KVH Industries Inc (KVHI) 2020 Q1 法說會逐字稿

Good day, and welcome to the KVH Industries First Quarter 2020 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.

Thank you, operator. Good morning, everyone. Thanks for joining us today to discuss KVH Industries' first quarter results, which are included in the earnings release we published this morning.

With me on this call is Martin Kits Van Heyningen, company's Chief Executive Officer; and Brent Bruun, our Chief Operating 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 to ir@kvh.com.

This conference call will contain certain forward-looking statements that are subject to many assumptions and uncertainties and 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'll also update certain non-GAAP financial measures. 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 typically those under the heading Risk Factors in our 2019 Form 10-K, which was filed on February 28, and our 10-Q, which is expected to be filed this afternoon and the company's other SEC filings, which are available directly from the Investor Relations -- excuse me, the Invest Information section of our website.

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

Thanks, Don, and good morning, everyone. Thank you for joining us today. Let's get started. The -- despite the impact of the pandemic on the global economy during the quarter, we're pleased to have delivered fourth quarter results in line with our guidance. Total revenue was up 1% to $36.6 million, with a GAAP net loss of $0.35 per share compared to a net loss of $0.37 per share in the first quarter of last year.

We also made good progress on all of our key strategic initiatives this quarter. While we began the year strong, our business, like almost every business in the world, now faces unprecedented challenges and uncertainty as a result of the current health crisis. However, our core business model, the diversification of our company and the underlying long-term demand fundamentals are assets for KVH.

When COVID-19 was declared a pandemic, KVH already had action plans in place. As a global technology company, we have the infrastructure in place already for most of our workforce to work from home, enabling us to continue providing 24/7 service support.

As an essential business, for both telecommunication services and defense navigation products, we've maintained full operations at both of our factories, of course, with modifications for social distancing, extra cleaning, protective masks and gloves for worker safety.

On today's call, we'll provide more details on how we're faring with our diverse operations, discuss the recent ongoing impact of the COVID economic situation and provide details on how we're managing our business to weather this pandemic.

In the maritime market, airtime revenue for the quarter was up 5% or $900,000 compared to the first quarter of last year. Total VSAT shipments were up 12% versus the same period last year, and we increased our subscriber base by 10% over the same period. Given everything that happened in Q1, we're really proud of those stats.

Our AgilePlans product shipments grew 19% versus Q1 of last year and amounted to 78% of total commercial VSAT shipments. First quarter AgilePlans revenues were up 85% compared to the same period last year. These results illustrate that we carried our momentum from the fourth quarter into the new year. However, starting in mid-February, we began to experience some impacts from the pandemic, most notably in the Asia Pacific region, as we mentioned in our last call.

Beginning in mid-March, the commercial maritime industry had experienced a significant slowdown as seen by the decline in daily commercial shipping port calls from an average of around 26,000 per day to a low just before 14,000 3 weeks ago. Some ports have been closed and vessels have been put on new restrictions, limiting onboard access by people who are not crew members.

Nevertheless, our field service techs, together with our robust global network of service providers and technical dealers, continue to carry out installations of new systems and support existing products while complying with the new regulations and restrictions. Sales and service activities also continue, but the process has been slowed.

On the leisure mobile connectivity front, European boat builders, marine dealers and even marinas started closing beginning in March. Lockdown requirements and closing of Beach and marine access has also limited activity in much of the United States. And all of the major spring boat shows scheduled from March through June have been canceled or postponed until fall. As a result, the leisure boating season is getting off to a record slow start.

Despite these factors, which are outside our control, we continue to focus on bringing innovative products to market. In February, we expanded our successful AgilePlans lines with the new AgilePlans regional service. It's targeted at smaller commercial vessels and operate in coastal waters and don't need -- have a need for global travel. This new service employs the same model as our original AgilePlans, now known as AgilePlans Global to deliver an all-inclusive, no commitment SATCOM solution using our small 14-inch TracPhone V3-HTS.

On its introduction, we saw immediate interest in this new product, not only from the Americas and Europe, but also in new markets like Indonesia. The smaller vessels and smaller fleets that we identified as a significant growth opportunity found the compact design, fast data speeds and starting cost of only $4.99 a month, very appealing.

