U.S. Markets close in 6 hrs 27 mins

Edited Transcript of KVHI earnings conference call or presentation 31-Oct-18 2:30pm GMT

Q3 2018 KVH Industries Inc Earnings Call

MIDDLETOWN Dec 3, 2018 (Thomson StreetEvents) -- Edited Transcript of KVH Industries Inc earnings conference call or presentation Wednesday, October 31, 2018 at 2:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Donald W. Reilly

KVH Industries, Inc. - CFO

* Martin A. Kits van Heyningen

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

================================================================================

Conference Call Participants

================================================================================

* Christopher David Quilty

Quilty Analytics, Inc. - Founder & Partner

* James Patrick McIlree

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

* Richard Frank Valera

Needham & Company, LLC, Research Division - Senior Analyst

* Richard Hamilton Prentiss

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, good day, and welcome to the KVH Industries, Inc. Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Don Reilly. Please go ahead, sir.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, operator. Good morning, everyone. Thanks for joining us today to discuss KVH Industries' Third Quarter Results and our Guidance for 2018 Fourth Quarter and Full Year, all of which is included in the earnings release we published this morning.

With me on this call is Martin Kits van Heyningen, the company's Chief Executive Officer.

The earnings release is available on our website and also from our Investor Relations department. If you would like to listen to a recording of this call, you can access a webcast replay on our website. If you're listening via the web, feel free to submit questions to ir@kvh.com.

This conference call will contain certain forward-looking statements that are subject to 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. You will find definitions of these measures in our press release as well as reconciliations of these non-GAAP measures to comparable GAAP measures. We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading Risk Factors in our Form 10-K, filed on March 2nd, and our 10-Q, which is expected to be filed this afternoon and the company's SEC filings available directly from the investor information section of our website.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Don, and good morning, everyone. Thank you for joining us today. I'm pleased to report that our third quarter results reflect a continuation of the strong momentum that drove the first half of our year. Total revenue for the quarter was $43.5 million, an 8% increase over Q3 of last year, while adjusted EBITDA for the quarter was $3.2 million, up from $1.8 million the same time last year. These results were all in line with our guidance.

A major factor in our positive results was a third quarter record for VSAT shipments, which grew more than 125% compared to the third quarter of last year. In fact, our VSAT shipments through the first 9 months of the year have already surpassed our shipments for all of 2017 by more than 40%.

Our AgilePlans Connectivity as a Service Program was a significant driver of this growth, but traditional sales of our VSAT product increased almost 45% as well. At the same time, our airtime subscriptions grew by 9% compared to Q3 of last year.

Looking more specifically at AgilePlans, we entered the quarter with more orders that we could fill in a timely fashion. And I'm pleased to say that we expanded our production capacity and we are now able to keep up with the growing demand for our maritime SATCOM systems.

In addition, we continued to improve our delivery and implementation efforts for AgilePlans orders. The result of these efforts were record installations with a 27% increase in field installations over last quarter.

Most fleets are selecting the TracPhone V7-HTS, which we introduced 1 year ago today. This was and remains a revolutionary product for maritime VSAT. It delivers download speeds as fast as 10 megabits per second worldwide, a level of performance that's never been possible in a 60-centimeter antenna. All V7-HTS systems come with a high-speed data channel and a separate, unlimited data use channel, both of which are supported by our next-generation global network that we launched in cooperation with our partners, Intelsat and SKY Perfect JSAT.

Since we began shipping the V7-HTS in December last year, we've seen positive responses, both commercial and the leisure markets, which is reflected in our quarterly VSAT results. Now we've applied that same innovation to an ultra-compact system, the TracPhone V3-HTS, announced this morning, is scheduled to be unveiled at the Fort Lauderdale Boat Show in just over an hour.

The V3-HTS is the world's fastest, lightest, smallest maritime VSAT system. At only 14.5 inches in diameter and 25 pounds, it delivers speeds as fast as 5 megabits per second down and 2 megabits per second up, using the same network that serves the V7-HTS. Not only is this the fastest ultracompact VSAT system, it's also faster than some competing 1 meter VSAT antennas.

Customers have a choice of high-speed metered airtimes, plans with month-to-month flexibility. Plus they can enjoy access to a full suite of value-added tools and services that help ensure they have complete visibility into their network and data as well as powerful controls for how their data is used.

The TracPhone V3-HTS's fast data speeds, combined with its small size make Internet connectivity and HD quality streaming available aboard smaller power boats and sailboats along with commercial vessels, such as workboats and offshore fishing boats that don't have room for large satellite communications antennas. It also has an affordable entry-level airtime plan that starts at $99 a month for 200 megabytes.

We're very excited by the potential for this new product. It's the newest addition to our HTS product line. We expect shipments to our global sales channel and customers worldwide to begin today.

The audience of potential customers grew during the third quarter following our announcement of a new partnership with Singtel at the end of August. Singtel is Asia's leading communications technology group and one of the largest service providers for competing SATCOM services in the region.

