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Edited Transcript of KVHI earnings conference call or presentation 2-May-19 2:30pm GMT

Q1 2019 KVH Industries Inc Earnings Call

MIDDLETOWN Jun 4, 2019 (Thomson StreetEvents) -- Edited Transcript of KVH Industries Inc earnings conference call or presentation Thursday, May 2, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent C. Bruun

KVH Industries, Inc. - COO

* Donald W. Reilly

KVH Industries, Inc. - CFO

* Martin A. Kits Van Heyningen

KVH Industries, Inc. - Co-Founder, Chairman, CEO & President

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Conference Call Participants

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* Christopher David Quilty

Quilty Analytics, Inc., Research Division - Founder & Partner

* James Patrick McIlree

Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology

* Richard Hamilton Prentiss

Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the KVH Industries Incorporated First Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to CFO, Don Reilly. Please go ahead, sir.

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Donald W. Reilly, KVH Industries, Inc. - CFO [2]

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Thank you, operator. Good morning, everyone. Thanks for joining us today to discuss KVH Industries' first quarter results and our guidance for the 2019 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; and Brent Bruun, the company's Chief Operating Officer. The earnings release is available on our website and also in our Investors 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 at kvh.com.

This conference call 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 2018 Form 10-K which was filed on March 1, and the company's other SEC filings which are available directly from the Investor Information section of our website.

This time, I'll turn the call over to Martin.

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [3]

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Thanks, Don, and good morning, everyone. Thanks for joining us. The overall Q1 revenue remain relatively flat at $40 million compared to $40.1 million in the first quarter of last year. Our fiber optic gyro sales, which had been up double digits for 8 quarters in a row, came in over $2 million below our forecast. Given our strong backlog in our FOG group though, we don't expect this to continue either in Q2 or for the rest of the year. Nevertheless, this caused our results to be outside of our guidance range.

From a strategic perspective, we made substantial progress during the quarter on all of our goals for 2019. Among these are to accelerate our subscriber growth on our HTS network, go through a new customer acquisition and the migration of existing ArcLight network customers, push into the maritime IoT market with a new subscription service, maintain their momentum in the pursuit of the military Assured Position, Navigation and Timing or A-PNT programs, and commercialize our photonic chip-based fiber optic gyros by the end of this year.

So now I'll go into some details both on the goals and the Q1 results. In our Mobile Connectivity business, we are seeing very positive progress. We shipped our 9,000th VSAT system this quarter, and our airtime revenue grew 11% or $1.8 million compared to Q1 of 2018. This was driven by a 14% increase in total subscribers by the end of the quarter. AgilePlans and HTS continue to lead the way in our maritime business. We're now starting to see the positive financial impact from this growth as well.

AgilePlans revenue increased 14% sequentially over the fourth quarter of 2018 and more than 500% from a year earlier, reflecting the benefits of compounding AgilePlans subscriptions. We remain on track for AgilePlans to be cash flow positive by the second half of this year. New AgilePlans subscriptions represented 77% of our total commercial maritime VSAT shipments and 60% of our total quarterly VSAT shipments across all markets. Overall, VSAT shipments for AgilePlans and new product sales combined also increased 10% versus the prior year setting a new record for first quarter shipments.

As we continue our transition to a service model, we're investing in our operations and service capabilities to support the expanding number of system installations and higher number of subscribers. We had established a new customer service department focusing on airtime subscribers, while simultaneously strengthening our global distribution and service provider network with new tools and resources. Scaling up our operations and service has enabled us to maintain a rapid schedule installations around the globe. We continue to deploy AgilePlan units and activate subscribers while maintaining a healthy backlog of new sales and AgilePlan subscriptions.

For example, we announced earlier this month that Seaspan, one of the largest container ship operators in the world, had completed the deployment of our systems aboard all 107 with managed vessels and their global containership fleet. During this effort, we worked closely with Seaspan to install our VSAT systems on 60 vessels in less than 12 months. Seaspan cites our end-to-end solution as well as our unique dual-channel configuration as part of HTS as key reasons they chose to work with us.