Unfortunately, these smaller companies were the -- were very disrupted by the pandemic, and the momentum of this launch was slowed. We're still quite optimistic that these opportunities have simply shifted to the right. Now on the other hand, demand for AgilePlans Global continues to be strong. There, the issue is getting systems installed due to travel and port restrictions. In fact, we now have a backlog of AgilePlans installations in excess of 200 systems, which is actually very encouraging.

Just as important is the current status of our existing AgilePlans subscribers. AgilePlans offers exceptional flexibility for our customers as it has no contract. Subscribers can simply take the system off and send it back if they wish to end their service. However, that is not happening. There has been no increase in AgilePlans churn during Q1 or so far in Q2.

What we are seeing is a slight increase in suspensions year-over-year, along with a slower pace of reactivations from seasonal suspensions compared to this time last year. We believe the reactivation timing is a result of delayed openings of marinas and a slower return to seasonal operations for smaller commercial vessels. It's also important to note that activations are still higher than terminations as our overall subscriber base continues to experience net growth of 10% for the quarter.

We're also observing a trend of increased data usage from our VSAT customers. Just as most of us are working from home and depending on more bandwidth to stay connected for business, school and with friends and family, fleets and crew are experiencing a similar demand for more data. They need the bandwidth to support continuing operations as well as increased connectivity for the crew, most of whom are being denied shore leave for health and safety considerations. In fact, most crew rotations have been delayed or suspended, further increasing bandwidth demands for these crew.

KVH is in an excellent position to assist these customers. First, our new KVH Link multicast content service went live at the end of January, delivering an experience similar to home streaming services based on curated content, which includes movies, TV, daily print and TV news, music, karaoke, viral videos and more. Every KVH TracPhone V7 or V11 system is fully compatible with KVH Link. As a result, we're activating new subscriptions and delivering content to vessels remotely. This product just happened to launch at exactly the right time for people, hungry for news about the pandemic and hungry for entertainment to escape the news about the pandemic.

In addition, we launched several new maritime initiatives in response to the situation. These programs include free calls for the -- to the International Seafarers' Welfare helpline from any KVH-equipped vessel, free daily news delivery to any commercial ship that request it, whether it's a KVH customer or not. In fact, more than 100 new vessels are currently trialing our new digital news service.

We're also offering discounts on prepaid crew calling cards, so it's more affordable for crew members to stay in touch with home, and on data plan upgrades to support expanded bandwidth needs. This incremental upgrade program has been a huge success with more than 400 vessels increasing their monthly data plans in the last 6 weeks, boosting the monthly recurring charge for the upcoming Q2. That increased demand for airtime may also carry over into the leisure market when that restarts. That's why we announced yesterday the expansion of our new KVH Elite unlimited HD streaming service for larger yachts.

While the service continues to be available in the Caribbean, it will also go live in the Mediterranean, Adriatic and Black Sea starting on June 1. Of course, this assumes that we'll see a gradual reopening of the leisure marine market in Europe.

And finally, in the commercial market, we continue to make good progress with our KVH Watch IoT service. The opportunities for this product are increasing, as fleets are recognizing the critical need for remote intervention that connects engineers onshore with crew on board, especially in the situation in which it's impossible to get a technician on board the vessel to assist with troubleshooting and repairs.

Our IoT webinar, a few weeks ago, was heavily attended by fleet managers, service providers and equipment makers. We're receiving positive feedback from the full range of potential customers for IoT, and we expect to be making new service announcement later this quarter. Again, we're taking this opportunity to push KVH forward even while the market is paused.

As we look ahead to the remainder of Q2 and the marine industry going forward, we're seeing some evidence that the market is beginning to open up. Leisure marinas in Europe are making plans to resume operations. Many dealers in Florida have reopened this week. And several states here in the U.S. already easing restrictions that make it easier for people to get out on their boats.

One encouraging sign within the commercial market is that the daily port calls have been trending back up after hitting a low of just below 14,000 3 weeks ago. Daily port calls have steadily climbed back above 20,000, consistently for most of the past week. That's still down from the historical norm, but it's showing some improvement.

Moving on to our Inertial Nav business, Fiber Optic Gyro product sales were up $400,000 or 9% in the first quarter of last year. Likewise, TACNAV military products were also up $400,000 versus last year.

As with our communication services, we're designated as an essential business for our military products, some of which include our FOG technology. Now Fiber Optic Gyro sales have been a bright spot during this crisis. We have a healthy backlog for our commercial FOG products, and we continue to see strong bookings in April. We also still anticipate receiving 1 or more major TACNAV orders that we mentioned in our last call.