Now Singtel will be providing its maritime customers with KVH's SATCOM product and service offerings, including AgilePlans. The result is expanded visibility for our product and increased access throughout the Asia-Pac region, which boasts some of the busiest ports and largest fleets in the world.

We believe this is a great opportunity that not only reinforces our leading position in the maritime industry, but it validates the quality, performance and value of our VSAT solutions.

In other mobile connectivity news, although revenues were lower for the quarter, we're beginning to achieve the turnaround for our content and training business. The launch of our Videotel performance manager platform and the new task-based competencies make us optimistic that our content business will return to growth as we saw an increase in the number of subscribers in Q3.

Our strategy of using content to drive airtime sales continues to go well, with 60% of AgilePlan customers reporting that the inclusion of NEWSlink TV was part of the reason for selecting KVH.

On the training side, our Videotel Performance Manager continues to grow with 58% of eligible vessels now on the new platform and that's an increase of 18 points over the last quarter. The launch of the online training and task-based competency features has helped drive the growth in adoption and reduce churn.

We continue to see strong interest in our new TracPhone LTE-1 system, which was introduced at the end of the second quarter. This cellular-based communication system delivers faster speeds and extended coverage offshore here in the United States. It's being used both as a stand-alone solution on smaller boats, as well as a complement to our VSAT systems on larger vessels. And over the next few months, we'll be adding new partners bringing us new coverage and global roaming.

And finally, we're very proud of our commitment to outstanding products, services and support and the customer experiences that were recognized again by the members of the National Marine Electronics Association. The Marine professionals who comprise the NMEA honored our TracPhone V7-HTS and our TracVision TV3 with their Annual Product Excellence Awards in September. This marks the 24th -- 21st consecutive year that a TracVision TV system has won and the 16th year that a TracPhone SATCOM system has received this honor.

Now even though 60% of our revenues come from services, we strongly believe that having the best hardware and having it tightly integrated with our software and services is the key to our future success.

Turning to our Inertial Navigation business. Fiber optic gyro sales rose over 50% year-over-year. This was our seventh consecutive quarter of double-digit growth in this market. We're continuing our efforts to expand our capacity to match the high demand and we've recently fully staffed a second shift at our facility in Illinois.

This jump in demand is a result of customer requirements for high performance at lower costs and applications like airborne autonomous platforms, image stabilization, mobile mapping and the general move towards autonomous everything. Our systems' easy integration, compact designs and outstanding accuracy, performance and reliability make them an ideal choice for these applications.

In addition, remote weapon stations, which have been a core part of our business for many years, continue to need our systems, thanks to our ability to meet the critical pointing requirements for these high precision weapon systems. We've recently received a $2 million order from a stabilized weapon supplier and that's a sign that this part of our market is starting to grow again.

On the TACNAV side of our business, we saw a $900,000 decline in sales year-over-year. However, we're seeing some very encouraging signs in this industry.

For many years, ours was one among -- was among the few voices that raised concerns about GPS vulnerabilities and the value of inertial navigation systems, as both a complement to and a backup for GPS. Now the U.S. Military is coming on board with this issue and the Army is setting aggressive schedules to deploy assured navigation, position and timing solutions on thousands of vehicles in the coming years.

Our TACNAV 3D continues to prove itself in the field and on test ranges with military planners and we're working diligently to get this precision nav system incorporated by the leading prime contractors for the upcoming Army A-PNT initiative.

And finally, the development of our photonic chip technology and its integration into our compact FOGs and inertial systems is proceeding very well. We remain on pace to deliver samples of these systems to a few automotive customers before the end of the year. We're qualifying a second [FAM] house and expect to have samples in the next few weeks.

Separately, we continue to make progress towards our goal to align with a strategic partner in the automotive space so we can take full advantage of the possibilities of this new technology.

So in conclusion, Q3 continued the momentum we built in the first half of the year. We're making outstanding progress on achieving the strategic initiatives we set for ourselves at the start of the year, including the expansion of our HTS efforts, launching new products, developing groundbreaking photonic technology for the inertial NAV market, building our AgilePlans customer base and pursuing the military Assured Navigation market.

I feel very positive about our continued development pipeline for innovative products and services, and I believe we're on the right path for continued growth for the year, for the year as a whole and into 2019.

Now I'll turn the call back to Don for the numbers. Don?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Martin. As Martin mentioned earlier, our third quarter revenue was $43.5 million, which was within our previously announced guidance range. This compares to $40.4 million recorded in the third quarter of 2017.

As you know, we implemented the new revenue recognition standard, ASC 606, this year. The impact of that new standard for the third quarter was a net decrease of about $400,000.

Product revenue for the third quarter of 2018 was $16.3 million, an increase of $2.2 million or 16% from $14.1 million in the third quarter of the prior year. Service revenue for the third quarter was $27.2 million, an increase of $0.9 million or 3% from $26.3 million recorded last year. Revenue from our inertial navigation segment increased $2.4 million and in our mobile connectivity segment, increased $0.7 million.

By segment, in our inertial navigation segment, product revenues increased $1.8 million or 27%. Our FOG business continued its solid top line revenue growth, as Martin mentioned, growing over 50% this quarter while TACNAV sales decreased about 55% compared to the prior year. Non-recurring engineering service revenue increased about $0.5 million compared to last year.

