KVH Industries Inc (KVHI) 2017 Q1 法說會逐字稿

Good day, and welcome to the KVH Industries Q1 2017 Earnings Conference Call. Today's conference is being recorded.

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

Okay, thank you. Good morning, everybody. Thanks for joining us today to discuss KVH Industries' first quarter results and our guidance for the 2017 second quarter and 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 a webcast replay on our website. If you are listening via the web, feel free to submit questions through ir@kvh.com.

This conference will contain certain forward-looking statements that are subject to many 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 on 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 9 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 the call over to Martin. Martin?

Thank you, Don. Good morning, everyone, and thanks for joining us today. I'm pleased to report that our results for Q1 of 2017 were right in line with our guidance. First quarter revenues were $40.2 million, and our non-GAAP loss of $0.09 per share is consistent with our expectations.

Mini-VSAT Broadband Airtime was up 7% from last year. Mini-VSAT Broadband Airtime margins were at a new high of 38%, and usage-based plans accounted for 59% of airtime revenues. Overall services accounted for 63% of our total company revenue in the quarter in keeping with the trend of moving from a product business to a more predictable services and recurring revenue model.

Now, Don's going to cover the numbers in more detail shortly. But before he does that, I'd like to recap some of the significant achievements and trends we saw in our 2 business units in Q1.

As you may recall, our 2 business units are now called mobile connectivity and inertial navigation, terms we started using last quarter as a better reflection of their market focus and product coverage.

Turning first to mobile connectivity. The commercial maritime world remains challenged and challenging, with shipping companies adjusting their business models in hopes of improvements in the economic climate. Against the backdrop of ongoing macroeconomic and market trends, our growth in both revenues and margins in airtime is very encouraging.

Commercial maritime customers are increasingly coming to appreciate the synergies between our offerings in satellite communications, e-Learning, news and sports, entertainment that contribute to the safer and more productive crew members. In a challenging economic environment, the combination can improve business productivity and keep business healthier until markets turn up.

Now on the leisure marine market, we see continued improvement in the health of the market. Reports from numerous boat shows in Q1 indicate that increased buying interest and activity, boats are being purchased and upgraded. For us, the result is increase in our satellite TV revenues in Q1 and continued demand for our VSAT products and leisure as well.

Overall, despite the headwinds in the commercial maritime sector, we recently announced the shipment of our 7,000th VSAT terminal and are continuing to outpace our competition. We're proud of the fact that our airtime revenue was up 7% over the comparable quarter in 2016 at a time when our major competitor just reported a drop in revenue of 3% in its maritime business for Q1. This is the strongest airtime growth that we've seen in recent quarters.

In addition to the increase in airtime revenues and subscriber growth, we're also seeing an ongoing shift towards our usage-based airtime plans, which now accounts for 59% of plan population. Since those plans also deliver better margins, overall airtime margins were up 2 points from last year, and at 38%, 38% represent a new high in airtime gross margins for the quarter.

From a customer perspective, our usage-based plans mean that we can provide our customers with fast and reliable service, remain price-competitive and not sacrifice profitability. To keep this momentum going and increase our rate of growth and mobile connectivity, we have 2 key strategic initiatives that we're investing in for 2017.

The first is our move towards subscription-based hardware and in all-inclusive packages. The second is adding a whole new high-speed satellite overlay network to our many VSAT broadband service. Our subscription model AgilePlans by KVH was announced on April 12.

This first of its kind connectivity as a service or CAS offering helps address many of the economic uncertainties in commercial maritime that I spoke of earlier in the call. AgilePlans allows customers an all-inclusive package of capabilities with no long-term obligation. In the volatile world of shipping and offshore, vessels are constantly joining fleets, being laid up, transferred or sold, financial plans make implementing those changes easy.

Our competitive advantage with AgilePlans is a full complement of hardware, airtime, e-Learning, crew welfare, content and value-added services that no other company in our industry has in its portfolio. We're leveraging all the unique facets of our products and services with this offer, and we believe this will be extremely difficult for others to copy.

The market reaction to AgilePlans has been extremely encouraging. Customers and prospects have expressed early interest in our connectivity as a service offering, and we're tracking a large number of opportunities already. Many observers, including industry analysts and the trade press have acknowledged this unique approach and see it as a potential game changer.

The market, known for its conservative and slow-moving nature, it's both remarkable and encouraging that we immediately starting booking orders for this news subscription service. Obviously, it's very early in the process and given that it's a new and very different offering, we'll have to wait and see what impact it has on our overall business.

