KVH Industries Inc (KVHI) 2017 Q2 法說會逐字稿

Good day, and welcome to the KVH Industries Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Don Reilly, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Thanks for joining us today to discuss KVH Industries' second quarter results and our guidance for the 2017 third quarter and full year, all of which is included in the earnings release we published this morning.

With me on the 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 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 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 9 of this year, and the company's SEC filings available directly from the Investor Information section of our website.

At this time, I would like to turn the call over to Martin. Martin?

Thanks, Don. Good morning, everyone. Pleased to report that we enjoyed a successful second quarter with results in line or exceeding our guidance. Second quarter revenue was $40.5 million, while our non-GAAP EPS was $0.03 per share, beating our expectations. We also achieved record airtime gross margin for the second conservative quarter, while simultaneously increasing our subscriber base and airtime revenues by 6%.

Our AgilePlans, Connectivity as a Service product, is off to a strong start, and we saw robust sales of our Inertial nav products as well. We did experience some challenges with the continued delay in the anticipated military order along with the cold and rainy spring that slowed product orders for leisure boats and particularly, with our TracVision line. But overall, the second quarter was positive, both from a strategic and a financial perspective. And Don is going to cover the numbers in detail later, but before he does, I'll just go through some of the highlights and then touch on some of our new initiatives.

So starting with our mobile connectivity business. Our airtime business grew $1 million or 6% year-over-year. Airtime gross margins for the second quarter were 39%, and that was a record for the second consecutive quarter. As I mentioned earlier, our subscriber base was also up 6%.

Long term and new strategic initiatives are playing a part in this success. One major factor has been the growth of our usage-based airtime plans, which we launched 2 years ago as part of our mini-VSAT Broadband 2.0 initiative. While other satellite service providers were focused on delivering unlimited plans that were in fact, limited and throttled, we set out to differentiate ourselves from the pack and take full advantage of the speeds and savings that mini-VSAT Broadband offered.

Our new usage-based plans delivered the fastest network speeds at all times, with affordable monthly packages and complete transparency and control of data use. This was a groundbreaking approach to maritime satellite communications. And now, usage-based plans represent 60% of all mini-VSAT Broadband Airtime subscriptions. Together, with cost reductions and cooperation with our satellite providers, the transition to our usage-based plans is a key factor in our higher airtime revenues and improved airtime gross margins.

Now here at KVH, we take great pride in the reputation we've earned as a source of innovative products and services, and now we've turned that innovative spirit onto the maritime SATCOM business model. And as we discussed in our last earnings call, we launched AgilePlans, our subscription-based Connectivity as a Service product, in mid-April of this year. We recognized the need for flexibility in a volatile industry, in which vessels might be mothballed or sold or recommissioned quickly. The concept of multiyear rigid contracts flies in the face of reality when you look at how modern commercial fleets operate and are managed. Our goal is to respond to the maritime industry's growing awareness of the benefits of VSAT while eliminating the obstacles for getting a better solution onboard an entire fleet. And that's where the innovation of AgilePlans comes into play.

Our Connectivity as a Service approach is the first of its kind in the industry, offering an all-inclusive SATCOM package with no commitment, beyond an extremely affordable monthly subscription.

When it comes to competitive differentiation, KVH is uniquely positioned to offer a product like this, because we're the only company that bring can together the SATCOM hardware, installation, airtime service, license content, training, content delivery, global support, all within a single product offering. And we're very pleased to report that it's off to a strong start.

AgilePlans represented around 40% of all new commercial maritime shipments in the second quarter for our V7 and V11 products. That's about 20% of our total global VSAT shipments for the period, which was less than a full quarter. So this is an especially exciting as we didn't begin taking AgilePlans orders until about 1/3 of the way through the quarter. And AgilePlans isn't offered in the leisure market at this point, and it's also only available for V7s and V11s.

Early ARPU results on AgilePlans are also very positive, and we've entered the third quarter with a substantial AgilePlans installation backlog. Now this is a completely new approach to delivering SATCOM solutions for marine industry. And as a result, we're also learning how this business model is going to operate in the real world. For example, because it's a subscription program, we don't record revenue until the system is actually installed and activated. So right now, we're seeing roughly 30 days from the time we get an order to onboard installation and activation and it's still early. So we'll have to see if that schedule remains consistent.