In our mobile connectivity segment, product revenues increased by $0.4 million or 5%. The increase was primarily due to a $5 million -- of $0.5 million increase in marine product sales, partially offset by a $100,000 decrease in sales of our land product sales.

With respect to the Agile program, approximately 54% of our total unit shipments this quarter and 64% of our commercial shipments were in connection with this new offering. The adoption of the new revenue standard ASC 606 also negatively impacted product revenue in the MC segment.

Service revenues in our mobile connectivity segment increased $0.3 million due to an increase in mini-VSAT Broadband airtime service revenue of $1.2 million or over 6%, offset by lower content and training revenue of $0.9 million. Sequentially, mini-VSAT Broadband airtime revenues were up 4% from Q2 2018 and 9% from Q1 of 2018.

For the third quarter, our consolidated gross profit margin decreased slightly to 42.2% as compared to 43.3% in last year's third quarter. From a segment perspective, our mobile connectivity gross margin was just over 41% and our inertial navigation gross margin was just under 46%.

Operating expenses remained flat at $19.3 million for the third quarter of this year and last year. For the third quarter, these changes in revenue, margins and operating expenses resulted in a loss from operations of $0.9 million compared with a loss of $1.8 million recorded in Q3 of '17.

Our mobile connectivity segment generated an operating profit of $1.5 million compared with $2 million last year while our inertial navigation segment had an operating profit of $1.9 million for the quarter compared with $400,000 last year. Our unallocated loss from operations increased slightly, $100,000 by -- to $4.3 million from $4.2 million last year.

Our overall effective tax rate for the third quarter was just under 16%, which reflected the tax expense on our foreign earnings. For the third quarter of 2018, we recorded a valuation allowance on deferred tax assets generated by the net operating losses incurred in the U.S., as required by accounting rules. As we consider this valuation allowance to be a discrete noncash item, we've excluded this reserve when computing non-GAAP net income and EPS.

In the third quarter, our net loss was $1.2 million as compared with a net loss of $2.4 million last year. On a non-GAAP basis, which excludes amortization of intangibles, stock-based compensation, employee termination and other non-recurring costs, foreign exchange transaction gains and losses, the tax effect of the foregoing and the change in the valuation allowance, we had net income of $700,000 compared with $400,000 last year.

EPS for the third quarter was a net loss of $0.07 per share compared to a net loss of $0.15 per share last year. Non-GAAP EPS for the third quarter was income of $0.04 per diluted share compared to $0.02 per share last year.

As Martin mentioned, our adjusted EBITDA for the third quarter was $3.2 million compared with $1.8 million recorded last year. For a complete reconciliation of our non-GAAP measures, please refer to our earnings release that was published this morning.

Net cash provided by operations in the quarter was $3 million, that's an increase of $400,000 compared to last year. Our capital expenditures were $4 million in the quarter and our net debt at the end of the quarter was $12.4 million, up somewhat from Q2 due to the additional capital expenditures, mostly attributable to our Agile program.

As you know from our earnings release, we completed the restatement of our debt agreement yesterday, which included repaying about $12 million in principle net and provides us with more covenant headroom as we continue to execute on our long-term initiatives.

Total backlog at the end of September was $10.2 million of which $5.4 million is scheduled to be delivered during the remainder of 2018. Backlog for our inertial navigation products and services at the end of September was approximately $8.9 million of which $4.4 million is scheduled to be delivered during the remainder of 2018.

And with that, I'll now turn to our outlook for the fourth quarter and full year. We've reduced our full year guidance for revenues and earnings, partly as a result of the continued success of our Agile's -- our AgilePlans program, which, to some extent, negatively impacts the amount of revenues we're able to record in a particular period.

The reduction in our full year revenue and earnings forecast also reflects lower-than-expected TACNAV orders, which impacts earnings more significantly due to the high margins earned by these products, the decline being attributable somewhat to the recent political tensions in certain international markets. And higher operating expenses associated with the launch of our new V3-HTS product that Martin described as well as our continuing investment in long-term initiatives, such as our new photonic chip-based FOG.

Also, although service margins improved in Q3 versus Q2 and should continue to improve in Q4 and beyond, service margins will be somewhat lower than we expected this year, which contributes to our lower expectations for Q4 earnings.

Our guidance for the fourth quarter is as follows: fourth quarter revenue is estimated to be in a range of $44 million to $48 million and GAAP EPS to be in the range of negative $0.10 to negative $0.01 per share. Non-GAAP EPS is expected to be in a range of $0.02 to $0.09 per share and adjusted EBITDA is expected to be between $3 million and $5 million.

At the midpoint, our Q4 2018 revenue guidance represents an increase of about 18% compared with Q4 2017, primarily due to higher FOG sales in our inertial navigation segment and higher airtime revenue in our MC segment.

For the full year, our revenue guidance is $171 million to $175 million. Our expectations for full year GAAP EPS is a range of negative $0.48 to negative $0.38 per share, and our non-GAAP EPS is expected to be from $0.04 to $0.11 per diluted share and our adjusted EBITDA is expected to be in the range of $10 million to $12 million.

