Peter Rendall - CFO Martin Kits van Heyningen - President and CEO.

James McIlree - Chardan Capital Rich Valera - Needham & Company Chris Quilty - Raymond James.

Good day ladies and gentlemen welcome to the KVH Industries Q2 2014 Earnings Call. As a reminder this conference is being recorded. At this time, for opening remarks and introductions I would like to turn the conference over to Peter Rendall, CFO. Please go ahead..

Good morning everyone this is Peter Rendall and with me is Martin Kits van Heyningen, Chief Executive Officer of KVH Industries. Welcome to today’s call. This call will address the second quarter earnings release that we issued earlier today. Copies of the release are available on our Web site and also from our Investor Relations department.

This call is being simulcast on the Internet, and will be archived on our Web site for future reference. If you are listening via the web, feel free to submit questions to ir@kvh.com, and we will answer them following this call. This conference call will contain certain forward-looking statements that involve risk and uncertainty.

For example, statements regarding financial and product development goals are forward-looking. The Company’s future results may differ materially from the projections described in today’s discussion.

Factors that might cause these differences include, but are not limited to those mentioned in today’s call and risk factors described in our most recent Form 10-Q, filed with the SEC on March 17, 2014. The Company’s SEC filings are directly available from us, from the SEC, or from the Investor Information section of our Web site.

Now at this time, I would turn it over to Martin for today’s discussion of our results.

Martin?.

Thanks Peter and thank you all for joining us today. This morning we reported second quarter revenue of 40.9 million and pro forma earnings per share of $0.05 that was about the midpoint of our quarterly guidance. Our overall results reflect the good growth in our mobile broadband business.

Our maritime VSAT airtime revenues continued on their trend of double-digit growth and we’re pleased to see a better than normal number of new activations during the quarter. ARPU also ticked higher in the quarter and fixed rate plans are now just over $2,000 per month.

Our TACNAV revenues were up by 15% however at lower than expected FOG sales caused our guidance and stabilization revenues to decline year-over-year. Looking at each business in greater detail, our overall mobile broadband revenue was $29.7 million for the second quarter, it’s a 9% increase year-over-year.

Much of this growth came from strong mini-VSAT Broadband airtime sales which were up 24% year-over-year. Hardware sales of TracPhone products for mini-VSAT Broadband network were below our 250 unit per quarter run rate but our number of activations was quite strong with well over 300 systems activated.

This could be due to some inventory coming out of the channel in the quarter and into use and sales in July show normal hardware sales.

Maritime satellite TV sales of 4.1 million were flat with the prior year and they were impacted by a late quarter launch of our brand new TracVision product line which resulted in demand for new products that carried over as backlog into Q3.

We expect to clear this backlog during the current quarter which will result in a year-over-year increase in Q3 for our TracVision TV products. It was a very active quarter for our mobile broadband teams in terms of rolling out new products and services and for business development.

KVH became the first maritime VSAT provider to multicast a live sporting event to customers at sea all over the world when we broadcast the World Cup Finals. This was incredibly well received and we got an enormous amount of positive feedback from our customers.

One of our larger customers Vroom [ph] sent pictures of their crews watching the World Cup on board their ships to everyone in their company to highlight their plans for rolling out the IP-MobileCast service.

Several maritime industry magazines registered Vroom [ph] experience and we expect to see a lot of positive articles a result, which would be a great way to help build awareness for the IP-MobileCast service. Another major development of course is our acquisition of Videotel, the maritime industry’s leading provider of e-learning services.

Videotel is one of the best known companies in the commercial shipping industry. They have very good relationships with most of the ship owners and operators and other industry stakeholders.

TSR [ph] training is a very important problem in the industry due to all of the new regulations and we’ve already received a lot of inquiries and positive feedback about our strategy to deliver Videotel’s training services over our mini-VSAT network.

I really believe that we’re reaching a tipping point now in terms of people embracing the benefits of our global content delivery system. Adding Videotel represents a key part of our strategy to offer mission critical services and new capabilities via IP-MobileCast on top of our great entertainment features.

We’ve already begun our integration efforts between the two teams and we’re planning big customer events at upcoming trade shows like the one in Hamburg at the SMM Show as well as other shows around the world later in the fall. The sales teams are working on ways to bring together Videotel and KVH customers to create cross selling opportunities.

In addition to our own training content we’ve also signed up another significant partner to deliver their content over the IP-MobileCast service. Applied Weather Technology or AWT. AWT software optimizes the ship’s route to save fuel and to arrive at its destination just in time.

It requires high resolution global weather forecast data that we multicast to ships four times a day.

Their sophisticated route planning software answers the two basic questions on the bridge, what should our course be and how fast should we be going right now? It routes around storms and also minimized the field consumption ships and these ships typically burn about $50,000 of fuel per day.

So it's yet another compiling reason to buy our IP MobileCast service. Moving on to our guidance and stabilization business, revenue which includes our fiber optic gyro products and our TACNAV military navigation system was $11.2 million in the second quarter and that's down 30% year-over-year.