In addition to AgilePlans, we're also expanding and enhancing our connectivity, content and training services for mariners. In May, we introduced the YOURlink service, which allows companies to deliver their own custom media files directly to every vessel in their fleet via our IP-MobileCast service. Crew members can then watch or listen on TVs, tablets, smartphones and PCs. Several fleets have already used YOURlink to deliver safety training and corporate videos.

Now trainings are a requirement in the maritime industry, and ship operators recognize that effective training minimizes risk to their crews, their vessels, their cargo and their bottom line. And that's why in May, we launched an extensive new training suite to address gaps in seafarer engineering knowledge. The 100 modules of the KVH Videotel Practical Engineering Suite are now available on a mobile-friendly platform, utilizing 3D animated graphics and comprehensive assessment and testing. We're now preparing to introduce a major new software-based training platform at the London International Shipping Week in September. This will be the first major product launch for Videotel as part of KVH.

In leisure marine, there's strength at the very high end of the market industry wide, and one of our new initiatives is to target the superyacht segment with our end-to-end approach, which is why we've established a dedicated superyacht sales and support team focused on the unique needs of this segment of the market. There are over 5,000 yachts in this ultra-premium category, and we believe that we are well positioned to establish a solid foothold there. Our message of solving the entire end-to-end problem should resonate with this demanding customer segment.

Of course, this group relishes high speed above all else, and we continue to make excellent progress on the development of our next-generation VSAT network, which is built on a foundation of HTS or high-throughput satellites. As part of this effort, we're working on a range of new SATCOM products and services, designed to support HTS availability and will be an overlay on our existing network.

So wrapping up on mobile connectivity. Our previous initiatives are now paying off, and we're investing in new technology and business models to continue our market leadership.

Now moving on to our inertial nav business. Revenue for our fiber optic gyros were up 11% for the quarter, driven by sales of our high-level inertial measurement and navigation systems. Overall, revenue for our business segment decreased 29% year-over-year due to large TACNAV military orders that we had in Q2 of last year. While there were no large TACNAV shipments in Q2, we still anticipate significant revenues in Q4 from the previously discussed large TACNAV programs. These contracts are not yet booked, but we anticipate having them in place in the second half of the year in time to ship a portion in Q4. Some of these contracts will include our new large-screen moving map navigation display. We're also refining other new products. We've made additional improvements to our TACNAV 3D product line, which includes our fiber optic gyros, and just a few weeks ago, we completed extensive independent testing of our TACNAV 3D tactical nav system for the U.S. Army program managers. During these tests, we demonstrated a remarkable 0.15% accuracy in position data over distance traveled, which is even better than our own specification.

Success in these tests was crucial as our fiber optic gyro-based TACNAV 3D system will play a significant part in our ability to meet the upcoming requirements for Assured Position, Navigation and Timing, also known as A-PNT. So the call for PNT is driven by the growing recognition among military planners that GPS-based navigation is at risk due to the emerging threat of GPS jamming and spoofing, which were demonstrated recently in places like the Ukraine and Syria.

TACNAV is part of the solution to provide next-generation A-PNT capabilities to our war fighters. It includes our 1775 inertial measurement unit, which provides extremely accurate heading, dead reckoning and orientation and a 100% situational awareness in GPS-denied environments. Its small size, low weight, low power and now, independently verified accuracy make it the ideal navigation and pointing solution for the digital battlefield with or without GPS.

And looking at our FOG sales for the quarter, the 1775 IMU and our another inertial systems contributed to continued strength in our fiber optic gyro sales, which as I mentioned, were up 11% for the quarter. Among new bookings was a nearly $2 million order for IMUs to be used in a classified drone program, and the majority of that should ship this quarter in Q3.

We're continuing to invest in R&D in our photonic chip-based gyro, which is a key strategic initiative for our nav group. Designed for high-volume production, this design is expected to maintain the current outstanding accuracy of our fiber optic gyros, but will dramatically decrease their cost and improve their manufacturability. This approach is crucial to our long-term prospects in the emerging driverless car market. While our existing FOGs provide the accuracy needed, they aren't designed for the high-volume manufacturing that may be required. Some analysts estimate that up to 15% of all automobiles produced globally will be autonomous by the year 2030.