Also as you know, all public companies in the U.S. were required to adopt a new revenue recognition standard on January 1 of this year. For us, that new standard is expected to reduce revenues and adjusted EBITDA in the fourth quarter by $1 million and $200,000, respectively, and the full year by $2 million and $300,000, respectively.

The reduction to non-GAAP EPS is expected to be $0.01 in the fourth quarter and $0.02 for the full year. These amounts are reflected in the guidance amounts provided.

For 2018, we expect our capital expenditures will be in the range of $15 million to $18 million, and this assumes that there'll be no significant changes in foreign currency exchange rates.

So that concludes our prepared remarks. 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?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Mr. Jim McIlree with Chardan Capital.

--------------------------------------------------------------------------------

James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [2]

--------------------------------------------------------------------------------

Can you indicate how much the TACNAV reduction -- how much you're expecting the TACNAV reduction to have on guidance? Does that make sense?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. I think it's -- I would say it's a factor, but it's not a huge element. So as you know, we have a fairly complex business with a lot of different moving parts. So I think that -- I would say that TACNAV was more upside for the guidance for the year. So I think it's important, but not a significant factor.

--------------------------------------------------------------------------------

James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [4]

--------------------------------------------------------------------------------

So you're...

--------------------------------------------------------------------------------

Donald W. Reilly, KVH Industries, Inc. - CFO [5]

--------------------------------------------------------------------------------

I was going to say TACNAV -- what we expected for TACNAV would have brought us closer to the high-end of our range. And so the upside that we were expecting -- doesn't look like we'll have it. So when we come down -- when the range narrows because that comes out of the higher end.

--------------------------------------------------------------------------------

James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [6]

--------------------------------------------------------------------------------

Okay. And I know it's difficult to predict what's going to happen on the political front, but it seems like it's delayed more than gone. Is that a reasonable expectation?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, I think so. I don't -- I would say at this point, we haven't seen any delays, but we just have trouble seeing how that -- these events are going to accelerate anything. So I'd say -- so looking forward in our crystal ball, what we assume now is nothing's happening in Q4.

--------------------------------------------------------------------------------

James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [8]

--------------------------------------------------------------------------------

Okay. And Martin, you mentioned a strategic partnership on the photonic chip. Can you elaborate a little bit on what you're looking for? Is that a distribution or a product integration or a tech transfer or partial sale or -- what are you kind of looking for there?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. So what we're looking for is a strong, credible partner who can help bring this product to market and help us deliver at scale. So we've been very successful in getting our product in front of the key decision makers. We've been successful getting it designed into prototypes, and I'd say, most of the self-driving cars on the road today have some of our technology in it.

But in order for us to be part of these programs when they transition to high-volume manufacturing, we feel it would be very helpful to have a strong partner who has credibility and again, scale, to succeed in that market. So that's what we're looking for.

--------------------------------------------------------------------------------

James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [10]

--------------------------------------------------------------------------------

And I know it's difficult to predict how long it might take to accomplish that, but just best guess, what do you think it takes in terms of the time to get a partnership?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Well, our goal is to get it done in the next quarter or two so that we can move forward. I'd say, if it's not done by the middle of 2019, I'd say then we would push on alone because we certainly don't want to wait. So...

--------------------------------------------------------------------------------

James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [12]

--------------------------------------------------------------------------------

All right. And you said you're delivering samples to customers this quarter. What are the steps after they get samples?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [13]

--------------------------------------------------------------------------------

So these are customers who are buying today's product and they're happy with the performance. And what we're doing is we're delivering them, whether they're buying single access or they're buying full line use, we want to deliver something that is form, fit and function identical to what they're buying today and demonstrate that the performance is as good or better than the product that they're happy with.

So once we've demonstrated that, then the only remaining question is the cost of the new design, which we know is going to be dramatically less. So we're at the stage now where we want to give our customers confidence that this know photonic chip delivers the performance that we've been promising.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Our next question comes from Richard Valera with Needham & Company.

--------------------------------------------------------------------------------

Richard Frank Valera, Needham & Company, LLC, Research Division - Senior Analyst [15]

--------------------------------------------------------------------------------

Just wanted to follow up on Jim's partnership question. I'm assuming you'd want to go after a company, sort of one level below the OEM level that's sort of neutral and can presumably supply to pretty much all of the auto OEMs. Is that a fair assessment?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Yes, that's exactly what we're targeting. So we have some key OEM that we're selling to now and although that would be a logical place to start, we don't want to be locked into one manufacturer, for example. So we would want somebody who's neutral and could sell to others.

--------------------------------------------------------------------------------

Richard Frank Valera, Needham & Company, LLC, Research Division - Senior Analyst [17]

--------------------------------------------------------------------------------

Right, makes sense. And then obviously, some strong progress on the mini-VSAT unit shipments. Can you give a sense of how -- and you'd had some very strong order activity. I'm wondering if you can give any color on how the order activity trended in 3Q off what I think was admittedly a very strong 2Q. Any color there would be appreciated.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. So seasonally, Q3 is one of the slowest of the year. So it was great to see such strong performance in Q3. So we expect Q4 again to be strong. So we're just very pleased that the momentum is continuing and that we've been able to accelerate the pace of installations and deliveries. So we're down to -- in the 30- to 60-day lead time, in that range, which is -- for actual installation on vessels on a global basis, which is pretty good.