In addition to flexibility and a set of all-inclusive offerings, people want higher speeds. And that's the focus of our second strategic initiative in the mobile connectivity segment. We're making excellent progress with the execution of our next-generation network that will be utilizing high throughput satellites or HTS technology.

We're settling all the elements we need to provide faster-expanded service, including strategic satellite partners, improved geographic coverage, HTS hardware, airtime plans and all our innovative services such as IP-MobileCast. All into a network that we believe will lead the industry for many years to come.

As we stated in the last earnings call, we've been shipping HTS-ready antennas for several months now in anticipation of turning on the HTS expansion and overlay to our mini-VSAT Broadband network. We're tracking according to plan and expect to have this new service up and running in the second half of 2017. Early testing indicates that we're well on our way to providing to 2x or 3x the speed of our current service, which will improve the customer experience and provide additional customer value.

And at the same time, we'll be able to provide those speeds while holding subscriber prices steady. And as we've spoken of before, we expect our cost to go down and margin improvements to accrue to KVH at the same time. More detail of the product service announcement on this will be made in upcoming quarters.

So in summary, our mobile connectivity business outlook remains solid. We believe that we continue to have a very good position to grow our customer base going forward, particularly as competitors' older L-band equipment reaches end-of-life and new modern alternatives are considered.

Now switching gears to our inertial navigation business. Revenue growth was 16% in Q1 over Q1 of last year. As anticipated, it was a low TACNAV revenue quarter, but fiber optic gyros sales were up solidly year-over-year, which is nice to see.

In February, we announced TACNAV live GPS, which is a new compass-based navigation system with an embedded GPS and moving map display, which brings an added level of flexibility and performance to military vehicle navigation.

This product has already been [spec-ed] in into a major vehicle program in the Middle East. We also recently announced the $3.5 million TACNAV order, and that gives us confidence that our TACNAV product line remains a leader in the military and government space.

In March, we launched 3 new variants of our high-performance DSP-1760 Fiber Optic Gyros. The new unhoused DSP-1760 variants offer application engineers and system integrators the ability to more easily install 1, 2 or 3 compact FOGs into higher-level systems. This flexibility is key to expand KVH's presence in high accuracy stabilization and pointing systems, which place emphasis on small size and weight, while not sacrificing accuracy and performance.

And we also have key strategic initiatives that we're working on in our inertial nav business. These are key to our long-term growth and ultimately, delivering long-term shareholder value. The first strategic initiative within our inertial nav business is to develop a low-cost fiber optic gyro for self-driving cars.

To recap the opportunity here, industry analysts project that 15% of automobiles will be autonomous by the year 2030 and the component sales for driverless cars will be approximately $42 billion. We're working on a photonic chip-based optical circuit for our fiber optic gyros that would maintain the current accuracy, but would dramatically decrease the cost and improve the manufacturability.

Our existing fiber optic gyros provide the accuracy and bandwidth to power the next-generation of autonomous vehicles. However, they need to be less expensive and easier to manufacture in order to scale the automotive volumes.

The timing of the market remains uncertain. If it happens very quickly, we won't be ready with a cost-effective alternative. If it happens too slowly, there won't be a big enough market to justify the investment. But nevertheless, we feel that we're uniquely positioned to redefine the market for precision gyro sensors and establish a significant market in the upcoming autonomous world.

As far as we know, there's no technology that can deliver our level of accuracy at the price points we expect to achieve. These car companies taking a different approach to our level of precision won't be selective for every self-driving application.

Different car companies will select a variety of sensors and accuracy levels for each component. The concept of sensor fusion means that the total level of precision will be a mixture of many different sensors. However, the overall level of precision needs to be incredibly high, and we believe that this will be a large market in the future.

Our second strategic initiative in inertial nav business is to focus on the upcoming U.S. Army requirement for Assured Navigation, Position and Timing or A-PNT. Within our TACNAV business, the recently signed budget agreement has a significant increase in U.S. defense spending, which should help fund these key priorities.

With instability continuing in the Middle East and other global hotspots, the overall outlook for the defense industry remains positive. The militaries of the U.S. and its allies need our technology. The world has become dependent on GPS navigation, but the vulnerability of GPS is now well-known. GPS signals can be jammed, leaving soldiers in the field essentially blind to their position or even worse, GPS can be spoofed into providing the wrong position. Overcoming these vulnerabilities requires complementing GPS with inertial navigation system such as KVH's TACNAV products.