So overall, our ongoing strategic investments in technology and services are progressing as expected. We've got strong foundation of existing technology and services, and I am confident that the new products and initiatives launching later this year could significantly boost revenues starting next year. We're all very excited about where we stand now and our prospects ahead. And now I'm going to turn the call over to Don for some of the detail of the numbers. Don?

Thank you, Martin. So now I'd like to discuss in more detail the financial results of the company for the second quarter. As you know, our business operates in 2 reportable operating segments based on product lines, mobile connectivity and inertial navigation.

The last page of our earnings release includes a summary of our operating results by segment for the second quarter and year-to-date periods. As Martin mentioned earlier, our second quarter revenue was $40.5 million, which was in -- which was within our previously announced guidance range, and this compares to $46 million recorded in the second quarter of 2016. Revenue from our mobile connectivity segment decreased $2.8 million, and our inertial navigation revenue decreased $2.7 million. In constant currency, our revenues declined by about 10%.

Product revenue for the second quarter of 2017 was $14.3 million, a decrease of $5.7 million or 29% from the $20 million in the second quarter of the prior year.

By segment, product revenues in our inertial navigation segment decreased $3 million or 36%, and in our mobile connectivity segment decreased by $2.7 million or 23%. Within our inertial navigation segment, our FOG business continued its solid top line revenue growth, growing 11% this quarter.

TACNAV sales declined this quarter as the prior year included the initial deliveries on a large TACNAV contract that concluded in the fourth quarter of 2016.

In our mobile connectivity segment, the decline in product sales was partly driven by the launch of our AgilePlans subscription model. As Martin mentioned, approximately 20% of our unit shipments this quarter were in connection with this new offering. And as previously communicated, we do not recognize revenue -- product revenue on shipment of AgilePlans products as we continue to retain ownership of the products.

Also, challenging weather conditions, particularly on the U.S. East Coast impacted second quarter sales for all marine products and accessories. And additionally, we filled a portion of a particularly large order in 2016, which makes the quarter-to-quarter comparison more difficult.

Service revenue for the second quarter increased by $0.2 million or 1% to $26.2 million from $26 million in the second quarter of last year, due to an increase in mini-VSAT Broadband Airtime service revenue of $1 million or 6%. Sequentially, mini-VSAT Broadband Airtime revenues were up 3.6% from Q1 2017 and 6.5% from Q4 2016. The increase in Q2 airtime revenue was partially offset by lower content and training revenue of $0.8 million, which was primarily a result of the unfavorable impact of currency exchange rate fluctuations in the British pound.

And again, as previously mentioned, we launched the AgilePlans subscription program in the second quarter. Although the revenue recognized in the quarter from this program was not significant due to the time between shipment and activation of a system, customer feedback has been positive, and we're quite pleased with our initial shipments and the level of interest in this new go-to-market approach.

For the second quarter, our consolidated gross profit margin improved to 44.7% as compared to 42.8% in the second quarter of last year.

From a segment perspective, our mobile connectivity gross margin was very strong, coming in at 44.6%, up about 400 basis points, while our inertial navigation gross margin decreased about 800 basis points to 44.8% due to product mix.

Margins on product sales for the second quarter of 2017 held steady, with the prior year second quarter at 35%. Our overall service margin was nearly 50% for the quarter, which was up over 100 basis points from last year. As Martin mentioned, our mini-VSAT Broadband Airtime gross margin improved to 39% from second quarter. That's the highest margin we've ever recorded on this business in any quarter.

Operating expenses for the second quarter were just under $19.4 million, down about 5% from $20.4 million in the second quarter of the prior year. The decrease was -- the decrease in [prior] year was primarily due to lower commissions expense related to the higher TACNAV sales recorded in the prior year quarter, which is offset somewhat by increases in administrative costs.