--------------------------------------------------------------------------------

Donald W. Reilly, KVH Industries, Inc. - CFO [19]

--------------------------------------------------------------------------------

And Q2 was an overall record for the company versus any quarter of any year in shipments, but Q3 was a -- this Q3 of '18 was a Q3 record.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

You said Q2 was not a...

--------------------------------------------------------------------------------

Donald W. Reilly, KVH Industries, Inc. - CFO [21]

--------------------------------------------------------------------------------

No, no. I said Q2 was a record.

--------------------------------------------------------------------------------

Richard Frank Valera, Needham & Company, LLC, Research Division - Senior Analyst [22]

--------------------------------------------------------------------------------

Right, right. I was referring to orders and I'm guessing it sounds like from your comments, Martin, that Q3 was probably down sequentially, which should be seasonally typical from an order perspective, probably up significantly year-over-year from an order perspective. Is that fair?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [23]

--------------------------------------------------------------------------------

That's correct. Yes, but it was very close to Q2, which is very unusual.

--------------------------------------------------------------------------------

Donald W. Reilly, KVH Industries, Inc. - CFO [24]

--------------------------------------------------------------------------------

Yes. I might have misspoke, I meant to say Q2 was a overall record for the company of every quarter -- any quarter of any year, Q3, was a Q3 record.

--------------------------------------------------------------------------------

Richard Frank Valera, Needham & Company, LLC, Research Division - Senior Analyst [25]

--------------------------------------------------------------------------------

Got it, perfect. And then I just want to understand the dynamics around the mini-VSAT airtime and subs. So it sounds like your subs grew 9% year-over-year and I think you said airtime revs grew 6%. Now I'm not sure if that's overall airtime or if that's mini-VSAT airtime, but wondering why they're not sort of growing at at least the same rate.

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [26]

--------------------------------------------------------------------------------

Yes. So if you imagine that you're adding subs on a linear fashion during the 3 months for the quarter, let's say -- just to make the math easy, you add 100 subs during the quarter, then on average, you've added 50 subs for the quarter because it was zero going in and 100 exiting. So if you look at the revenue for the quarter, it would be the equal of 50 times your ARPU. So it's almost exactly half when it's linear.

You follow what I'm saying? So it's -- so the revenue -- the growth in revenue for the quarter is the average of the subscriber growth for the quarter, whereas, the number of subscribers is the number you ended up with on the last day of the quarter.

--------------------------------------------------------------------------------

Donald W. Reilly, KVH Industries, Inc. - CFO [27]

--------------------------------------------------------------------------------

So if all of your growth of subscribers came on the last day of the quarter, you could be up 10% with a flat rev -- with flat revenue.

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [28]

--------------------------------------------------------------------------------

Right. And conversely, if you added all your subscribers on day 1 of the quarter, then they would be identical the way you're expecting.

--------------------------------------------------------------------------------

Richard Frank Valera, Needham & Company, LLC, Research Division - Senior Analyst [29]

--------------------------------------------------------------------------------

I guess the confusing part is you've been adding subs for 3 quarters prior to the current quarter, right? Which would, in theory be driving year-over-year growth in revenue. And then what happens in the final quarter of that 4-year -- 4-quarter period would be sort of the incremental piece...

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [30]

--------------------------------------------------------------------------------

Yes, right. So it's always compared to the prior year, so both the revenue is compared to prior year and the number of subs. So the only confusing thing is that subs are reported on the last day of the quarter. That's the growth in total subscribers. But the growth in airtime revenue is based on the average number of subscribers, if you will, meaning the number of days that the subscriber was paying money.

So it's always going to be -- if it's linear, if you're adding subs the same every day, then it will always be exactly half of the ending subscriber total.

--------------------------------------------------------------------------------

Richard Frank Valera, Needham & Company, LLC, Research Division - Senior Analyst [31]

--------------------------------------------------------------------------------

Got it. Got it. Fair enough. And just wanted to be clear, the -- I think historically, you guys have actually given the airtime revenue number. Do you have that convenient? Can you actually tell us what that was?

--------------------------------------------------------------------------------

Donald W. Reilly, KVH Industries, Inc. - CFO [32]

--------------------------------------------------------------------------------

Yes, it was just $18 million.

--------------------------------------------------------------------------------

Richard Frank Valera, Needham & Company, LLC, Research Division - Senior Analyst [33]

--------------------------------------------------------------------------------

Got it. And then just wanted to revisit this TACNAV large order situation. So Martin, is it fair to say that -- and I think the answer is yes, but there's a handful of large orders we've identified in the past. At least 2, if not 3, that -- one of which I think we already have sort of semi-built in an inventory and others that are at various states of completion.