As you know, there are several significant programs that we've been designed into and we've been expecting to receive productions orders for them in the near future. Our prime contractors have now been selected, funding is in place and subcontractor responsibilities are being negotiated. With the design and requirements set, we're in a strong position.

But as we've seen in the past, the timing remains difficult to predict with any certainty. We're not counting on all of the large TACNAV contracts to book and ship this year and we have forecast our TACNAV revenues to be essentially flat for 2017 versus last year. This should provide some upside, and we'll continue to keep you updated as the progress of the contracting cycle. However, it's important to understand that we do have significant TACNAV contracts that need to be booked and shipped as part of our second half guidance.

As we relayed in the last call, we view 2017 as a year of strategic investment and transition. We've already made good on our first strategic initiative, which is to bring AgilePlans' subscription model to market. We look forward to implementing our next-generation network, leveraging high-throughput satellites and continuing to work on bringing our low-cost automotive FOG to the world of self-driving cars.

Our current TACNAV business is still strong as evidenced by the recent $3.5 million order this quarter. We have upside potential in the wings. And when combined, these strategic initiatives could significantly boost revenues for the next 3 or 4 years with substantial growth in EBITDA. Building off progress in Q1, I feel we're in very good shape to continue to move the business forward and deliver long-term shareholder value.

Now, I'd like to turn the call over to Don to review the numbers. Don?

Thank you, Martin. So as Martin said, I'd like to discuss now in more detail the financial results for the first quarter.

As you know, and as Martin said, we changed our segment reporting at the end of 2016 and now have 2 reportable operating segments based on product lines, but with connectivity and inertial navigation.

To assist in trend in comparative analysis, we filed an 8-K on March 15 that provided supplemental, unaudited, consolidated financial information regarding our segments for each of the quarters in 2016.

So as Martin mentioned earlier, our first quarter revenue was $40.2 million, which was slightly above the midpoint of our guidance range, was substantially in line with the first quarter of 2016. In constant currency, our revenues exceeded last year by about 2%. Our mobile connectivity revenue decreased about $1 million but was roughly flat in constant currency, while our inertial navigation revenue increased about $800,000.

Product revenue for the first quarter decreased approximately $500,000 or 3% to $14.9 million from $15.4 million in the first quarter of 2016 due to a decrease in mobile connectivity product sales of about $900,000 or 8%, which was partially offset by an increase in inertial navigation product sales of about $300,000 or 7%.

The primary driver in the mobile connectivity product sales was lower sales for our mini-VSAT products. The increase in inertial navigation product revenue was due to higher sales of our FOG products as compared with last year, particularly our IMU products.

Service revenue for the first quarter increased $300,000 or 1.2% to $25.3 million from $25 million in the first quarter of last year due to increases in mini-VSAT Broadband airtime service revenue of $1 million or 7% and nonrecurring engineering revenue from the inertial navigation segment of $600,000. These increases were partially offset by a lower content and training revenue of $1.1 million, which again was primarily the result of unfavorable exchange rates.

Mini-VSAT Broadband airtime revenues were up 3% versus the fourth quarter of 2016. In the first quarter, our consolidated gross profit margin held steady at roughly 41% as compared with the first quarter of last year. And product margins for the first quarter were 29% compared with 31% last year.

Our overall service margin was 48% for the quarter, on par with last year. Our mini-VSAT Broadband airtime gross margin improved by over 200 basis points to a record 38% from the first quarter. This was offset again by the decline in training revenues and that was due to the weakness in pound.

From a segment perspective, our mobile connectivity gross margin held steady at about 41.5%, while our inertial navigation gross margin decreased about 2 points to 36.5% and that was due to product mix.

Operating expenses for the first quarter were just under $21 million, up 4% from just over $20 million in the first quarter of last year, as expected. The increase from prior year was primarily due to an increase in administrative personnel costs and certain investments in R&D spending relating to the growth initiatives that Martin described.

For the first quarter, these changes in revenue, margins and operating expenses resulted in a loss from operations of $4.5 million compared with a loss of $3.4 million recorded in the Q1 of '16. Our mobile connectivity segment generated an operating profit of $600,000 compared to $2 million last year, while our inertial navigation segment approximately broke even for the quarter compared to a loss of $900,000 last year. Our unallocated loss from operations increased $500,000 due to higher R&D and administrative costs.