Now Western defense budgets have not been impacted by the crisis. The potential orders from the Middle East, however, should be considered at higher risk due to the low oil price and the potential impact on defense budgets in the region.

Our biggest initiative in the Inertial business is, of course, the release of our Photonic Integrated Chip, or PIC. We've been working on the development of this technology for more than 2 years and did not let up during the quarter. We're now moving into the product integration phase. Our PIC overcomes numerous technological obstacles to meet the demanding requirements for autonomous platforms by incorporating complex elements onto a chip to maintain or improve accuracy and performance as well as simplified production and remove handwork from the process.

I'm pleased to report that the first PIC-based gyro shipped at the end of March for a military customer. This is a tremendous milestone and achievement by our engineering and R&D teams. We're now continuing the integration of PIC into our existing product lines and are in the final phase of product release. We anticipate that the first commercial production IMUs with the PIC inside will ship later this quarter. That's about a month later than we expected, but given that most of the staff is working from home, it's still incredibly impressive. By the end of 2020, we still expect that all of our FOG-based products will have the PIC inside.

So our progress in the first quarter is tempered by the challenges facing us in the coming months due to the economic environment resulting from the pandemic. KVH remains fully operational. We anticipated potential disruptions and took proactive steps to ensure business continuity.

For example, we bought laptops for all our call center staff in the Philippines in case there would be a shutdown. So when the lockdown happened suddenly in Manila, we had already practiced working remotely. We continue to deliver 24/7 support and service safely for our customers, while maintaining all functions of our network operations center and teleports.

Our Mobile Connectivity and Inertial Navigation manufacturing facilities remain open with employees following stringent health and safety guidelines. We're determined to maintain our workforce during this time to support our current customers and to focus on our strategic initiatives. Thus far, we've been able to avoid layoffs.

The economy in rapid decline and the course through the pandemic still to be charted, we're taking unprecedented measures to align our cost with the current business environment. To that end, we're reducing executive salaries and bonuses temporarily, reducing nonexecutive salaries and trimming other forms of employee compensation. We've eliminated most discretionary spending, and delaying most capital outlays, except those that are in connection with our AgilePlans program and our PIC initiatives. And we're taking steps now to ensure our liquidity in the future.

Our team's morale is high, and we're working harder than ever to exit the crisis in a far stronger position relative to our competitors than how we entered it. The disruption caused by the COVID pandemic will be with us for some time, and we'll all be adapting to whatever the new normal becomes. We continue to compartmentalize the global economic reality to which we must adapt and the internal products and services, which we can control. The questions that we face are not about the underlying long-term fundamentals of our products and services, but rather the pace of recovery of the broader economy.

Given the many unknowns of the economic situation, we're suspending guidance for the rest of the year. I believe that KVH remains in a strong position, thanks to our diverse and essential business, our successful transition to a service and subscription-based business model and a clear and continuing demand for connectivity and improved precision navigation.

So now I'd like to turn the call back over to Don to give some detail on the numbers. Don?

Thank you, Martin. As Martin mentioned earlier, we were off to a good start in the first quarter. Our results were generally in line with our expectations, and we made good progress on the key -- on the execution of the key initiatives that we believe will be the source of meaningful revenue and earnings growth in the future.

And we did start to see and feel the impact of the COVID-19 global pandemic before the end of the quarter. Blue water's marine products began to slow, regardless for our Inertial Navigation products. Our installation rate for Agile products slowed down due to the difficulty experienced by installation crews trying to get to vessels.

I'll talk more about the impacts of this pandemic on our business in just a minute. But first, allow me to summarize our results for the quarter. As you know, we concluded the Videotel -- the Videotel disposition in the second quarter of 2019, met the criteria of a discontinued operation and we've reflected it that way in our earnings release and in our 10-Q, which we'll file here today.

Our first quarter revenue was $36.6 million, a slight increase from our 2019 first quarter, which is $36.4 million and was within our guidance range. Revenue from our Mobile Connectivity segment remained flat year-over-year, while our Inertial Navigation revenue increased slightly from the prior year's first quarter.

Product revenue for the first quarter was $13.1 million, about even with the first quarter of the prior year. By segment, product revenues in our Mobile Connectivity segment decreased by $800,000 or 11%, while product revenues in our Inertial Navigation segment increased about $700,000 or 12%. And within our Inertial Navigation segment, our FOG business increased about $400,000 or 9% compared to last year. And our TACNAV sales also increased about $400,000 or 46%.