We now have in place updated and very favorable service agreements with our satellite provider partners, which will help manage our cost and add greater predictability going forward. As a result, I'm confident that our airtime margins will grow throughout the year, and we expect airtime margins to be around 40% as we exit 2019. On the hardware side of our business, we completed our HTS product line with the introduction of the TracPhone V11-HTS just a few weeks ago. This new system is the only 1-meter Ku/C-band maritime VSAT antenna in the world, and it delivers the fastest global speeds available, 20 megabits per second down and 3 megabits per second up. That's 5x faster than our current TracPhone V11 product.

We now offer an HTS system for virtually every need with our 35-centimeter V3, award winning 60-centimeter V7 and now the 1-meter V11. In addition, we offer very easy upgrade pass from the V7 IP and the V11 IP customers who want to collect -- sorry, who want to convert to HTS. This is part of our larger initiative to encourage our current standard mini-VSAT broadband customers to migrate to our new HTS network because when they do, they'll enjoy all the benefits that come with our HTS service including dramatically faster speeds, simultaneous high speed and unlimited used data channels, more flexible airtime policies, lower per megabyte cost and better global coverage. At the same time, we enjoy better margins and greater network control and visibility.

Adding to our services appeal, we expanded the HTS service in the Pacific in Q1 on the Horizons 3e satellite, it's an Epic satellite, and we now deliver the fastest speeds in even more places. Our network is designed to offer robust redundant communications with as many as 3 or 4 satellites supporting each region. This enables us to deliver greater uptime by ensuring vessels can typically see at least 2 satellites in any given time. This reduces blockage on the ship and allows us to effectively manage the network for optimal performance and greater customer satisfaction. This layered design is also critical to our ability to provide continuity of service in the event of a major issue.

We experienced just such an occurrence a few weeks ago when Intelsat's IS-29e satellite suffered a propellant leak and was lost. IS-29 was one of our satellites for HTS connectivity in the Americas and its loss would have been catastrophic for another service that relies on only a single satellite to support a region. But thanks to our layered network architecture however, virtually all KVH customers who had been connected via IS-29 immediately switched over to an alternate satellite in our network ensuring continuity of VSAT connectivity. Our network operations team worked closely with Intelsat to bring additional satellite capacity online, so these customers quickly saw average speeds in connectivity similar to what they received prior to the service outage.

An additional factor in our rapid response is the fact that we design and manufacture the onboard antennas that transmit and receive data via the mini-VSAT network. Our end-to-end solution meant that we were able to send updates of new coverage maps, be an out-of-band support channel, ensuring that the onboard antennas could find and track the new satellite beams. Thanks to our integrated IoT capabilities, our tech support team also received ongoing reports and alerts for antenna performance issues enabling us to refine each antenna's configuration and tracking as required.

Making full use of our own onboard Internet of Things functionality, it's just the start of our second strategic goal for 2019. We anticipate making announcements in early June, both pertaining to a major new maritime industry partner for our IoT capabilities as well as our IoT products and services that will leverage our competitive advantages.

Now moving on to our Inertial Navigation business. Our fiber optic gyro sales were $300,000 below Q1 of last year and over $2 million below our plan for the quarter. As a result, our streak of double digit revenue growth came to an end, though we expect that this will be a temporary pause. The primary driver for the lower than anticipated revenue was the new U.S. military order for inertial systems for using drones that was received but for shipment later in the year. We now have just over $9 million in FOG backlog for shipments this year.

Our pursuit of military A-PNT opportunities continues to go well. We achieved the next milestone in our third strategic goal during Q1 when we delivered 17 TACNAV 3D systems as scheduled to the U.S. army. These systems are now undergoing extensive field testing in GPS denied environments. Early feedback indicates that our TACNAV 3D is meeting or exceeding the performance goals, and this is part of a trial that could lead to a very large program.

And finally, we're very pleased with the progress made in the development of our photonic chip technology. We recently presented our first public paper on this ground breaking new technology at a major IEEE form. And we also received the first of what we expect to be many patents on this very unique technology. In Q1, we delivered the last of our initial round of IMU prototypes using the photonic chip based fiber optic gyros. After customer bench tests, live field testing of these prototypes is now underway with automotive and autonomous vehicle OEMs.

Our photonic chip-based IMUs are being tested side by side with their existing inertial systems which have always performed extremely well, would have been too expensive for a high volume automotive applications. We're confident that the performance of our photonic chip based solutions will be as good, if not better, than our traditional all-fiber gyros. We're also on track to begin incorporating this photonic chip technology into our own fiber optic gyro products later this year. Anticipated benefits include reduced cost, streamlined and easier manufacturing, higher quality and improved performance.