Our overall effective tax rate for the first quarter was negative 3%, which reflected a tax expense on our foreign earnings. We recorded a net operating loss in the U.S., which we are not able to benefit from as we recorded a valuation allowance on the deferred tax assets generated by the loss.

Similar to the fourth quarter of 2016, as we consider the valuation allowance to be a discrete noncash item, we excluded this reserve when computing non-GAAP net income and EPS.

For the first quarter, our GAAP net loss was $4.9 million as compared with a net loss of $2.8 million recorded in the same period last year. Our non-GAAP net loss was $1.4 million compared with a loss of $0.6 million last year, primarily driven by the increase in our operating loss that I've just described. GAAP EPS for the first quarter was a net loss of $0.30 per share, compared with a net loss of $0.18 per share in the same period last year.

And the non-GAAP EPS for the first quarter, which excludes discrete items, intangible amortization, stock-based compensation was a loss of $0.09 a share, slightly better than the guidance range we provided for the quarter, which was a loss of $0.13 to a loss of $0.10.

Our adjusted EBITDA for the first quarter was a negative $800,000 compared with a positive $1 million recorded in the first quarter of last year, close to the high end of our guidance, which was a negative $700,000 to a negative $1.5 million. For a complete reconciliation of GAAP and non-GAAP measures, please refer to our earnings release that was published earlier this morning.

Total backlog at the end of March was $10.4 million. Backlog for our total inertial navigation products and services at the end of March was approximately $8.4 million. Of this amount, approximately $6.5 million is scheduled to be delivered during 2017. From a cash flow perspective, we had a very good quarter, which allowed us to reduce our net debt by over $3 million to about $2.8 million.

With that, I'll now turn to our outlook for the second quarter and full year. As we have discussed, and as Martin is just described, we're investing in certain key strategic initiatives this year that we believe will have meaningful applications for our company in the future.

These initiatives include the rollout of new high-throughput satellite service and hardware, the introduction of our AgilePlans, our innovative subscription model for the commercial -- which is our innovative subscription model for the commercial maritime sector, development of a low-cost FOG for autonomous vehicles and enhancements to our TACNAV technology to support the critical military demand for Assured Position, Navigation and Timing or A-PNT. We are making incremental investments in these initiatives this year, both from an expense and a capital perspective, so as to be in the best position we can be to benefit from this success in 2018 and beyond.

Consequently, as we noted last quarter, our guidance for 2017 anticipates only moderate growth in revenue with a fairly large increase in operating expenses and capital expenditures as we fund these programs. Our guidance for the second quarter and full year 2017 is as follows.

Second quarter revenue was estimated to be in the range of $40 million to $42 million, and GAAP EPS to be in the range of negative $0.27 to negative $0.23. Non-GAAP EPS is expected to be in the range of negative $0.07 to negative $0.04, and adjusted EBITDA is estimated to be between $500,000 and $1.2 million.

At the midpoint of our -- at the midpoint, our 2017 revenue guidance represents a decline of about 11% compared to Q2 2016. And that's mostly due to lower TACNAV and FOG sales, which tend to be lumpy. Also, the introduction of our AgilePlans, as we've been discussing, will have a near-term negative impact on revenue comparability as we shift from product sales to subscription revenue, and FX will likely be a headwind for the quarter.

Our full year guidance is unchanged from the guidance we provided during our 2016 fourth quarter call. But to reiterate, we expect full year revenue to be in the range of $170 million to $190 million, GAAP EPS to be a loss from $0.69 to $0.38, non-GAAP EPS to be from $0.07 to $0.27, and adjusted EBITDA to be from $8.5 million to $13.5 million.

In our Q2 and full-year guidance, we've included only a limited number of TACNAV systems from the anticipated large orders in the pipeline. In 2017, we expect -- we continue to expect our capital expenditures will be in the range of $15 million to $20 million.

As previously disclosed, the initiatives outlined will require a higher level of capital investments for 2017. A significant portion of which will be direct revenue-generating assets under our AgilePlans, along with higher operating expenses.

Again, we believe 2017 is an important transition year and that the incremental costs and capital expenditures have the potential to transform the company going forward. This guidance assumes there will be no significant changes in foreign currency exchange rates.

So that concludes our prepared remarks. So I will now turn the call back over to the operator, and we'll open the line for Q&A.

(Operator Instructions) And we'll take our first question from Ric Prentiss with Raymond James.