In our Mobile Connectivity segment, the decline in product sales was driven mostly by a decrease in marine Mobile Connectivity product revenue. With respect to the Agile program, as Martin mentioned, shipments increased to 19% compared to the first quarter of 2019, 63% of our total unit shipments this quarter, representing 63% of our total unit shipments this quarter, 78% of our commercial shipments.

Service revenues for the first quarter were about $300,000 or 1% -- increased, excuse me, about $300,000 or 1% to $23.5 million from $23.2 million in the first quarter of last year. In our Mobile Connectivity segment, airtime service revenues increased $900,000 or 5% compared to the first quarter last year due to a 10% increase in airtime subscribers, largely as a result of the continuing momentum of our AgilePlans program.

In our Inertial Navigation segment, contract engineering service revenue decreased about $500,000 compared to last year. And for the first quarter, our consolidated gross profit margin was just over 32% as compared with 35% last year. From a segment perspective, our Mobile Connectivity gross margin was about 33%, in line with last year, and our Inertial Navigation gross margin was just under 30%.

Operating expenses for the quarter were $19.4 million, up slightly from $19 million in the first quarter of last year. So for the first quarter, these changes in revenue, margins and operating expenses resulted in a loss from operations of $7.6 million compared to loss of $6.2 million we recorded in Q1 2019.

Mobile Connectivity segment generated an operating loss of $2.3 million compared with an operating loss of $1.4 million last year, while our Inertial Navigation segment had an operating loss of $800,000 for the quarter compared to a profit of $400,000 last year. And our unallocated loss was $4.5 million compared to last year's $5.2 million.

For the first quarter, our net loss was $6.2 million as compared with a net loss of $6.5 million recorded in the same period last year. And on a non-GAAP basis, which excludes amortization of intangibles, stock-based compensation, transaction-related and other nonrecurring legal fees, foreign exchange transaction gains and losses, tax effect of the foregoing and changes in our valuation allowance and other tax adjustments, we had a net loss of $4.3 million compared to a net loss of $3.8 million last year.

EPS for the first quarter was a net loss of $0.35 per share compared to a net loss of $0.38 per share in the same period last year. Non-GAAP EPS loss for the first quarter was $0.25 per share compared to a non-GAAP EPS loss of $0.22 per share last year.

Our adjusted EBITDA for the quarter was a loss of $3.7 million compared to the loss of $2.8 million recorded in the first quarter of 2019.

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 the first quarter was $22.6 million, of which approximately $16.9 million is scheduled to be delivered during 2020. Backlog for our Inertial Navigation products and services at the end of March was approximately $20.3 million, of which approximately $14.6 million is scheduled to be delivered during 2020, which includes about $11.8 million for FOG products alone.

Net cash used in operations was $2.9 million compared to $1.1 million from last year. Capital expenditures for the quarter were $3.3 million. We have no outstanding short-term or long-term debt other than normal levels of accounts payable and accrued expenses. And we ended our first quarter with a strong cash position of over $41 million.

Our cash collections for the quarter were fine. We saw no noticeable increase -- delay in payments or increase or deterioration in the aging of our receivables.

I would like to share a few more thoughts about the COVID-19 pandemic that has impacted KVH and just about every other company in the world, who's driven the economy into recession. As Martin said, we are about as well positioned as we could be to withstand the impact of the pandemic. We have a very diversified and global business and had already taken steps to prepare for this health crisis before it became the global threat that it is today.

I know everyone listening to this call and is fully aware of how the world has changed as a result of the pandemic and as a result of the actions that businesses and governments all over the world have taken in response to it. As I am sure you can appreciate, the health crisis has impacted many of our customers and our suppliers in both of our segments. So understandably, the pandemic may have a material adverse effect on our revenues, results of operations and our financial condition for the foreseeable future.

The extent to which the pandemic will impact our business will depend on many factors beyond our control, which I'm sure everyone is aware of, including, among other things, is development and implementation of effective treatment and preventative measures; importantly, the scope of governmental assistance made available to us or companies be engaged with; and the duration of restrictions on travel and trade and other economic activities.

In light of the significant uncertainty that we all face, it's currently not possible to forecast or estimate with reasonable assurance what the impact will be in our revenues and earnings, especially in the short and medium term. So as Martin said, we've withdrawn our guidance for this year, and we'll refrain from providing guidance -- updated guidance until we have a clear picture of how significantly and for how long the pandemic will affect us.

