger than just the $15 million. So -- but as of today, that's what we would -- if we got the order today, we would ship $15 million of that order, which is different than shipping the whole order which we would've done had we got the order, say, in August.

I guess I'm confused. Is the whole order roughly double the $16 million, or at one point you said $15 million was 20% of it? I just wanted to be clear on what the entire order size was.

So the total orders that we are talking about here are more than $40 million. So --

Got it.

So it's difficult to reconcile because there are a lot of pluses and minuses when you give guidance in terms of airtime and currency and training. But, if you just want to focus on the TACNAV piece, have the entire order come in and ship, we would have been above the high end of our guidance range. So --

Got it. And then just moving on to the media side of the business. You bought a couple of properties, and so far it seems that you've -- clearly some currency issues there, but it doesn't sound like we are kind of seeing the growth we would've liked to see in the sort of media properties. Just I was hoping you could sort of just talk about how you see them since you bought them and what maybe have been some impediments to them growing at the rate you would've liked.

There's a couple different things here. One is -- let's call it the legacy media business. Part of our goal there is to destroy that business. So we want to take the DVDs by mail and NEWSLink by email and convert that to IPbMobileCast. So, when we churn those customers, that comes out of the legacy media business, but that's our strategy. We want all those customers to convert to IPbMobileCast. So that's part of the answer.

The other part of the answer is that they are operating in the same segment as the mobile broadband business is, which is primarily commercial shipping. So the commercial shipping is 99% of the business for Videotel training services, and it's a very high percentage of the media and the legacy media business as well. So we have exposure there to the overall market conditions.

But we are actively working on some new products that we think will make a big difference in the training space. We are looking at integrating some exciting new capabilities for training relating to onboard -- other onboard activities and Internet of Things type activities that we are heavily focused on. So we think it's a great fit, and we are very optimistic about the long-term.

Can you give any color on the economics of switching a customer from the old DVD subscription business to MobileCast to you, what's the revenue and/or profit contribution you see from a customer in those two modes?

Yes. At the low end, if they are sort of a 10 DVD a month customer, they are at $150 to $200 range per month. The IPbMobileCast bronze package starts at $295 a month. Typically they also get NEWSLink or SPORTSLink, so that adds another $100 or $200 to that. So it's a higher ARPU customer, it's a higher margin customer. There's no physical media creation, shipping, handling. All that stuff goes away. So margins are better and the revenue is higher.

And sorry, would the mobile cast customer also be in that media revenue bucket?

They are not. So right now it's still part of the mobile broadband VSAT revenue bucket.

Got it. Okay. That's it for me. Thank you.

Ric Prentiss, Raymond James.

Thanks. Can you guys hear me now? Good. I don't know why. It went silent. Then it dropped me off. So glad to be back on. Appreciate the color on the autonomous car market. What about your thoughts on kind of scaling the drone market for us? I've get two millennial kids, and they're excited about both the autonomous car and the drone stuff. So walk us through what the drone opportunity might look like.

So our products are fairly expensive, so they are not for the Karma-type drone, the GoPro type drone or the low-end DGI. These are for commercial applications. These are people who use the drones every day for work. So, for aerial surveying, where you need to take photographs that are geo-referenced, so you can take every pixel in the photograph and report it flat long. Those kind of guys need all the precision they can get, and our products, as good as they are, are just barely good enough for those types of application because it's really hard application.

So those are the drones that sell for more than $40,000; some of them sell for $100,000. And there's 1000 of those built a year now, and that's going to be growing to 50,000 of those. So -- and then that is kind aerial surveying industrial market. Then you have got things like package delivery, which is really not a market today, but potentially could be big someday. So there's just a lot of exciting things that people are doing with drones, whether it's pizza delivery or package delivery or surveying or inspection pipeline, above ground pipeline or electrical power inspection, electrical cables. So just a lot of different applications that require the kind of precision that we have.

And when you think about your product going into those type of drones, what kind of SKU price are you talking about?

The lowest priced product we have now is about $10,000, and the highest price one we have is about $20,000 in terms of IMU. So it's in that range right now.

I think during earnings season, we all would take the pizza delivery on the sell-side.

Let me see if I can vector one in for you.

As we --

Look out your window, Ric.

As we -- I think last quarter you mentioned the TACNAV had about $100 million in the pipeline. So, as you think about what's happened with this order that, gosh, you've got everything, you've got commitment and you're starting to build it, how should we think about what the pipeline is looking like then into 2017?

I think there's been no big change in terms of the pipeline, so I think that's still a good number to use. If you look at US opportunities, there may be some new things that we didn't know about but related to US Army opportunities and requirements that are popping up. But I wouldn't put those in the pipeline yet because there's no formal funded program that we've already won. That's kind of what we talked about in the other side when we talk about pipeline, it's projects that we know about that are apparently funded where we've been selected. So that's kind of what we call the pipeline. But the US Army stuff is not in those numbers yet.

Okay. And given the slipping of the order, we all get it. It's a lumpy business. Tough to get it all locked down. Should we consider that within 2017 maybe that total order of $40 million for these couple of projects could come in within the calendar year then at that full level?

I would certainly hope so, and that would be our expectation, yes.

That makes sense. And then one final question from me. Obviously you talked a little bit about the high throughput satellites, capacity coming online, pricing per megabit coming down as a customer benefits you. Can you help us scale that part of the business? What magnitude are you guys paying today for that service and your cost and as we think through what that might be a benefit into the future then as these high throughputs come online?

I don't want to disclose our exact cost per megabit per second, but in order just to put -- to give you a sense, we are talking about -- with our costs going to half what they are, and that's our internal goal in terms of in a new capacity. So that doesn't mean that the total Company costs will go to half, but as we add capacity, as we get on new satellites, we are looking to cut our costs in half.

That helps a lot. Thanks a lot.

We have no further questions at this time. I'd like to turn the conference over to our speakers for any additional or closing remarks.

Great. Thanks for your time, and as always, John and I will be available afterwards for any one-on-one discussions. Thank you.

This does conclude today's conference. You may disconnect at any time, and have a wonderful day.