The testing and transition to manufacturing for our photonic chip technology is moving along well. The next major step is finalizing the product packaging. We recently developed a new automated packaging design which looks promising in terms both of cost and full-scale automation. And I am confident that this product will be ready when our customers begin to move into mass production of their own autonomous vehicles.

May Mobility is an excellent example of one type of autonomous vehicle that relies on our existing FOG technology and be a perfect candidate for our chip-based solutions. They were the first company to successfully deploy self-driving vehicles to replace existing transportation systems on city streets when it launched a self-driving fleet in Detroit in June of 2018 followed by second program in Columbus, Ohio in December. In 2 weeks, they will officially launch their pilot program here in Rhode Island in Providence, and later this year in Grand Rapids, Michigan. In each of these programs, the May Mobility self-driving vehicles travel on public streets carrying passengers on short routes in urban environments. Every one of these vehicles includes KVH's fiber optic gyro based Inertial Navigation systems, which enables their vehicles' localization algorithm and delivers the precision required for safe autonomous travel.

So in conclusion, Q1 reflected some short-term challenges in our FOG business which impacted our financial results. However, the substantial progress made throughout the business, strong performance in our core strategic markets, and our long-term growth drivers are all positive. We've had a solid backlog in FOG products. Our AgilePlan opportunities and backlog are strong, and we are entering the quarter with more subscribers than ever before. We have a strong new product pipeline and should have some key partnership announcements in the coming months.

Now I'll turn the call over to Don for the financial results. Hold on. Don?

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Donald W. Reilly, KVH Industries, Inc. - CFO [4]

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Thank you, Martin. As Martin mentioned earlier, our first quarter revenue was $40 million, about the same as our 2018 first quarter of $40.1 million. We sum up all our guidance range primarily due to lower than expected FOG sales during the quarter. Revenue from Mobile Connectivity segment decreased slightly and our Inertial Navigation revenue increased slightly from the prior year first quarter. Product revenue for the first quarter was just about $13 million, a decrease of about $1 million or 8% from the $14 million in the first quarter of the prior year.

By segment, product revenues and our Mobile Connectivity segment decreased $800,000 or 11%, while product revenues on our Inertial Navigation segment decreased about $300,000 or 4%. Within our Inertial Navigation segment, our FOG business decreased $300,000 or about 6% this quarter compared to the first quarter of last year, while our TACNAV sales remain essentially flat compared to the prior year.

In our Mobile Connectivity segment, the decline in product sales was driven by the decrease in marine mobile connectivity product revenues by $800,000 or 11% compared to the prior first quarter. But with respect to the Agile program, as Martin mentioned, shipments increased 28% compared to the first quarter of 2018 with 60% of our total unit shipments this quarter and 77% of our commercial shipments.

Service revenue for the first quarter increased about $1 million or 4% to just over $27 million from just over $26 million in the first quarter of last year. In our Mobile Connectivity segment, mini-VSAT broadband airtime revenue increased $1.8 million or 11% compared to the prior year first quarter due to a 14% increase in airtime subscribers. That's partially the result of the introduction of our AgilePlans and cost of ramp up of our HTS network. This increase was partially offset by a $1.2 million decrease in content and training revenue.

In our Inertial Navigational segment, contract engineering service revenue increased about $0.5 million compared to the prior year first quarter. The first quarter, our consolidated gross profit margin was 38.6% as compared to 43.3% in the first quarter of last year. From a segment perspective, our Mobile Connectivity gross margin was 37.6%, down about 6.5 percentage points due mostly to the impact of our new HTS network along with certain transition costs we are incurring in connection with the migration of our legacy network to our HTS network.

Our Inertial Navigation gross margin increased about 3.1 percentage points to 42.7%. Operating expenses for the first quarter were $21.3 million, up slightly from the $20.5 million incurred in the first quarter of the prior year. And for the first quarter, these changes in revenue, margins and operating expenses resulted in a loss from operations of $5.8 million compared with the loss of $3.2 million recorded in Q1 of 2018.

Our Mobile Connectivity segment generated an operating loss of $1 million compared to an operating profit of $1.1 million last year, while our Inertial Navigation segment had an operating profit of $400,000 for the quarter compared to an operating profit of $300 million [sic] [$300,000] last year. Our unallocated loss was $5.2 million compared to last year's $4.6 million. In first quarter, our net loss was $6.2 million as compared with a net loss of $3.9 million recorded in the same period last year.