Right now, we're still waiting and obviously, we've got some sort of new developments over in the Mid East that -- but no changes at least in sort of -- no cancellations of those orders, as far as you know?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No, absolutely not. And again, when we're trying to forecast, we're just taking that factor in because we read the news like everybody else. It's not related to anything that's actually happened. We were just factoring in that that seems like it's going to be a distraction and it's hard to see how that would accelerate things.

So no reason for us to put it into Q4 guidance. But I just want to stress that nothing bad has happened. We're just thinking this may not positively impact the timing. That's all.

--------------------------------------------------------------------------------

Richard Frank Valera, Needham & Company, LLC, Research Division - Senior Analyst [35]

--------------------------------------------------------------------------------

That's a fair point. And then final one. I know you gave the percentages for FOG and TACNAV. But could you actually give the actual dollar numbers for those in the quarter?

--------------------------------------------------------------------------------

Donald W. Reilly, KVH Industries, Inc. - CFO [36]

--------------------------------------------------------------------------------

Sure. So our FOG sales in the quarter were $7.8 million. And our TACNAV sales were about $700,000.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Our next question comes from Chris Quilty with Quilty Analytics.

--------------------------------------------------------------------------------

Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [38]

--------------------------------------------------------------------------------

Just a follow up on a number, Don. Can you give that backlog for the inertial navigation again? I heard 0.9, and maybe missed the front integer?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Just 1 second, I'll just get it back from my script.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And while we're there, can you also pull up the mini-VSAT gross margin in the quarter?

--------------------------------------------------------------------------------

Donald W. Reilly, KVH Industries, Inc. - CFO [41]

--------------------------------------------------------------------------------

Yes. So first backlog for inertial nav was $8.9 million, $4.4 million scheduled to be shipped this year.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Got you.

--------------------------------------------------------------------------------

Donald W. Reilly, KVH Industries, Inc. - CFO [43]

--------------------------------------------------------------------------------

And our airtime margin was 32% -- say, 32.5%.

--------------------------------------------------------------------------------

Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [44]

--------------------------------------------------------------------------------

Okay, so that's down a little bit. What was driving the decrease in margin?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [45]

--------------------------------------------------------------------------------

Well, it's actually up sequentially as we expected. So I'll just let Don speak to specific numbers, but just from a color point of view. So as we added the HTS network at the very end of last year, we're effectively running 2 networks.

So as we add subscribers that's coming on board and the costs are being spread over a larger number of subscribers, so we're actually pretty pleased that we saw the turnaround in Q3 with margins improving sequentially, and we expect that trend to continue into Q4 as we get more and more people on our HTS network. So...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So the margin did actually improve quite nicely from the second quarter, but second quarter had -- I think we mentioned some onetime costs and some other issues. So it's improving and we expect it to continue to improve. Perhaps not that -- sorry?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

You said 32 and a half?

--------------------------------------------------------------------------------

Donald W. Reilly, KVH Industries, Inc. - CFO [48]

--------------------------------------------------------------------------------

32.5%, yes. So probably not improving as fast we might have hoped or expected, but still definitely improving and we are confident that it will continue to.

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [49]

--------------------------------------------------------------------------------

Right. And then speaking about ARPU, so ARPUs are actually increasing year-over-year. I think they're up a little bit sequentially as well. So that's also going in the right direction. So...

--------------------------------------------------------------------------------

Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [50]

--------------------------------------------------------------------------------

And is that, again, a trend of AgilePlans being well above the minimum? And are you seeing any upward migration in AgilePlans and, if so, what's driving that?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [51]

--------------------------------------------------------------------------------

Yes. So we -- so I was speaking about total ARPU but also for AgilePlans' ARPU we're seeing a little bit of increase in the ARPU, which is nice. So it's still holding at 2 to 3x the minimum. So people are continuing to buy the higher packages, which is great. So if anything, it's slightly up on the ARPU. So it's been more than a year now. So that's good to see.

As far as further improvements in ARPU, we are offering a new movie package, which does not require a media server. So that's an over the air upgrade. So we've just rolled that out and we have some other new content options that we'll be introducing in the next couple months here.

So overall, subscribers are up, unit shipments are up, ARPU is up, so we're pretty happy with the way things are going. And the gross margin, well, I agree with Don, we're not as happy with that as we could be, but the trend is up. So that's moving in the right direction as well.

--------------------------------------------------------------------------------

Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [52]

--------------------------------------------------------------------------------

Okay. One other thing that was down in the quarter, I think sequentially, AgilePlans as a percent of commercial declined. Was that simply because of the number of non-AgilePlans being up so much, I think like 45%? Is that another factor?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [53]

--------------------------------------------------------------------------------

Yes -- no, you're right. That's a -- I think that's a non-important stat right now. I think what happened is we had a couple big fleets who decided they want to buy the hardware, which is great for us. So they want to buy rather than do Agile, which is -- we're perfectly happy with that.

--------------------------------------------------------------------------------

Donald W. Reilly, KVH Industries, Inc. - CFO [54]

--------------------------------------------------------------------------------

We'll take that.