For the second quarter, these changes in revenue, margins and operating expenses resulted in a loss from operations of $1.4 million compared with a loss of $0.7 million recorded in Q2 2016. Our mobile connectivity segment generated an operating profit of $2.6 million compared with $1.6 million last year, while our inertial navigation segment had operating profit of $0.4 million for the quarter compared with $1.6 million last year.

Our unallocated loss from operations increased $0.5 million due to higher administrative costs.

Our overall effective tax rate for the second quarter was negative 21.3%, which reflected the tax expense on our foreign earnings. For the second quarter and first half of 2017, we recorded a valuation allowance on deferred tax assets generated by the net operating losses incurred in the United States as required by accounting rules. As we consider this valuation allowance to be a discrete noncash item, we've excluded this reserve when computing non-GAAP net income and EPS.

For the second quarter, our net loss was $2 million as compared with a net loss of $0.8 million recorded in the same period last year. On a non-GAAP basis, which excludes discrete items, intangible amortization and stock-based compensation expense, we had net income of $0.6 million compared with $1.2 million last year. This decline was primarily driven by the increase in our operating loss described earlier.

EPS for the second quarter was a net loss of $0.12 per share compared with a net loss of $0.05 per share in the same period last year. Non-GAAP EPS for the second quarter was income of $0.03 a share, which was significantly higher than our guidance range, which we provided for the second quarter of a loss of $0.07, a loss of $0.04 per share. That's driven by stronger margins and focused management of operating expenses.

Our adjusted EBITDA for the second quarter was $2.1 million compared with $3.5 million recorded in the second quarter of last year. Adjusted EBITDA was also significantly stronger than our guidance range, which was $0.5 million to $1.2 million. For a complete reconciliation of our non-GAAP measures, please refer to our earnings release that was published earlier this morning.

Total backlog at the end of June was $11.1 million. Backlog for our inertial navigation products and services at the end of June was approximately $9.7 million. Of this amount, approximately $6.2 million is scheduled to be delivered during the remainder of 2017.

Our cash flows continued to be strong in the second quarter, with cash from operations contributing $2.4 million. Our net debt increased from the first quarter by $1.3 million to $4.1 million, primarily related to increased capital spending, which was expected, but it was down $1.8 million compared to our last year-end.

So with that, I'll now turn to our outlook for the third quarter and the full year. Our guidance for the third quarter is as follows: third quarter revenue is estimated to be in the range of $41 million to $43 million and GAAP EPS to be in the range of negative $0.21 to negative $0.17 per share. Non-GAAP EPS is expected to be in the range of $0.01 to $0.04 per share and adjusted EBITDA is estimated to be between $1.2 million and $1.9 million.

At the midpoint, our Q3 2017 revenue guidance represents a decline of about 8% compared with Q3 2016, primarily due to lower expected TACNAV sales, which tend to be lumpy and the expected decline in mini-VSAT product sales as we continue to experience the planned transition to our AgilePlans model for a portion of our units shipped.

For the full year, we've tightened the high end of our revenue guidance somewhat from $190 million to $184 million. Our revenue range now is $170 million to $184 million, and we are reaffirming our expectations for our full year GAAP EPS range to be a loss of $0.69 to a loss of $0.38. Our non-GAAP EPS to be from $0.07 to $0.27 and our adjusted EBITDA to be from $8.5 million to $13.5 million.

As a reminder, in our full year guidance, we've included only a limited number of TACNAV systems from the anticipated large orders in the pipeline. This guidance assumes there will be no significant changes in foreign currency exchange rates.

For 2017, we expect our capital expenditures will be in a range of $14 million to $18 million, slightly less than the high end of $20 million we had estimated earlier in the year. I would like to remind us all again about certain key strategic initiatives that are underway this year that we believe will have meaningful implications for our company in the future. These initiatives include the rollout of new high-throughput satellite or HTS service and hardware; the introduction of AgilePlans, which we've talked about; development of a low-cost FOG for autonomous vehicles; and enhancement of our TACNAV technology to support the critical military demand for A-PNT. We believe 2017 is an important transition year, and these initiatives have the potential to transform the company going forward.

So this concludes our prepared remarks, and I will now turn the call over to the operator to open the line for the Q&A portion of this morning's call. Operator?

(Operator Instructions) And we'll take the first question from the line of Ric Prentiss from Raymond James.