And on a non-GAAP basis, which excludes amortization of our intangibles, stock-based compensation, employee termination and other nonrecurring costs, nonrecurring legal cost, foreign exchange transaction gains and losses, and the tax effect of all of those things, along with the change in a valuation allowance, we had a net loss of $2.9 million compared to a net loss of $1 million last year. EPS for the quarter was a net loss of $0.36 per share compared with a net loss $0.23 per share in the same period last year, and non-GAAP EPS loss for the quarter was $0.17 per share compared to a non-GAAP EPS loss of $0.6 per diluted share last year.

Our adjusted EBITDA for the quarter was a loss of $1.2 million compared with a gain of $900,000 recorded in the first quarter of last year. And 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 first quarter was $18.2 million of which approximately $13.7 million is scheduled to be delivered during 2019. Backlog for our Inertial Navigation products and services at the end of March was approximately $14.7 million, of which approximately $12.2 million is scheduled to be delivered during 2019 and that includes about $9 million for FOG products alone. Net cash used in operations this quarter was just over $1 million and in line with the first quarter of last year. Capital expenditures were $3 million, and our net debt was $17.4 million, up from the $3.6 million -- up $3.6 million from the end of 2018.

With that, I'll now turn to our outlook for the second quarter and full year. Our guidance for second quarter is as follows. Revenue is estimated to be in a range of $42 million to $44 million and GAAP EPS to be in the range of negative $0.18 to negative $0.13 per share. Non-GAAP EPS is expected to be in a range of negative $0.02 to positive of $0.01 per share. And adjusted EBITDA is estimated to be between $2 million and $3 million. For the full year, our guidance is unchanged at this point. Our revenue guidance is $180 million to $195 million.

Our expectations for full year GAAP EPS is a range of negative $0.56 to negative $0.22 per share. And our non-GAAP EPS is expected to be from negative $0.07 to positive $0.17 per diluted share. And our adjusted EBITDA is expected to be in the range of $10 million to $16 million. For 2019, we continue to expect capital expenditures in the range of $15 million to $20 million.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Rick Prentiss with Raymond James.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [2]

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First question I've got is certainly around the guidance. For the 1Q guidance, obviously you came in a little late, but you gave it on March 1. So wondering with 2 months under your belt, was it really the -- maybe that military drone order you're referring that you've received the order but it didn't ship, that was one of the bigger kind of slip backers?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [3]

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Yes. Yes, that was the vast majority of it.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [4]

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Okay. And then you say scheduled to later this year, but when I look at the 2Q guide, it sure seems like maybe 3Q, 4Q. Is it going to be a stage shipping?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [5]

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Yes. Yes, it's Q3 and Q4. So the orders in here, it's a firm PO, so it's -- it has firm delivery dates now.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [6]

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Okay. That's what I was going to get at is the visibility that you've got because if we look at first half '19 between the actual and the revenue guide, you run rate that and you'd be below the annual. So wondering how should we think about the range for the annual revenues? What would it take to hit the low end versus to hit the high end of those ranges?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [7]

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Well, as you know, there is -- there are a lot of moving parts in our business. For a company our size, it's fairly complicated. So just to compartmentalize the AgilePlans and the VSAT is pretty predictable because you've got a solid subscriber base that's growing. The hardware sales, for example, like our TracVision products and the leisure marine side can be a little bit difficult to predict. There is -- it's a retail type business in spring weather, stuff like that impacts it.

On the FOG side, it's generally pretty predictable because you've got some backlog, but then these orders, the larger orders that come in on top of that can be a little bit more difficult to predict. And then lastly, the TACNAV I'd say is the most difficult to forecast because it's -- they tend to be very large contracts, sort of single point and binary outcome. So you put all that mixed together, that's why we end up with a -- probably a fairly wide range on the top line in terms of where we think we'll be. But given that that order did materialize, it just didn't ship, that we're pretty confident we will ship this year. So…

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Donald W. Reilly, KVH Industries, Inc. - CFO [8]

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So let me just add a little more editorial. So as Martin said, we had 8 consecutive quarters of double digit growth and at the beginning of every quarter, hard to say how much of that revenue each quarter was in backlog. But a lot of it just materialized over the course of the quarter. So it's pretty hard to predict. Sometimes it comes in without too much notice and fortunately we have enough inventory and enough capacity that we can meet the orders when they come in. So we had every reason to believe that that rate of growth would continue in the first quarter. In fact, that came in a little bit soft, partially due to this 1 order. But overall, they were -- the trend that we had been seeing stagnated a little bit in the first quarter.