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [55]

--------------------------------------------------------------------------------

So that's not a negative. But we see no reduction in the demand for Agile and the typical commercial sale is still going Agile.

--------------------------------------------------------------------------------

Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [56]

--------------------------------------------------------------------------------

Okay. Content was also up and that's been struggling for a couple years now. What's your sort of prognosis near-term and longer-term for -- whether you can achieve growth in that business?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [57]

--------------------------------------------------------------------------------

Yes, actually, the content business, which we call our training and content together, was actually down and that's what I addressed in my prepared remarks, where we have new software, new features and we're starting to see the number of vessels grow. This quarter, there was an increase in the net number of subscribers. So we do expect that return to growth on the revenue line, but we haven't seen that yet. So that was down year-over-year this quarter.

--------------------------------------------------------------------------------

Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [58]

--------------------------------------------------------------------------------

Got you. And the FOG business is doing really well. I mean, it's supporting most of your operating profit at this point. What's your outlook as you go into 2019? Do you have sufficient visibility either with customer contracts or pipeline that you think the business can continue to grow at the sort of double-digit rates into 2019?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [59]

--------------------------------------------------------------------------------

I think so. I think, basically, at this point, we don't have -- obviously, Q4 guidance yet, but we're looking at the trends and we haven't seen anything that tells us that these trends are going to be reversed. And that's true both for our VSAT business and for our inertial nav business. So we're on a nice positive trajectory with more customers and customers who are getting their products to market successfully and we're designed in. So we're optimistic that that trend should continue.

--------------------------------------------------------------------------------

Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [60]

--------------------------------------------------------------------------------

And is there any single item in there that really has started to drive the growth of the business, either a customer or a certain application, or is it just truly broad-based?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [61]

--------------------------------------------------------------------------------

It's pretty broad-based. I mean, there's some big drone stuff in there, but there's also autonomous vehicles. On a sort of daily basis we get these -- we got a nice order yesterday for $0.5 million for autonomous vehicles, for inertial measurement units. So it's very -- the nice thing about our FOG business is that there are so many different applications. It really is that -- autonomous everything now. So we're seeing a lot of different opportunities there.

--------------------------------------------------------------------------------

Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [62]

--------------------------------------------------------------------------------

Got you. And final question, just on -- back to the mini-VSAT business. When you look at seasonality, obviously, Q4, we get some softness. Are you seeing any issues that are impacting the business on a regional basis? Either European or Asia-Pacific region that give you concern?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [63]

--------------------------------------------------------------------------------

No. The European sales and bookings have been very strong. Asia is especially strong. We see -- on a global basis, you always have some regional players that are in the market, but we haven't seen anything new there. And we're really optimistic with our new product. We're going to address a whole other segment. It's dramatically faster both up and down in terms of forward and return length speed. So we're expecting that growth to continue.

--------------------------------------------------------------------------------

Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [64]

--------------------------------------------------------------------------------

And does that V3 product -- I mean, how important is that? I know in terms of volume, the V3 was always higher volume than V7. But in terms of revenue contribution, will that V3 also have AgilePlans attached to it? Or will that be more of a metered?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [65]

--------------------------------------------------------------------------------

No -- yes, so that's right. So the V3-HTS won't be part of the AgilePlans. It's a straight hardware sale, relatively affordable hardware cost compared to V7, but with the speed and the pricing, we think it's going to be a great replacement for L-band systems that are out there for fishing, workboats, just a whole other category.

So over the course of this year, we've seen the V7 actually dramatically outsell the V3. So we think because the V7 was HTS and the V3 wasn't, so we're expecting this to sort of reignite that part of the market.

--------------------------------------------------------------------------------

Operator [66]

--------------------------------------------------------------------------------

Our next question comes from Ric Prentiss with Raymond James.

--------------------------------------------------------------------------------

Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [67]

--------------------------------------------------------------------------------

Want to do a couple of follow-up questions. First, on the guidance. When you mentioned the political tensions and the TACNAV side, I didn't think you'd ever put in a couple of those large international TACNAV orders. Is that still the case? This is just some extra TACNAVs you had, the kind of 2 or 3 that were big and then inventory, hadn't been in the guidance?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [68]

--------------------------------------------------------------------------------

Right. Yes, so there was -- as Don mentioned, it was more in the high end of the guidance range, but there was some smaller amounts not related to very large orders that were in the guidance. Sort of the run-of-the-mill TACNAV that was baked into our annual guidance when we set it at the beginning of the year.

--------------------------------------------------------------------------------

Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [69]

--------------------------------------------------------------------------------

Right, right. But the really very large ones weren't in guidance and still are not in guidance as you wait for those to kind of get cleared?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [70]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [71]

--------------------------------------------------------------------------------

Okay. And then on the AgilePlans, to follow up on some of Chris' questions. You mentioned I think, 64% of commercial sales took Agile this time. That was down a little bit. Where do you think that heads over time? Should we think of it in the 60s? Does it get back into the 70s? Could it really hit 80% as you think about what the take rate of agile could be? And was there any impact on that ability to fulfill the sales because you had to get your production capabilities up?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [72]

--------------------------------------------------------------------------------

Right. So I think -- I don't see any reason why it couldn't get up to 80%. I think that the AgilePlans continues to be very attractive. But again, this is a business model that we've used to gain market share and to dramatically increase sort of the pace of growth. It's not that we prefer Agile over a straight sale.