This concludes our prepared remarks. And I'll 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)

We'll take our first question from Ric Prentiss from Raymond James.

Hope you and your family, employees are safe through this difficult and crazy times. First, did you guys apply for and get any of the PPP money that was offered out there?

We applied early on in the first round before the money ran out, and we did not get any money.

Second question. As you think about the trends that you saw in January, February and then into March and April, any further detail you can lay out for us as far as what you've seen in April as far as AgilePlans subscriptions, termination? Any change in kind of how the ARPU flows through on that side?

Yes. So the AgilePlans has been a continuing bright spot. So here, we still see daily bookings that are -- I feel look very good. The quarter was better than the year earlier quarter. So the daily bookings for Agile looked good. ARPUs are the same or slightly better. No increase in terminations or suspensions for Agile compared to prior years. So that part of the business is subscription-based. And what we've been monitoring very closely is to see if there's any uptick in terminations in the subscription business or increased churn with Agile, and that hasn't happened. So so far so good there. And as I mentioned on the call, the challenge is -- actually, we've got good demand. The challenge is getting the ships into port, and a lot of companies don't let people who aren't crew members on board, nobody comes on or off the ship right now. So that's been a challenge.

And Don, you mentioned that you're not seeing cash collection decline in the first quarter. Is that across all the different segments, Agile, other services, product revenue? I assume most of the auditors out there this quarter are having people look in particular about any reserves that might need to be taken.

That's correct. The auditors are. They did a much deeper dive than you might normally expect for our quarterly review. But no, Ric, we haven't seen any real significant change in the trend of collections or a deterioration in our receivables in either of our segments at this point. A couple of customers have reached out to us for accommodations, which we've granted, but no real trend, significant trend or a negative trend in our receivables collections or the quality of our receivables at this point.

Okay. I assume that you're talking about like payment plan, sounds like in payment over time?

Exactly. Yes. And really, it's smaller customers and not large amounts.

And Martin, you talked a little bit in the beginning, obviously, looking at all your costs out there. How should we think about the variability versus fixed nature of the cost if we think of the services business, the product, hardware business and then kind of your corporate SG&A, product development, et cetera?

Well, I'd say the majority of our costs are fixed, especially now, because as cost (inaudible) we're -- might have had some variability to them, we've cut back on -- we cut back on them early. Our service -- our airtime service business, as you know, has a substantial fixed component to it, which is -- that's the idea of the model so that we can benefit from airtime revenue growth directly at the margin lines. So a lot -- not entirely fixed to cost, but a large fixed component there. Our overall G&A is fixed within ranges. As Martin mentioned, we implemented across the Board salary reductions recently. So clearly, it's not fixed, if -- you can do that, but -- so to the extent that we can reduce those fixed costs we have.

R&D cost is a significant -- one of our most significant operating costs. And you could think about those as a variable, if you like, but where we cut back in R&D, it's likely a long-term negative impact associated with that. So we've tried not to do that, and we'll continue to try not it to impact R&D.

Sales and marketing costs have a fixed and a variable component. The variable component is commissions and travel and other sales-type costs, but there's also a fairly -- from maybe half or 3 quarters our sales costs are fixed in nature.

So if we think about the -- go ahead.

No, so I was asking if that answered your question.

It does. Just trying to also think from a high level and not with guidance, obviously, since there isn't any, but how much burn rate do you think the business might come under as we look out over the next coming quarters as we try to find what the depth and duration that the pandemic is.

Well, we've -- as we've said a couple of times now, we've taken whatever steps we can take at this point or a lot of steps anyways, there's probably more we can do, but to lower the burn rate. So I certainly expect the burn rate in the second quarter will be a lot less than the burn rate in the first quarter, likewise through third and the fourth quarter. So we should end the year -- and without giving guidance, we should the end of the year with enough cash to enter 2021 with a lot of momentum, and continue some of the investments that we need to make to hit the revenue and earnings growth targets that we're all excited about.

Yes. I think at a high level, we've taken the steps that we need to take that we feel comfortably get us through the years. In other words, we don't feel that there's more to be done. We feel that we don't have perfect visibility beyond what we've seen today. But based on what we see today, we feel comfortable that the steps that we've taken will be more than adequate.

It makes sense, nice that you have that pool of cash in there.

Yes.

Yes.

We will take our next question from Christopher Van Horn from B. Riley FBR.