However, we still have very strong backlog at the end of the first quarter, as I mentioned on my -- in my remarks. For FOG alone, it's $9 million to ship this year, which is a very strong backlog. So we are confident that FOG growth will return in the second quarter, and certainly more so in the second half of the year. But as Martin also said, a lot of it is -- we have some visibility into, but it's hard to predict. It's kind of trends and conversations with customers and our sales people that be on the ground. Like every other company, you use -- we take all the information that you have available to you and look at trends and look at the conversations and closely about the forecast.

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [9]

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And total Inertial Navigation backlog --

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Donald W. Reilly, KVH Industries, Inc. - CFO [10]

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Is over $12 million.

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [11]

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Yes.

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Donald W. Reilly, KVH Industries, Inc. - CFO [12]

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To ship now this year.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [13]

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Okay. Yes, great. Okay. Second question, obviously, you've had a lot of success with the AgilePlan. What are you seeing as far as the typical plan of usage that people are subscribing to? And what kind of ARPUs are you seeing in that and any competitive response from Inmarsat who reported yesterday?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [14]

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Inmarsat has announced some new like crew calling, the crew-based solution that they think is an answer to AgilePlans which we don't think is -- they seem to think that our AgilePlan customers are not using it for business purposes, which is completely wrong. So I'm not sure that that's going to work for them. We're seeing that the ARPUs are slightly above our typical ARPUs. So they are -- AgilePlan ARPUs are actually higher. Our ARPUs year-over-year are up slightly. So we haven't seen pressure yet on the monthly ARPUs on an annual basis. So I think we're in pretty good shape there.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [15]

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Okay. And the typical plan, are they signing up for like a 20 gig plan or what type plan are you seeing as the most popular?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [16]

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Well, it's a little bit more complicated now with the -- with our HTS Agile we're offering because they get 2 channels. You get a fixed channel. So even if you sign up for say the 5 gigabyte channel plan, you also get the unlimited use channel. So total consumption is higher. So your average ARPUs are in the $1,200 to $1,300 range.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [17]

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Okay, great. And last one from me is, obviously Intelsat's failure had some effects. We were on that call yesterday or the day before. And can you help us to understand a little bit about you mentioned how you've gone on to some other satellites, Intelsat is working with you. But any change to your revenue streams or your cost streams given the propellant issue they had there?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [18]

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No, no. I think that we had really -- I think we were very lucky as well as being well positioned. But we had some satellites that were planned to come online in a couple of weeks. So they were -- we just accelerated that. So we had that in the pipeline already. So we don't foresee any change in cost or revenue as a result of this now.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [19]

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Great. And is that new satellites that came on, was that Intelsat satellite or was that an alternate provider?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [20]

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It was a Intelsat. It was another Epic satellite. So we have North America. If it had to happen, North America is the place where we have the most coverage. We have 5 satellites over the U.S. and Caribbean, for example.

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Brent C. Bruun, KVH Industries, Inc. - COO [21]

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There is actually more than 1 Epic satellite.

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [22]

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Yes, you're right. There's 2. That's Brent Bruun, our COO, adding that we have 2 different satellites that -- 2 additional Epic satellites that came in. And as I mentioned, every single customer except for 4 immediately switched over and those 4 were well up the Amazon in the middle of Brazil. But we're able to upload some maps for those guys even though they were offline using -- we have a -- all of our products have a built-in cell connection as well in LTE, so we're able to upload some maps by dialing into them and got them back online as well. So it was a -- all-in-all, it was a pretty smooth disaster recovery.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [23]

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That's obviously a job well done. That was a very quick move to something that spun out of control quickly. So hats off to your ground guys who did that.

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [24]

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Yes, a lot of sleepless nights.