Two questions if I could. First, on the guidance. You mentioned '17 guidance, only a limited number of the TACNAV in the pipeline. But earlier, you'd said some would need to book and ship to hit the second half guidance. Help us understand where you are in the process with those particular fairly large contracts as far as are they done being manufactured? Are they sitting on the floor waiting to be shipped? And what's the timeline to really -- the visibility to when it might hit? And is there customized? Just thinking through the whole process of when those might hit.

Right, yes. So what we've -- what we're saying is that the total TACNAV guidance is flat with last year. We just bought this $3.5 million order, a big chunk of that will ship this year, which is good. There are at least 2 other large orders that we expect to receive, and we've only put a portion of that into the guidance. So we're trying to indicate that we still feel very confident in those orders. We expect to get them this year. We expect to ship a big chunk of it this year. And if that happens, we will meet or beat the guidance for inertial nav. So the current status of those programs is that the vehicles are in production. Some of the vehicles have been delivered. We're spec-ed in. We have purchased materials and built some of the products in anticipation of the order. We expect to get the order in the second half of this year. And our turnaround time is basically going to be governed by getting an export license, which it normally takes sort of 4 to 6 weeks. So it can happen even late in the year and still be in the plan.

Right. So you've prepped up for it. It's really just sitting on [G, waiting on O] for the order really to come in hand?

Yes.

Yes.

And it's in the -- it's a foreign military sale and it is in their budget. So it's not a budgeting problem. So we continue to feel very good about it, and we just don't have confidence in giving specific dates.

Yes. And particularly, if the order is not firmly a hand-type thing, sure.

Right. Yes.

Second question is a little more long term. You mentioned about the autonomous vehicle kind of program. Working on bringing the cost down and the manufacture easability, if that's a phrase. Help us understand what the process is to do that as far as you don't want to be too early because the market might not be there or your cost might be too high but you don't want to be too late in the market. So again, what are you doing specifically? What kind of benchmark milestone should we be looking for?

Right. So where we are now, we've received -- in Q1, we received our first set of prototypes. We tested those, we've made modifications. Just in the last couple of weeks, we got second set of prototypes that look a lot better. We're working on a new method for attaching the fiber to the chips, which would be a further improvement that we didn't originally anticipate, but we've come up with something there as well. So we're optimistic that, during the course of this year, we should see -- have something to talk about every quarter as we progress down the path. So -- and we're doing it incrementally so that we should be able to have regular milestones there.

And from the contract side of things, what are the people you're working with in hopes of getting a contract wanting to see delivered? And what kind of time frame do they want to see the engineering and manufacturing kind of process?

Well, it varies. I mean, some people are moving very fast and they want it now and if they can't have it now, they don't want it. Other people, who are the more mature, the big car companies, they have longer time horizons than we do. And so we're very comfortably ahead of their timeline. So it really varies a lot. So -- and in the interim, we're continuing to provide prototypes of the existing design, which works great. It's just impractically expensive for volume production. So it's sort of similar to the path that the LiDAR guys went through. You get in early and then sometimes you get kicked out if they don't -- if they want something super cheap right now. But in the long run, it -- I think LiDAR is going to be in all of these vehicles.

Right. And any update on drones? It was discussed on the Verizon Analysts Day yesterday. DISH brought it up on their call this quarter. What's the opportunity in drones? You talked about it a couple of quarters back.

Yes, we're -- a lot of our products are being used in drones, everything from surveillance drones to military drones to package delivery drones. So there's a lot of opportunity there. So we -- some of the product announcements we just did where we have the new unhoused version basically makes the product very small and very lightweight, which is important for drones. But a lot of our IMUs are going in drones, which is our high-end inertial nav system based on our 1750 IMU. And sales of that product were up almost 50% this quarter. I think it was like 46% year-over-year. So we're seeing good growth in that part of our business.

And we'll take our next question from Rich Valera with Needham & Company.

First, just wanted to follow-up on the TACNAV questions from the previous caller. It sounds like you are describing specifically one order, Martin, when you were talking about the timing of that particular order. And if I recall, you had a couple of orders. One which I thought was in kind of a $6 million, $7 million range, which you may -- I thought you actually already had prebuilt an inventory and another one that wasn't quite as far along as that. So can you just maybe drill down a little bit on if in fact that's the case and if the one you were referring to was the one that's already in inventory?

Yes, you're exactly correct. So there were 2 orders, but they're from the same country. So I tend to lump them together when I talk about it. But the first one is a little bit further along. And you're correct that it is also the one that we've actually built and have on the shelf.

Got it. So you -- that one you have pretty good confidence on getting some time in the second half and then you need the 6-week export license, how about the one behind that? Do you think the timing of that is similar?