It's Alan actually in for Ric. So looking at the 2017 guidance, you took down the high end by about $6 million. And I believe previously, you guys had assumed that TACNAV orders would be flat from '16 and '17. So I guess my question is what's baked into the guidance now in terms of like revenues from TACNAV?

No. We haven't changed our TACNAV forecast. We think the upside in TACNAV is probably less than it was, but we're still assuming overall TACNAV sales of about $16 million for the year.

Right. So we have booked some other orders. So we actually decreased a little bit the amount within that $16 million that was based on the orders we don't have in hand. So we just kept it flat at the $16 million. So just going into the year, we've got a lot of different parts to our business between mobile connectivity and VSAT and TracVision and training and content. So there's pluses and minuses. So halfway through the year, we tightened the -- tightening the range a little bit.

Okay. And then, if I look at your product gross margin consolidated. It's been kind of 30% to 40% range. How should we think about the gross margin profile of those TACNAV revenues when they do come in?

Well, TACNAV margins are much higher than the average.

Okay. Great. And then my final question is, you talked a little bit about encouragement in terms of the ARPU that you're seeing from the AgilePlans. So and the range of ARPU, it's pretty wide, I think from about like 500 to like 5,000 a month. So and I guess, are those ARPUs different than you would have seen from kind of your historical subscribers? And I guess, where am going with the question is, are you seeing some of the customers that you have kind of using the savings that they generated from avoiding the upfront capital cost, kind of redeploying those savings to take on more bandwidth and more service than they would have historically?

That's a great question. And that's what we -- that is in fact what we're seeing, but it's so early, we don't want to count on that. So as -- and Don mentioned, we record revenue from the time the unit is installed and activated and that takes some time and planning to get the shipment forward. So it's early days, but so far, it's much better than traditional and better than we were thinking. So -- but we'll wait and see whether that is a trend or just an anomaly for early adopters, but so far so good.

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

First, just wanted to follow-up on your answer to that last question, Martin. So could you just clarify what is much better than traditional, when you do an AgilePlans versus a historical plan?

Well, our ARPUs have been in the 1,300 range traditionally. So -- and these were better than that, which was not what we were counting on. And really, I'm just answering the question as it was asked. We don't want to make a point of saying that AgilePlans are going to be double the ARPU. We had counted on them being similar. And initial -- initially, they look better. So that's -- I don't want to overstate it. It's just -- I'm answering the question that we were pleasantly surprised, but we weren't counting on that.

Right. So can you just refresh us on the benefit to KVH of selling a unit as an AgilePlans versus a traditional plan? Obviously, you're giving up the upfront revenue for the equipment. What is the expectation of the benefit that you get, if not higher ARPU?

Well, higher margins. So the margins on the AgilePlans, I think, common misconception people think, oh, they're giving the hardware away, so how they're going to make that up? We're -- we don't use this word in our marketing, but it's -- in fact, it's a rental program. So we're renting the hardware. So we have higher gross margins are built into the AgilePlans for the hardware and the service. So it's a high-margin sale compared to the other model, where you sell the equipment at a relatively low margins and then sell the airtime plans at the 39% average margin that we're reporting today.

Okay. I guess, I thought that the monthly rate or the monthly amount paid by the subscriber was similar under both plans. Is that not the case [on the fulfillment] of your traditional plan?

It's similar. Yes, it is similar, but the quantities are different. So in other words, the -- there's a certain component of the monthly bill that covers the hardware and then there's a certain component that's internally allocated for all the various components, including the content and the gigabytes of data usage. So under the agile model, we see the data usage being incremental to the plans because they're fixed quantity plans.

And the ARPUs -- the margin the ARPU included on -- the component of the ARPU allows us to recover the investment in hardware in 18 to 24 months. That we've -- that's consistent with what we've said in the past. And we're seeing we're off to a very good start. The ARPUs are running -- the ARPUs are running higher. Nicely higher but -- and we hope that, that continues, but it's very early days.