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Operator [25]

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Our next question comes from Chris Quilty with Quilty Analytics.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [26]

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Martin, just wanted to clarify, I think you said just a moment ago that the initial backlog was over $12 million. I thought the number was -- was it $14.7 million?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [27]

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Yes, that's the full number. You're right. It is $14.7 million. But that the -- some of that is not for shipment this year. So normally we identify backlog as shippable. This year, the $9 million for FOG is all shippable this year.

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Donald W. Reilly, KVH Industries, Inc. - CFO [28]

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Yes, so Chris, the numbers are $14.7 million total. $12.2 million to ship in the rest of this year, of which $9 million is FOG.

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [29]

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The rest is TACNAVs. So…

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Donald W. Reilly, KVH Industries, Inc. - CFO [30]

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TACNAV, yes.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [31]

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Speaking of TACNAV, I mean I know we don't put these large orders in the forecast here, but you feeling marginally better or less better about the prospects of landing one of those this year?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [32]

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Well, we got our first decent international order for TACNAV 3D which is our FOG-based product. So that's sort of the -- we -- and that was not a huge orders, it's like million, $0.53 million, something like that, so that we're optimistic that that's a -- the beginning of a trend. I also mentioned in my prepared remarks that the army testing it, formal trials is underway. That is also a good sign. And as far as these big international orders, we've been in the process of delivering revised quotes to all the bidders and they've submitted their proposals to the government. And we'll -- so there continues to be progress on that front. But as you know, we don't have it in our guidance.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [33]

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Understand. And in terms of other U.S. government TACNAV programs, I think you had like JLTV and AMPV and some others that are sort of longer term. Are any of those meaningfully there this year or next in terms of volume?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [34]

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Yes. Yes. The AMPV is going to be a big program for us. That's one that we have one we're designed in 3 years ago. They've just finished their initial testing and vehicle acceptance, and that's going into production. And that's actually being pulled into 2019. So we were seeing a little pickup there. We expect to see a pickup in Q4 for that program. And that's round numbers, going to be like a $30 million program for us.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [35]

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So that becomes meaningful in 2020?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [36]

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In 2019 Q4, it'll be noted.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [37]

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Okay, I'm pushing it out to 2020.

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [38]

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That's good.

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Donald W. Reilly, KVH Industries, Inc. - CFO [39]

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Fair enough.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [40]

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And how about the JLTV?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [41]

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That doesn't have a formal NAV requirement. But that could be part of this new U.S. army program where they're trying to find a solution that'll work on all vehicles.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [42]

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Okay. Shifting gears. I just I missed the name of the vendor that is deploying you said in Columbus and coming to Rhode Island. Was that Waymo?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [43]

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It's a company called May Mobility, M-a-y.

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Donald W. Reilly, KVH Industries, Inc. - CFO [44]

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May Mobility.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [45]

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Yes, okay. Got it. And on the mini-VSAT, the numbers as you gave them in terms of year-over-year growth in percentage and dollar didn't calculate for me. What was the exact mini-VSAT revenues? And also if you can give the gross margins in the quarter, I think they were supposed to be down but I think you said trending up towards 40 percentage at the end of the year?

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Donald W. Reilly, KVH Industries, Inc. - CFO [46]

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Correct. So VSAT airtime was just over $18 million. Our margins were just under 29%, roughly the same as the fourth quarter of 2018. But as Martin said, we -- there are lots of reasons why we expect that margin too. So that didn't surprise as much as kind of what we expected for the first quarter, but we also continue to expect airtime margins to increase over the course of the year. As Martin said, we should be ending the year around 40%. Airtime around $18.3 million.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [47]

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$18.3 million, got it. And you said they were -- you had no incremental cost that you were associated with the 2019 turnover?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [48]

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That's correct. I mean we did have some biggest during the initial event when we moved everybody to adjacent satellite, there was some congestion. So as a courtesy, we gave some customers like a week's credit, but it was a de minimis.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [49]

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And given that that was a fairly important satellite in Intelsat's fleet in terms of its coverage pattern, I know it's been covered extensively in the trade press. Is that -- for you the ability to handle that turnover, is that an opportunity perhaps in looking at some of your competitors that are on sort of single string networks to emphasize your ability to have a multilayer redundance network?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [50]

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Yes. In fact, we've launch some marketing material and some blogs just to throw stones at our competitors, but just to point out the advantages of our approach. And even with the V11 with C-band, you have this fully redundant global overlay, so it's a -- it really is a better way to do it. So I just feel that for the people who had fixed issues.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [51]