We do think the timing is similar. So -- and the fact they may become co-mingled into a single contract, we're not quite sure. So -- but we think that the timing of both now is very similar.

And just one more on that. I mean, it frankly seems like we've been in this position now for at least a couple years in a row. And just trying to understand what might be different this time. Has anything happened at a high level in the government of this defense organization that you're ordering from that would give us some confidence that this year would be different than the prior year or 2?

Well, I think that from our perspective that we continue to see progress, both the fact that the funding is in place, that the vehicles are in production, that the contractor has been selected, we've provided updated price quotes, we're discussing installations. So we have a lot of small indications that give us confidence but I can fully appreciate your position, which is that we've been confident for a while now. So -- and that's why we're sort of straddling the fence here with not putting a lot of this in our guidance and basically giving the guidance, that it was the same as last year in terms of revenue.

Got it, okay. Well, just want to move on then to mini-VSAT. So it's nice to see the growth of the service revenue and, obviously, a tough market. Just wanted to understand a little bit on the hardware side. I think you mentioned you had an $800,000 or $900,000 decrease in hardware, but it sounds like that would seem to imply perhaps meaningfully lower gross unit ads. But I imagine there could be some impact from units being added on the subscription model. So just wanted to get a sense of any color on unit ads year-over-year and how much of the new business is coming on, on the subscription model at this point?

Yes, we did -- as I mentioned in my prepared remarks, we did have some immediate interest. And we started presenting this subscription service to some key customers -- some early customers in Q1. And we had some early takers who also have the predecessor to that, which is sort of a crew-calling service, where the equipment goes on board and -- in exchange for an airtime contract. We don't count those as revenues. So the overall growth in subscription airtime is sort of the net number two. So what we're seeing is, if you recall from many quarters, we were describing a decline in the offshore oil vessel subscribers, which was kind of hurting our growth rate so we'd be adding subs and not really seeing an increase in revenue because we're getting suspensions or deactivations from both sort of being laid up. So I think all those things are a factor in getting the airtime growth up a bit.

All right. Any color at all on sort of thoughts on gross adds this year versus last year or in the quarter?

No. I mean, we don't -- as you know, we don't talk specifically about number of subs or subscription just for competitive reasons. But we're -- the idea behind the AgilePlans is to really increase the number of subscribers. So that's the whole concept here. So we're not -- if we just trade a hardware sale for subscription revenue, it's kind of innovative. But it doesn't really move the needle for us. So that's not why we're doing it. So what we're really trying to do here is increase the subscriber growth in a very material way.

Got it. I mean, are you going to give us some sort of data points along the way this year to give us any sense of if you're being successful on that front?

Yes, I think so. I think we try not to do too much too early, keep digging up to see if the seed is growing. But I think as soon as it becomes even remotely material, we'll be discussing it in detail.

Got it. And then just wanted to go on to the FOG for the ADAS applications. Am I to understand that correctly that you already have a version of the photonics IC in your prototype? Or is that still to come?

No, we have prototypes in the lab. So we're getting samples from 2 different suppliers who are building the actual chip and we're testing them in our lab. They're not running in vehicles.

Got it. So can you talk about what are some of the major steps? I mean, seems getting a photonics IC done is a big step. Do you need to -- you think have multiple spins of that shipped to get to the ultimate cost target? Like what are some of the big milestones we should look for to get down that cost or to where you need to be for these ADAS applications?

Yes, so the -- at a high level, the steps are designing the circuit itself and that's been completed and that appears to be working. The fab steps that are critical are reducing the loss through the circuit through the material itself and maintaining the polarization. So those are sort of the 2 keys things that we're working on now, the second spin that we just did. The first one had very high loss, the second one cut the loss in half, so we're pretty happy that we're right -- on the correct path there. And then those are really the 2 major things that we are working on right now.

Got it. And then just quickly, can you say what the CapEx was for the quarter? And how much, if any of that was for the subscription plan?

Yes, and very little of it was for the subscription plan. And I could tell you just one second. CapEx was about $2 million.

Got it. And I'm sorry, just one more. And I promise I'll yield the floor. Can you give us the breakdown of TACNAV and FOG revenue for the quarter?

Sure. Just one sec.

It was mostly FOG.

It's mostly FOG.

And TACNAV was about $600,000 or $700,000.

Yes, TACNAV was about $700,000. So yes, TACNAV was about $700,000, FOG was about [$4.2 million] and then there was OEM-type business of a couple hundred thousand.