TACNAV product revenues were $5.7 million, which is actually up 15% from the same quarter last year but this increase was offset by lower FOG sales which were down 44% to $4.5 million year-over-year. The reductions in U.S. defense spending and programs like CROWS weapons system was a major factor in the decline.

The commercial side of the FOG business continues to grow, now representing 80% of our revenues and these are coming from emerging market opportunities like driverless cars, drones, stabilized cameras as well as robots.

Now while all these programs take time to develop, we believe that they represent significant opportunity which is why we continue to invest both in R&D and the production capacity. We continue to see strong demand for our TACNAV systems, which was reflected by the $5.2 million order we received in May.

A significant part of this order was already shipped in the second quarter.

In past calls we’ve mentioned other large TACNAV orders that we’re actively tracking and one of these potential contracts is with a major defense prime contractor, who has now received the order from their customer for vehicles and has given us a letter contract for up $500,000 to begin work while the terms of the overall contract are finalized.

So this took a bit longer than we would have liked but we hope to make an announcement on this contract shortly. Our product development efforts for TACNAV have resulted in the new high-end system we call TACNAV 3D which was introduced last month at a major military show in Paris call Eurosatory.

TACNAV 3D is able to navigate using that rating even work on dead reckoning, even works on hilly or mountainous terrain, which is important capability, even when GPS is blocked or jammed.

Our TACNAV 3D is based on merging our digital compass technology with our 1750 IMU, a built in GPS and an Iridium satellite data, a significant improvement over anything else on the market at its price point. We anticipate this opening up the broader high end market for KVH’s military navigation systems.

In fact the letter contract we just signed with the plan contractor I just mentioned was for a variant of the TACNAV 3D and includes our fiber optic gyros. So looking forward to the remainder of the year, we’re very excited about the opportunities and comfortable with our prospects with continued success in each of the strategic business areas.

For the mobile broadband business, our IP MobileCast service and our new relationship with our Videotel colleagues and our application provider partners like AWT and Jefferson give us an exciting story to tell customers that really differentiate the KVH mini-VSAT Broadband service from all competing solutions.

We'll use these relationships to cross sell and win new business from a KVH customer base that now includes more than 20,000 vessels. We believe that this powerful new combination will change the trajectory of our broadband business. We expect to exit Q3 with our recurring service revenues to be around 60% of the entire Company revenues.

The TACNAV pipeline continues to look very solid and we’re hoping to broaden the market by being able to meet the navigation requirements of higher end platform with our new TACNAV 3D product.

And finally we do expect our FOG business to rebound, both with increased demand from military customers, which will undoubtedly come as vehicles are upgraded and new systems are fielded in conflict areas around the world and more importantly from the many new commercial applications.

The machines that move and make decisions on their own based on sophisticated software rely on advanced and very accurate sensors like fiber optic gyros.

Right now a lot of these sales are just for prototypes being designed into these new products but in the longer term, the next generation of self-driving cars and humanoid robots that you read about in the paper require extremely precise answers. These are the new markets and they are the customers that we’re targeting with our new FOGs.

So now I’d like to turn the call back over to Peter for the detailed financial results.

Peter?.

Thank you Martin. Now I’d like to turn our attention a more in-depth financial review of our second quarter results. This morning we reported revenues of $40.9 million, which was 5% lower than the revenue reported in the prior year quarter.

As Martin stated earlier, our mobile broadband revenues of $29.7 million represented a 9% year-over-year increase, while our guidance and stabilization revenues were 30% lower at $11.2 million. Revenues from VSAT business were $18.6 million in the quarter, an increase of 8% year-over-year.

Of this amount airtime services represented, 14 million an increase of 24% over the second quarter of 2013.

During the second quarter our VSAT airtime ARPUs for the variable pay-by-the-megabyte plans were consistent with what we've reported in recent quarters, mainly $600 to $700 a month, where we saw a modest increase in the fixed rate plans from $1,900 per month to total over $2,000 per month.

All other SATCOM revenue including TV systems, KVH Media and Inmarsat Systems and associated airtime was $11 million up from 10% from a year ago. Within that amount maritime satellite TV product sales of $4.2 million were almost flat year-over-year while land based systems declined 11% to $1.1 million as we had anticipated.

TACNAV product revenues of $5.7 million came in as expected and were 15% higher year-over-year. As Martin has also mentioned, the main contributor to this revenue category was an international military customer who was referenced in the press release we issued in May.

Now turning to our FOG business, FOG sales in the second quarter of $4.5 million were 44% lower than the same period last year. As it relates to this year-over-year decrease the significant contributor was a sharp slowdown in spending under the CROWS program as we've previously noted.

For the second quarter almost 80% of our FOG revenues related to these commercial applications continuing the trend we’ve seen throughout this year with sales into commercial applications significantly higher than those related to defense applications.