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Yes. So another question just on the end markets in the maritime segment. Is there any puts and takes you can provide on where the energy market stands today or mining or commercial shipping, and what's happening at freight rates and what is that all portend for the balance of the year?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [52]

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That's a lot of questions there, Chris. The segments that we are in, we haven't seen any really change in the distribution. So if you look at like in our investor presentation, you see sort of a pie chart in there and that's been pretty steady. We're seeing a little I think uptick in leisure with some of these new products because they really like the new speeds. I think oil and gas is still pretty dead as far as offshore. We see some new interest in fishing fleets, especially with the V3 HTS because it's smaller and cheaper. So I wouldn't say there has been any change in the composition of the markets. I think the customer freight rate still seem to be reasonable. So overall, it's pretty steady as she goes in terms of the market.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [53]

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Okay. And final clarification. The discussion around the IoT services and you've got a pending announcement with the partner. Can you clarify for us, because people describe IoT as many different things, the exact type of services that you're thinking about in terms of is this more of a [Skada] type solution? Is it a narrowband solution? Who is the customer? What's the application?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [54]

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Yes. So that's what we'll be announcing at Nor-Shipping in the beginning of June. So it's a commercial maritime. It involves high speeds as well as sort of triple flow data off ships. So it's going to be an interesting take on the market and I think might be sort of unique product offering there.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [55]

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Okay, I guess we'll have to wait until June.

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Operator [56]

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(Operator Instructions) Our next question comes from Jim McIlree with Chardan Capital Market.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [57]

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Martin, you talked about the variability in the annual guidance coming I think primarily from leisure marine and TACNAV. Leisure marine I believe has some significant seasonality to it. Can you just remind me when the big quarters are for leisure marine on a seasonable basis?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [58]

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Well, Q2 is usually one of the bigger quarters. And it sort of March or April are the peak and it kind of depends on the weather. So this year, it's been a cold wet spring. So it works. So it was a little soft in Q1, so we think some of that will be pushed into Q2. So we don't -- that's really in our track vision side on the television products, not so much for the VSAT products because we sell large numbers of the TracVision products 2x, 3x what we sell for VSAT. It's a very popular lower price consumer type product sold through West Marine and stores like that.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [59]

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Got it, okay. And then the operating expense ticked up both from Q4 and from the year ago quarter. Don, is that a new run rate or is there something special that we should be aware of?

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Donald W. Reilly, KVH Industries, Inc. - CFO [60]

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No. I think -- I'm not -- I don't think it will any higher than that throughout the rest of the year, okay. So as the new run rate, it's probably indicative of the new run rate, but it's not as though -- and I don't think it will be higher than that for the rest of the year. And part of it, I know, some of the part of the increase is the investment that we're making in our customer service function. Part of it is ongoing engineering cost and the multiple things we're investing in. So I suppose it is somewhat indicative of the new run rate, yes, but I don't think it's going to be much higher than it was in the first quarter.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [61]

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Okay. And can you tell us what gross margin assumption you have built into your guidance?

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Donald W. Reilly, KVH Industries, Inc. - CFO [62]

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Well, as Martin said, we expect our airtime margins to grow throughout the year, and we expect down the year with around 40%. Otherwise, the margins that we're seeing on product sales should be about the same. We don't expect significant changes there. And our airtime, our margins on our content media business are pretty stable, very high margins in the high 60%, but not -- the only real change that we're expecting but it drives our overall margins quite a lot is with respect to the airtime.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [63]

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Okay. And then lastly the CapEx for the year, does that include any significant amounts for the photonic chipset or would that be something that takes place next year?

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Martin A. Kits Van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [64]

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Yes. There's not a lot of CapEx required this year for that. So there may be some incremental R&D expenses we go through the year to work out some of this packaging stuff that I mentioned. And that will have CapEx requirements, but if it happens, it probably will be -- end up being in next year-end.

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Operator [65]

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At this time, we have no other questioners in the queue. So I'll turn it back to our presenters for closing comments.

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Donald W. Reilly, KVH Industries, Inc. - CFO [66]

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Great. Thanks again for listening and as always, we're reachable after the call. Thank you.

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Operator [67]

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Ladies and gentlemen, that concludes this morning's presentation. You may disconnect your phone lines and thank you for joining us today.