I just wondered if you could talk about the competitive environment, and if you're seeing some market share opportunities as some of your competitors maybe struggle in these times.

Yes. We've definitely seen that we've been approached by some mid- to large fleets who were with some of our competitors and no longer feel comfortable with those companies. So we definitely see that as a short-term opportunity. So we're being very accommodating there to try and bring those fleets on board. So one of the things we're actually looking at is whether we can quickly move people who aren't using KVH antennas on board.

So that's an area that we're exploring. So people who have a need -- urgent need to switch to us, and we can't get on their vessels quickly to put new KVH antennas on. We're looking at reusing, repurposing the equipment that's already there, and we've done some tests on that, it seems to work. So that might be a way to rapidly migrate some of those customers.

Okay. Got it. And then sort of on that front, it seems like the adoption of AgilePlans is going well. Is it the competitive factors that you've cited in the past or is there something else at play more recently that's driving that?

No, I think it's just a continuation. And if anything, it may be that I think -- when you look at the ripple through -- ripple down effects of everything that happens, it happens to our suppliers happens to us, what happens to our customers, which happens to their customers. So it could be simply that shipping companies are looking at their own cash flow and think, geez, I don't really want to invest in these expensive products today, that AgilePlans sure looks pretty good. And if I lose a charter or something, I could just send it back. And this seems like a better move. So if you notice that our percentage of units that went out in the commercial market, I believe it was up to 78% was Agile this quarter. So I think it may be that this business model is even more attractive right now.

Got it. Okay. And then on the FOG opportunity set, both from a government and commercial perspective, talking to OEMs on the automotive side as well as defense contractors, there's talks of things are going -- in terms of the pipeline for autonomous or the spending on defense hardware, things are going maybe a little bit shift to the right, but still happening. Those conversations are still happening. And others are saying that things are deferred even longer than that. Could you just maybe update us on the pipeline for FOG and TACNAV?

So as I said in the prepared remarks, the FOG has been a real area of bright spot. So we've seen very strong bookings. We've got an $11 million backlog for FOG products. So that's actually gone pretty well. So we're very happy with that. And if that momentum can continue through the second quarter, then as we recover -- as the economy recovers, I think we'll be in good shape.

On the defense side, we haven't seen any programs slipping to the right. Their budgets aren't impacted. We have seen a few programs where they had some field trials, testing that they wanted to do that were postponed because they didn't want to have people gathering to do a test, but I think that's temporary. But we see no push out in any of our defense programs.

As far as the autonomous stuff goes, I think that's really on a time scale that I think won't be impacted by this, meaning that if you think this pandemic last till -- even until the end of the year, that's not long enough to impact the time scales for mass adoption of autonomous vehicles. So I think that's not going to have an impact there. And then the whole idea of peopleless driver and vehicles is probably going to be more attractive in the future as opposed to less.

We will take our next question from Chris Quilty from Quilty Analytics.

Chris, can't hear you. You might be on mute.

Yes, there we go. There's a phone problem. So just a follow-up on Ric's question earlier about SG&A and hard to know when things pick up. But if you assume maybe on a full year basis, we finish out at 70% of -- or 60% of where we thought we would be, things get moving in the fall. You had talked about, Don, about a $10 million year-over-year planned increase in SG&A spending. Is it fair to assume that a significant portion of that increase, things like marketing and trade shows, that were planned will get cut back, and so you could -- sure, it's not a dollar for dollar, but a significant portion of that could be scaled back?

It's a fair assumption, absolutely. Yes.

Yes. I think it's fair to say that we're doing everything we can to bring that increase as close to 0 as possible.

And I'm going to correct myself a little bit, when Ric asked the question earlier about cash burn in the second quarter, I should have been more specific. Our operating expense cash burn in the second quarter will be less than the first quarter. However, all cash balance will probably decline. It's probably in the neighborhood -- somewhere in the neighborhood of what we saw in the first quarter and then hopefully stabilize after that.

Okay. So coming back to the marketing spend, and you already mentioned that you see some competitive opportunities. Where might you opportunistically choose to spend more money? Is it simply AgilePlans? The fact that you're subsidizing the CapEx outlay for the customer, is that probably the single biggest area where you think you can use your balance sheet, which is an advantage relative to many of your competitors?

Yes. I think that's true. And I think it's probably too early to say. But right now, my theory is, that's why we're seeing the increased demand in Agile, is that our customers are becoming more risk-averse and just hedging their bets with short-term contracts or no contract with Agile.