Got it. Appreciate that. And also just wanted to follow-up on the TACNAV orders that you expect to receive and ship this year. I mean, you haven't -- if I'm correct, year-to-date you've seen very little TACNAV revenue, it looks like on the order of $1 million plus if it's on -- looking at this correctly, but you're still looking for $16 million for the year. So how should we think of that split between these last 2 quarters?

We think the big -- we still don't expect and our guidance doesn't anticipate large TACNAV orders in the third quarter. In fact, we expect the big bump we're going to get in the fourth quarter. And you're right. Our total year-to-date TACNAV sales were above $1.3 million.

Right. So the $16 million seems like a pretty big nut for the fourth quarter. Any color you can give around? I think I understand you have a good chunk of that, I believe, already built and sitting in inventory, but can you give any color -- other color around what would enable you to ship such a large amount in one quarter?

Yes. I think off the top of my head I think, around $9 million is unbooked. $9 million or $10 million rather is unbooked, so we do have other backlog that will ship in Q3 and Q4.

Got it. Okay. And Martin, I was wondering if you can you give us an update on the photonics-based FOG. Just -- I think you give us a little update last. What about -- I think you built a prototype with the second spin of the photonic IC. Any further progress to share with us there?

Yes. Nothing -- no big breakthroughs to report yet. During the quarter, we did actually install one of the prototype chips into a gyro. So we're getting core functionality. And as I mentioned last time, the problem to be solved now continues to be insertion loss. And we've got some new foundries who've committed to meeting our specification, which is encouraging. So we're continuing to make steady progress.

Got it. And then Martin, just wonder if you can give us some high-level views of the application of FOGs into the ADAS market and kind of the what level of automation in the ADAS hierarchy you see requiring FOGs and kind of your best guesses of the timing of when cars start shipping commercially with that level of automation?

Yes. I think for us, it's level 3 and higher. So -- and as I've mentioned in the past, there is every single car company and dozens of startups are all focused on this, and all of them have a mixture of different technologies and they vary the emphasis on each component. Some people are doing pure inertial nav-type solutions with collision avoidance. Other people are trying to do pure vision systems. And -- but most of them are using a mix of inertial LiDAR, RADAR, vision, kilometers just a real sensor fusion, which coupled with AI is really in my opinion, the most likely method that's going to succeed. So -- and today, the vast majority of those are using high-end inertial nav systems as a key component of that. So most of the ones that you've read about or seen are using very accurate inertial. So and that's the part where we intend to compete. And as you know, as things transition to automotive production, cost becomes the main driver. So while we think that we've got a great solution today, we don't have the right price point for volume. And that was true with the LiDAR, when they started and it's true with the fiber optic gyros as well. So -- but we think that if we can get the cost down to the $200 to $400 price point, we think that it will be very attractive. And as far as timing, we see this happening because it's such a large opportunity, we think that there'll be some significant volumes even in the early prototype stages. There are 100 million cars built today. You could see 1,000 or 10,000 cars being prototyped through experimental cars or small fleets that operate in cities for autonomous passenger delivery, if you will, rather than cars being sold. I think that will happen sooner rather than later. So internally, we're thinking 2018, 2019 we'll start to see some decent volumes out of this.

Got it. And expectations for this year. I know you'd shipped a decent number, I think close to 1,000 into this market last year. Any thoughts on this year versus last year?

No. I don't think we're going to see much this year. No significant revenues this year. I think that sort of, we've satisfied kind of the prototype markets. And I think that all hands on deck for the next-gen product to transition to this higher quantities of early-stage deliveries. So we see this is a next year-type thing.

We'll take the next question from the line of Jim McIlree from Chardan Capital.

If I can just follow-up on some of Rich's questions on the autonomous market side. Martin, you talked about getting the cost down to $200 to $400 price point. Were you talking about the one FOG, or for the collection of FOGs that would go into an IMU for that market?

That would be for one. As I think that as you, while they have 3 access solutions now, I think that in production, you'll probably able to get away with a single super high-precision sensor and 2 lower-accuracy sensors. So we're -- but everybody has a different solution. Some people are using our 3 access FOGs, but in our mind, we think that's probably where the market will evolve to just for cost reasons. So the answer is that's single access. $200 for single access.

So you think your total content per vehicle would be $200 plus depending on the solution that the specific customer is using?