So in other words, if a customer wants to buy the hardware outright, that's fantastic for us in terms of cash flow, it's actually better. So it's not that we think that there's anything wrong with selling hardware, but I do think that this model is attractive and in the commercial market, I think it's going to continue to grow.

--------------------------------------------------------------------------------

Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [73]

--------------------------------------------------------------------------------

Right. And just really, it facilitates sales, like you said? Okay.

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [74]

--------------------------------------------------------------------------------

Yes. Kind of like, do you want your software on the cloud or do you want it on-premise? And big software companies don't really care what your preference is as long as you become a customer of theirs.

--------------------------------------------------------------------------------

Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [75]

--------------------------------------------------------------------------------

Right. You want to have both options available, yes.

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [76]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [77]

--------------------------------------------------------------------------------

And then as far as gross margins, you touched on it a couple of times that there's been improvement and you expect further improvement but maybe you're not as happy at the pacing. Can you help us understand where you think you could head to on those margins and how long it would take then if it's going a little slower than you think?

--------------------------------------------------------------------------------

Donald W. Reilly, KVH Industries, Inc. - CFO [78]

--------------------------------------------------------------------------------

Yes. We think -- it won't be -- probably not in 2018, but we expect to get back to -- historically, we were in the high 30s. Next year, we should start off the year getting with -- at 35 plus and we should, as the year progresses, get closer and closer to where we were historically.

--------------------------------------------------------------------------------

Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [79]

--------------------------------------------------------------------------------

Okay, that makes sense. And then you touched on briefly also that you had redone your debt to get some covenant -- lighter covenants. What are looking to do there? What was kind of the real catalyst to redo the debt and get the covenants less restrictive?

--------------------------------------------------------------------------------

Donald W. Reilly, KVH Industries, Inc. - CFO [80]

--------------------------------------------------------------------------------

So the first reason is the debt was due in July of '19. So I wanted to get out in front of that, so I don't have to report the debt as current. So that was the real driver, quite honestly.

But since we were doing that, we worked with our bank partners to increase the revolver. Yes, to increase the revolver and to make the -- certain of the covenants less restrictive so that we don't run up against covenant issues that we happen to have -- that's going to the make CapEx requirement in any particular month that needs cash.

So the old requirement, the debt covenant, the leverage ratio was 1.5. With the new covenant the leverage ratio requirement is 3.0, scaling down to 2.0 at the end of the term. But it gives us at least a year or more of a very high leverage ratio, allowing us to borrow against the revolver if we need it, but in any event, not to be -- not to run up against cash flow constraints that could affect our ability to invest.

--------------------------------------------------------------------------------

Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [81]

--------------------------------------------------------------------------------

And does that fit into the whole photonic chip and partnership ramp that you might be looking at?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [82]

--------------------------------------------------------------------------------

I'm not sure that, that would really be part of this. So -- at least in my mind, I see this as more -- as Don mentioned, this bank deal was coming due in 2019 anyway. When we entered into the agreement years ago we hadn't envisioned the AgilePlans. So it made sense to get the debt agreement to match the realities of our business model as it is today. And maybe -- they were very supportive in doing that. So I don't think it really relates to raising money for FOG or photonic chips or anything like that.

--------------------------------------------------------------------------------

Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [83]

--------------------------------------------------------------------------------

This is really tied to the AgilePlans because obviously, you have to capitalize some of that equipment and just if you have strong sales or you want to be able to meet the capital, you have the leverage.

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [84]

--------------------------------------------------------------------------------

Yes, exactly. Yes, you got it. That's right.

--------------------------------------------------------------------------------

Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [85]

--------------------------------------------------------------------------------

Yes, I was just trying to figure it out because I was just like, the CapEx for the FOG -- any thoughts about what the partner would bring to the table or how structuring might occur with that future relationship with the supplier?

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [86]

--------------------------------------------------------------------------------

No, we're fairly open-minded about how it could work. I think we're looking for something that brings us credibility and scale. Those are really the 2 things we're looking for.

--------------------------------------------------------------------------------

Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [87]

--------------------------------------------------------------------------------

Great. Well, have a good Fort Lauderdale Boat Show. It looks like it's going to be an exciting day with the product launch down there.

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [88]

--------------------------------------------------------------------------------

Yes, we're looking forward to it.

--------------------------------------------------------------------------------

Operator [89]

--------------------------------------------------------------------------------

Speakers, at this time, we have no further questions in the queue.

--------------------------------------------------------------------------------

Martin A. Kits van Heyningen, KVH Industries, Inc. - Co-Founder, Chairman, CEO & President [90]

--------------------------------------------------------------------------------

Great. We'll sign off at this time, and as always, feel free to contact Don or myself directly with any follow-up questions. Thank you.

--------------------------------------------------------------------------------

Operator [91]

--------------------------------------------------------------------------------

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