And our next question comes from Jim McIlree with Chardan Capital.

So I think last quarter, you talked about OpEx increasing $10 million for the year. I'm wondering if that's still a valid observation? And then secondly, in order to get there, you're going to have to have a pretty big increase in OpEx. Is that going to be in conjunction, the increase in revenue that you're expecting in the second half? Or are there some timing differences?

So first, we still continue to expect OpEx will increase year-over-year about $10 million. The first quarter OpEx, I believe, one second -- I mean, it will ramp up a little bit in the last half of the year. We were at, let's see, $16 million -- about $19 million, almost $20 million -- well, I guess, which is about just under $21 million in the first quarter. We expect that it will increase slightly or somewhat in the last 3 quarters of the year. The run rate will pick up a little bit.

Okay. And is that independent of the revenue increases? Or is that (inaudible)?

Well some of them will positively -- I should say some of it will increase significantly in connection with TACNAV -- commissions will increase with TACNAV sales.

Okay. Okay, great. And then in order to hit the high end of the revenue guidance, is that mostly getting pertinent results on the TACNAV? Or is there something else that would drive the high end of guidance for the year?

Well, we have a pretty varied product line. So between the VSAT and the airtime, the training business, there's also a fairly significant part of our revenue is now denominated pounds so there's an exchange rate between airtime, the hardware and the maritime. You've got FOG and TACNAV. So it's really a mix of all those different things. But you're right, of course, large TACNAV orders would push us to the high end of the range. But there are other parts of the business like AgilePlans taking off, airtime revenue continuing to grow that would push us up as well. So -- but it tends to be that some things are up and some things are down. So it's kind of a blended forecast, if you will.

Okay. And my last one is, the CapEx for the year, you've indicated is going to be partial for the AgilePlans. Have you put a number around that? What -- how much in CapEx you're expecting related to the AgilePlans?

Not directly. It's a -- what we've talked about is a total CapEx of I think around $20 million or so this year.

Yes, $15 million to $20 million.

So it's less than half of that, maybe 1/4 or 1/3 of that might be.

It could be -- probably more than half of that will be adjustment.

I stand corrected. Sorry about that.

Is the -- does the HTS capacity increase, is that capitalized? Or is that expense?

It's a mixture. There's a lot of development costs, which we're expensing as we go. A lot of engineering network support, product development. So all that's being expensed as we go, and there are some capital investments as well in terms of network infrastructure that are being capitalized.

Right. So potentially ground terminals and you're going to have higher backhaul costs as well. Is that -- am I thinking in -- along the right lines?

Right. And traffic shaping equipment and a lot of networking -- it's a complex development project.

And our final question comes from Chris Quilty with Quilty Analytics.

Hey, Don. Could you give is the full 4-digit revenues by operating segment, which I couldn't find anywhere in the press release or supplementals? And it would actually be helpful if it was somewhere other than the Q that we'd have to wait for.

Well, first, I'll be happy to give you that, Chris. The Q will be filed tonight so you won't be waiting a long time, but I can tell you nonetheless. Mobile connectivity total sales are, for the quarter, $34,287,000 and inertial navigation is $5,924,000.

Got you. Martin, I know you don't give specific numbers on mini-VSAT, but is it fair to assume we're still looking at the same sort of 250 per quarter net adds in Q1?

Yes, I think the -- our -- the run rate of terminals deployed has not changed materially for a while, and that's really what we're looking to change here with this move towards connectivity as a service. So we're trying to jump-start and get us out of that range that we've been for the last couple of years.

And to give, I mean, a sense of what you hope the impact to be, if you've been adding sort of a gross thousand vessels a year, are you hoping to get a 50% improvement or a 2x or a 3x improvement over time? And just in context of -- I mean, you know how large the market is and what the penetration rate is and what competitors are doing. What's sort of possible and what would be the stretch goal?

I think the trajectory would be in those kind of multiples, a large increase over where we are today. The thing that we're -- always have to be careful of in commercial maritime is that it's a very conservative industry and this is a brand-new concept that no one's ever done before. So balancing those 2 things, we've had incredibly positive response from everybody. No one said this is crazy, why are you doing this? I once said this is exactly what we want. So on the one hand, we're getting really positive feedback. We made some immediate sales. We're actually full time at a trade show, which never happens in this industry. So that's all good. And I -- but I think if you look out, we're viewing this as an important strategic direction for the company. And over the next year, 2 years, 3 years, we think this will have a dramatic impact on our trajectory.