Right. Yes. And today, a lot of them are -- have fully redundant systems so they put 2 of everything. I mean, 2 batteries, 2 sensors, 2 motor -- I mean, it's just fully redundant. So whether that continues or not, I don't really know.

Right. And so the timing on the completion of the photonic-based FOG. Is that a this year event? Or is that more of an earlier, mid-next year that you would...

Yes. I just want to reiterate that this is an R&D project. So there's no guarantee that it will ever be completed. So this is an important strategic initiative, but it's in the lab. So we think this is going to work. We think it's a great idea, but as you know, with any new technology, there are no guarantees here. So I don't want to give the impression that this is merely an execution. It still -- it's still R&D.

Okay. Understood. But I'm still going to ask the question. So noted that it is an R&D project and you do have risks associated with it...

Yes.

Kind of like if all went well, it would be done by this time? [If it was] done [on] normal kind of things it would be done by this time (inaudible)?

Yes. So I think, if it's not working by next year, then it's probably not going to work. So I think we're at a stage now, where we think we've got a path, and we've got some foundries who say they can do it. And we expect -- we're iterating samples, and it should work. And if it doesn't work, then it's probably not going to. So I think 2018 is still our time frame.

Right. Right. Okay. All right. And I want to make sure I understand what's happening with the AgilePlans? It kind of sounds like it's going faster than -- well, the take up is faster than you expected. First of all, is that correct? And then secondly, I know it's early, but do you have an estimate? Or can you share an estimate as to when you think the AgilePlans, as a percent of total shipments, would max so like a when and at what level?

Well, our long-term goal was 50%, like we wanted -- we thought we'd be successful if half our sales were AgilePlans. Now keep in mind that it's not offered in the leisure market because leisure is a fleet product for commercial customers. And leisure markets really don't -- we don't think this is the right product offering for the private boat owner. And then, today, those are about 40% of our sales. So we expect that the majority of the commercial market will go that way. And we're off to a really good start in commercial.

Right. So just from a -- and I'm asking from a modeling standpoint. Because it seems like if the take up or the penetration of the AgilePlans has a steeper curve, then we'll probably see bigger than originally estimated drop on a year-over-year basis, but that will recover sooner as well. And that's how I'm thinking of it? Is that a fair way to think about it?

Right. Yes. That's how we're thinking of it as well because since this isn't a free hardware deal, it's a recurring revenue hardware deal, so that as time marches on, every month, now you're recording the hardware revenue from everything you sold in the previous month and then month 3, it adds to that. So you're definitely thinking about it the right way. So it eventually, it will equal even if sales don't increase, it will -- after, call it 4 years -- the hardware portion of our reported revenue will -- is identical to what it was if you were selling them.

Like any software subscription model, it compounds. So new activations this month and compound next month, so we have new activations next month plus this month and it just continues to climb that way. So over time, we get to a point I just described. A good portion of our revenue -- significant portion of our revenue will be from the subscription model.

Okay. And Martin, you talked about an HTS product. Is there an introduction date that you can share with us?

No. We're thinking this is something that we're working on for launch later this year -- towards the end of the year. So it's going to be a smooth transition as an overlay bringing higher speeds and lower costs for us. And the expectation is that all of our product offerings eventually will be part of our AgilePlans. So it will only be a continuum. We expect those 2 things to work together hopefully, to make the offering even more attractive.

Right. That makes sense. Okay. And just one more back to the FOG and the autonomous vehicle. So let's assume the worst that the R&D project doesn't succeed. Then what are -- are you just stuck with -- -- not stuck, but you're going to have a niche product or that will be a niche market for you, the autonomous market or is there a...

Yes. I think that for maybe for larger platforms like self-driving, 18 wheelers or buses, or people movers then a $2,000 solution might be fine. But for the mass market, we're talking millions or tens of millions. Realistically, I don't think that would fly. So I don't know if that answers your question but?

It does. It does.

(Operator Instructions) And we'll take the next question from Chris Quilty from Quilty Analytics.

Don, I was hoping you could give us maybe a little bit more granularity on Q3 rev -- your guidance has revenues up sequentially, but profitability down significantly and you had really good OpEx performance in Q2. Is that just moving back up to more historical levels, or things going on there in the gross margins?