And as we recall from 2008, 2009, sort of everybody assumed that they were going to lose their job and everything -- the assumption was that everything would be horrible. And I think for shipping companies today, they may be assuming the same thing, they're going to lose all of their charters, but they won't. And if they lose 5% or 10%, that's built into our model. So I think we've got a really attractive offering here that offloads the risk, and it doesn't really mean a lot of incremental risk for us. So we're really comfortable with where we are with that product offering.

Great. Switching gears over to the TACNAV side of the business. I think you had previously talked about 4 to 5 big orders, and it sounds like the Middle East is probably a no go, given the current environment. How many of those 4 or 5 were specific to the Middle East?

2. 2, and one that we're closest to right now is in North America. So...

Got you. And likewise, on the FOG business, you seem to indicate that it's going well. And I think you had previously talked about mid- to high single-digit growth for the business. Is it -- are you hoping to maintain that guidance based upon what you're currently seeing?

Well, I wouldn't call it guidance, but we did increase, I believe, the figure was 9% in Q1. So we are optimistic that the FOG business will continue to do well. But doing well in this economy, I mean, in the last 6 weeks, has a different definition than it did in January. So I think doing well now is generating millions of dollars of revenue, not necessarily solid growth every quarter.

And our backlog, Chris, is still pretty strong. It's almost $12 million, $11.8 million of shipment this year for FOG products. So that's a good number given the environment.

Okay. And Don, maybe I missed it. Did you give the entire, not just for FOG, but for Inertial Nav?

I did. But I'll give it again. Our total backlog was $22.6 million, just under $17 million of that scheduled to be delivered this year. Inertial -- our backlog for Navigation -- Inertial Navigation was $20.3 million, and about $14.6 million of that is scheduled to be delivered this year. And again, $11.8 million of that is FOG.

Okay. And while we're at it, the -- can you give us the mini-VSAT airtime revenues and margin in the quarter?

Sure. The revenues were about $19.2 million. Volume was just over 32%.

And at one point in the past, you had been targeting gross margins pushing up towards 40%. Is there still a prospect, given the current situation of that still being a target sometime within the next 6 to 12 months?

In that time table, yes, but not sooner.

And again, because building off the earlier comment is that a lot of those costs are fixed. So part of that answer depends on revenue growth. So if the revenues continue to grow, they were up 5% this quarter, which is good, but not fantastic. So -- but as the revenues continue to grow and compound and the cost stay relatively fixed, and those margins will continue to improve. And I think we're probably -- optimistically, but we do expect margins to improve here in Q2 for the airtime business.

Got it. And final question. I know it's still early days with the KVH Watch deployments and testing and whatnot. But it just seems like if you had launched that product a year earlier, the demand for it now would just be overwhelming in terms of the ability for these equipment providers to remotely access equipment that they can't get to now.

Yes.

Are there efforts underway to accelerate that? Or is it just not possible given the normal testing that you need to do and the restrictions on your -- your internal ability to work with customers in testing in the field?

Well, we're doing 2 things. One is that we haven't cut back our development efforts for that product at all. So we're still pedal to the metal, working on the KVH Watch product and service and family of services.

We're also looking at whether we can perhaps accelerate some of those features and deploy them to our existing customer base who have V7-HTS antennas on board. So then those would not necessarily be for equipment manufacturers, which is the target for the Watch product, but we're still seeing that there's a lot of demand for just remote expert and intervention for our existing custom set. So that, I think, might be the nearer-term opportunity as well because you don't need to visit the vessel to deploy it.

We will now take our next question from Rich Valera from Needham.

So Martin, as you've drilled down into each one of these businesses, it actually sounds like things are either largely on track, like I'd say, in Inertial or maybe stabilizing at the margin may be getting better if I think about the mini-VSAT business. So just trying to reconcile that with the pulling of guidance and trying to understand maybe what you're seeing in the last month that makes you think things could maybe get worse? And which parts of the business are you most concerned about possibly getting worse? Can you give any color on that?

Sure. Yes. So just to be clear, I'm answering specific questions about specific product lines and models. So -- but you're right, there was a disconnect between those answers and the general risk to the business and risk to the overall performance of the company. So for example, the leisure marine market, we actually had some booking stays that were literally 0, and that's never happened in the history of the company. I mean, like $0 and $0.00. So all the marine stores are closed, the dealers are closed, the boat builders in Europe, all the Italians -- big Italian boat builders were closed. U.S. Boat builders were closed. So that's an epic disaster, and that's gone on now for 5 or 6 weeks.