Okay. And just to be clear because the information wasn't available on the last conference call. When I looked at the pricing on these plans, it's the exact same price as you had before. It's just people get the antenna for free, they get the content for free and the same exact plans in terms of -- and these are all usage-based plans.

Right. So you get the antenna; you get the below decks; you get the cabling; you get the -- installation is included; maintenance is included; the vessel tracking is included; NEWSlink print; NEWSlink television; training -- the Videotel training, basic training package; as well as the chart update service, CHARTlink, and FORECASTlink. So it's a pretty comprehensive package of stuff that you get and it starts as low as [$4.99] a month. So that's what we mean by all-inclusive.

Got you. And I haven't seen any public statements by competitors, but I would assume that they think you're crazy?

I don't know. They always think we're crazy. So that's the -- probably the reason we have more subscribers than they do. But this is something customers want. It's something that's a unique benefit that we can offer. It's a turnkey solution and it's happening in other industries. Here at KVH, we used to buy software and servers and all this stuff. We don't do any of that anymore. We use Salesforce.com, We have Amazon Cloud. Everything is -- this is the way the industry is going, and they may think we're crazy now, but they'll be copying it within a year or so.

Got you. And separately, the content and training business I assume will be partially cannibalized by some of these plans. Maybe, who knows, you get actual step-ups because people get the basic and they decide to add on the premium. But independent of that, because the plans really haven't kicked in, other than the FX impact, that business really hasn't grown much in the last year or 2. What do you think the rash reasons are why you haven't gotten more traction with sort of the independent content business sales?

Well the -- as far as the cannibalization goes, I mean, some of that is for like the traditional movie linked services being cannibalized by IP-MobileCast. And that's been going on for 3 years now. The Videotel training has grown since we acquired them from a sort of 10,000-ish to 12,000 vessels. So that's grown. You have to remember that the British pound went from $1.70 to $1.20 during that time period as well. If you look at the number of vessels, we have increased about 2,000 vessels during that period. So I think the growth in that business will come from new products and we're working on some new products that we'll be announcing here during this quarter for the training business as well.

Got you. And on the automotive side, just a question on the photonic chip design. Are you designing that based upon specific specs that customers have given you that they desire? Or is it based upon what state-of-the-art what you think is achievable from a technology or an accuracy perspective?

Both. But primarily to me, customer requirements. So -- but we know what state-of-the-art is and we know current performance. So right now, we don't -- the goal is not to reduce performance from current levels but simply to make it smaller, cheaper and faster to build.

Got you. And from your script, it sounds like you're -- you feel like you're on track with the development. Can you remind us when do you think you'll have either prototype test units that will get fielded? Or when is the goal to kind of be in full production?

Well, we haven't set a specific date. The way R&D works is you keep working it, and then suddenly it works, which is different from an engineering development where you can plan out the schedule and make a discrete path. And so I think that if we're not in production in 2018, I would be very disappointed. If we get something that we can put into a gyro this year, I'd be very happy.

Got you. And Don, 38% margins on the mini-VSAT. Are those -- should we project that as a stable margin on a go-forward basis? Or were there onetime items where it might come back a bit?

Best I can see now, Chris, that should be a good run rate going forward.

Got you.

Well, there might be a blip of when we launched HTS. There might be some small incremental deltas, but it should be small. So I agree with Don, that's our target going forward.

Martin, one more question. You had said that HTS will allow you to lower cost. But just to be clear, you're going to still be operating your existing mini-VSAT wideband -- or wide beam network and you're going to have to layer on additional HTS capacity. So isn't it true that the costs are actually going to go up to add that service?

Well, every time you add capacity, your total cost goes up but the net cost goes down. So what we're saying is that our cost per subscriber or per megabit per second or per megabyte, whatever metric you want to use, those costs will be going down. And fairly significantly, we are looking at something like a 50% reduction versus our current comp so.

And will the -- all of those future HTS plans, will they include an existing wide beam overlay as an option or as standard as a way to continue pushing IP multicast and a backup service?

Well, we'll be announcing the details of the service shortly. So we'll address that point then. I don't want to get out in front of our new product announcements. But what you're asking is a very good question, and we've got a very nice solution for that. It's a great plan.

And at this time, we have no further questions.

Okay, we'll be available after the call if anybody has any follow-up questions. Thank you.

This does conclude today's call. Thank you for your participation. You may disconnect at any time.