Yes. But we're still -- moving back I guess, a little bit to historical. So we're also -- we've said all year long, we expect our operating expenses to increase year-over-year by about $10 million. We capped that a bit in the first half of the year, but we expect that we'll see some of the spending increases that we talked about come in the third quarter. So that's probably the biggest reason why quarter-to-quarter, revenues will be -- revenues will be higher, but our profitability will be below. Remember, last year, too, revenues will be -- I'll take that back, revenues will be lower, profit will be much lower. Remember last year, we had some significant TACNAV business, which I mentioned already is very high-margin business, so that makes the year-over-year comparison a bit more of a challenge.

Was your question sequentially Chris, or year-over-year?

Well, no, just on an absolute basis, the net loss you guided to is much wider. And I was just trying to figure whether that's more on the cost side or the margin side that's driving it on a sequential basis?

Sequentially, okay. So I'd say it's more on the cost side. Our margin should be -- our margins for the third quarter will be consistent with the second quarter. So it's -- we expect higher operating expenses in the third quarter. Higher R&D.

(technical difficulty)

Okay. Shifting gears, maybe this metric isn't as important anymore, but the net additions that you brought in the quarter. I think you said that the overall year-over-year shipped count was up 6%, but on a quarterly basis, are you still kind of running in that 200 to 250 range?

Yes. We're still in that range. And I think that's the big goal here is to start to gain momentum with AgilePlans and start to break out of that range, and we think the HTS will help with that as well. And we are still operating as you know in a challenging market. So we are still in the Marine market, which commercial shipping is not doing that well and the oil and gas which has stabilized, I don't think anybody would say it's recovered so.

Got you. And with regard to the competitive situation, have you seen anybody offer capabilities similar to what you've done with the AgilePlans or [some other] response in the market?

No, we haven't. I think that the -- our bundle is pretty unique. And I don't think anyone else is going to be able to offer what we're offering. So the only alternative is they can drop prices further. And that really speaks to why we did this. Is that we have a differentiated service offering, and we intend to keep selling on our features and not try and get into a price war on who's got the cheapest megabyte. So it's really a -- and it's starting to resonate with customers. We're really encouraged. Sales team's excited, customers love it. So we think we've done the right thing here.

Got you. And on the AgilePlans, I did this math on my head, so maybe dangerous, but it sounds like about 80% of the people that could take an AgilePlans did in the quarter. Is that -- first of all was that correct?

No. No, that's not correct. I think it's around 40%. So you exclude leisure and you exclude V3s, so it was about 40% in the 2/3 of the quarter, when we start -- from the time we announced in mid-April so.

Got you. And what's the reason why somebody would not take up the plan?

Some people have a CapEx budget, and they want to buy it. And they want to own it. They don't need the flexibility because they own their own fleet. The people who really like this are fleet management companies, where they're operating and that's a big segment of the market. Ship management companies. They don't have 3-year contracts with their customers. They may have balance for another 9 months. They expect it to be renewed, but there's no guarantee. So they can't go out and buy CapEx and put it on for 3-year -- on a 3-year plan because they may not have the vessel after 9 months. So -- but there are still people who own their own fleet and they like to buy, and we have no trouble selling them the hardware too. A little bit like the SaaS model. Software companies. We just did a deal with IBM and they said, hey, do you want it on-premise, or do you want it in the cloud? And they offered it both ways, and we made a decision. So I think it's fine for people who want to buy the hardware.

Okay. All right. Don, did you give the number for the mini-VSAT revenues in the quarter, airtime revenues?

I don't know if I did. I can give it to you, I think. Hold on a second. It's about $16.5 million if memory serves. Or let me just make sure. Yes, $16.5 million for the quarter.

$1 million up.

That was up $1 million versus last year.

Thank you. It appears, there are no further questions at this time. Mr. Reilly, I would like to turn the conference back to you for any additional or closing remarks.

Okay. Well, thank you, everybody, for your interest and being on the call today. Martin and I will be happy to take any calls later or answer any questions that may come through.

Thank you.

And this concludes today's call. Thank you for your participation. You may now disconnect.