Now we see that boat builders are starting to open and retail shops are starting to come back. So those parts of our business, as it relates to like product hardware, we're very, very, very impacted. Now going forward, is it going to get worse? We don't think so. We think it will get better, but we don't know how fast. People going to run out and buy boats, the way they did before? We hope so. Is that going to continue until the end of the year? We don't know.

So -- but the beauty of our business is that we have this diversification. A lot of people over the years have asked, why are you still in the NAV business? Why do you have military business? That doesn't seem to go with it. Thank God, that we do because we have a business that's very resilient and it's diversified. So parts of the business are doing pretty good, but not all of the business. But the parts that are doing poorly, we expect the poorness to be transient. So there's -- obviously, we're not selling products to boat builders that aren't building boats. Now those guys are coming back online, and we expect to start shipping again.

Got it. That's helpful.

I hope that answers your question, but...

Yes, yes. No, that's definitely helpful color. I think, yes, the leisure marine business is one that would stand out as likely being very, very hard hit here. Just drilling into the mini-VSAT business. I'm just wondering if you can give any more color on what you saw in the month of April relative to -- you had a really solid quarter, right, for the month -- I'm sorry, for the March quarter. And I'm guessing that the trajectory there was sort of some deterioration, at least as you went into March and into April. And just trying -- I think you would have taken the month of April and kind of times it by 3, is there any kind of rough estimate you could give us on what that quarter would look like in terms of kind of nets of adds? Or the number you gave us where you actually had a, I guess, 10% growth in units year-over-year, if there's any way you can give us a sense of what that might look like if we kind of took the month of April and multiply that by 3?

Yes. Well, we don't -- we're optimistic that, that won't be the answer as April x3. But if that were, then we would have flat to declining business, which hopefully won't happen. Hopefully, May will be better than April and June will be better than May. But again, we don't know that for a fact. So if things don't improve, then we could forecast that subscribers wouldn't grow. And you can imagine a worst-case scenario where subscribers shrink, which would be really bad. But so far, we haven't seen shrinking subscriber base.

Got it. That's very helpful. And I know, going back, this is quite a few years ago, but you had pretty meaningful exposure to oil and gas. And I think that's kind of been mitigated over the subsequent years. But can you give us a sense of what your exposure is today to oil and gas? And what you've seen with that part of your -- the fleet?

Right. We have very little exposure to oil and gas. We don't do any business on oil rigs or platforms. We have the few odd customers who use our products on land or -- but very, very minimal exposure there now. I mean, the collapse in oil prices for our SATCOM business is probably, if anything, a slightly net positive, so reduction in offshore vessels. But all of the commercial shipping companies are making a lot more money because of lower fuel cost. Fuel cost them $40,000 a day. If that gets cut in half, that's a huge saving for them.

Then on the tanker business, those guys are absolutely printing money because those -- because of lack of storage, people are using tankers for contango, where they store the oil on the tankers, and they're charging $240,000 a day. So they're absolutely minting money. So that's -- where it really hurts us is, as it's already been pointed out, is in the Middle East potential defense sales. So the price of oil there is, I imagine, a major factor that drives our defense budget. So we're very pessimistic about that business right now.

Got it. And then is my final question. You mentioned coming into this quarter, you had the kind of 4 to 5 TACNAV programs out there and it sounds like we're taking kind of 2 of those off the table, but you've still got 3 large ones. One, which sounds like you're pretty close on or getting closer on. So just wondering how you're thinking about the overall outlook for the Inertial business for this year versus where it was coming into the year. So it sounds like you still have some of that upside optionality from 1 or more of those large program signing.

We still have, I'd say, 2 that have decent probability. One, I would say, has a very high probability. But the one with a very high probability, it's unclear how much of that will deliver in 2020. So major program, more than $10 million. But how much delivery is going to be in 2020 is -- would be the concern with that. The other one is U.S. military base that could be -- we don't think that would be impacted by everything that's going on, but that one isn't as large as the others. So...

It appears there are no further questions.

That's great. Well...

I'd like to turn...

Go ahead. I was just going to say thanks for listening in the questions. And we'll -- as always, we'll be available for via e-mail or direct calls to answer further questions. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.