As it relates to the split of our product and service revenues, 49% of our revenues in the second quarter was service related, the vast majority of which was subscription based. In the second quarter last year, only 40% of our revenues related to services.

Included in that amount was 13% related to installation and program management services under the Saudi Arabian contract. In the current quarter 74% of service revenues related to airtime and 19% related to KVH Media.

With the continued airtime growth and the inclusion of Videotel subscription based e-learning services we anticipate that our service revenues will continue to grow as a proportion of our overall revenues.

The gross profit margin in the second quarter of 43% was slightly higher than our expectations and slightly higher than the 42% we'd reported in the second quarter last year. Our VSAT airtime gross profit margin of 35% for the second quarter was in line with what we reported in the prior year quarter.

As it relates to our second quarter operating expenses of $16.8 million, these included almost $500,000 of acquisition related expenses for the Videotel acquisition. On a like-for-like basis, excluding acquisition related expenses for KVH Media last year, our year-over-year operating expenses were 10% higher.

Almost all of this increase related to having a full quarter of KVH Media’s operating expenses since the acquisition took place midway through the second quarter of last year.

And compared to the first quarter of this year excluding acquisition related expenses and third party sales commission on the additional TACNAV revenues, our operating expenses actually declined by 3%.

So excluding Videotel acquisition related costs and a discrete tax charge, our net profit for the second quarter was approximately $800,000 or $0.05 per share. This compares to the $2.3 million of net profit and $0.15 of EPS we reported in the same period last year.

For the second quarter, our EBITDA adjusted for equity expense was $3.8 million, depreciation and amortization for the quarter was $1.7 million and equity expense was approximately $1 million. Now moving on to our balance sheet.

For June 30th, we had cash and marketable securities of $54.4 million, an increase of approximately $600,000 from the end of the prior quarter. At quarter end, our inventory balanced stood at $20.1 million, which was $1.4 million higher than that on hand at March 31st.

Part of this increase was attributed to components related to our new TracVision satellite TV, where orders were received in the second quarter but are shipping in the third quarter. Capital expenditures during the second quarter were $0.8 million, making the total year-to-date total spend $1.7 million.

Backlog for our guidance and stabilization products and services at the end of June was approximately $14 million, down by $3 million from March 31st. Now I turn to our outlook for the third quarter and full year.

So following the acquisition of Videotel at the beginning of the third quarter there are number of accounting factors relating to our acquisition of Videotel that may impact our results.

Our purchase accounting review of Videotel is incomplete, which includes the valuation intangibles and therefore the impact of future intangible amortization charges on our results. The guidance for the remainder of 2014 is based on a preliminary view of these intangibles but that could be materially different from the final analysis.

We have estimated that total company intangible amortization for the third and fourth quarters will be approximately $1.4 million. In addition, while we’re confident about some large TACNAV orders being announced in the coming weeks, we still remain cautious as to the timing of product deliveries under those contracts.

We also continue to be conservative in our forecast for sales of our FOG products given the recent quarterly run rate we’ve experienced, while we expect our mini-VSAT business to show solid year-over-year growth, particularly as we did see an uptick in new customer activations during the second quarter.

Our operating expenses are expected to be higher in the third quarter as Videotel’s operations were acquired at the beginning of July. We expect to have effective tax rate for the reminder of the year to be approximately 33%, subject to the effect of any unforeseen discrete items.

With this context, our guidance for third quarter revenue is in the range of $43 million to $47 million reflecting the contribution of Videotel, expected decline in TACNAV revenue and continued quarter-over-quarter and sequential growth from our mini-VSAT business.

We expect our GAAP net income for the third quarter to be in the range of $0.03 to $0.08 per diluted share. For the fourth quarter our revenue guidance is in the range of $47 million to $51 million while GAAP net income for the fourth quarter is expected to be in the range of $0.10 to $0.15 per diluted share.

In conclusion with the expected growth in subscription based services from airtime, VOIP and content, we continue to be confident in our long-term strategic growth par. And on that I would like to hand it to the operator to take your questions..

(Operator Instructions) We’ll take our first question from James McIlree from Chardan Capital..

Can you give us the SATCOM breakdown? You said it was $11 million total. I’m talking about the other SATCOM, axe the mini-VSAT. So you said $11 million total, $4.1 million Maritime and land $1.1 million.

What's the other $5.8 million? Including Inmarsat airtime and products or?.

Can you give us the SATCOM breakdown? You said it was $11 million total. I’m talking about the other SATCOM, axe the mini-VSAT. So you said $11 million total, $4.1 million Maritime and land $1.1 million.

What's the other $5.8 million? Including Inmarsat airtime and products or?.

Yes, so we have, there are other products accessories, services, marine navigation products like our digital compasses.

And head wins in there right?.

And head wins in there right?.

And KVH Media is in there..

Okay.

And how much was KVH media?.

Okay.

And how much was KVH media?.

For the quarter revenue wise, it was $3.8 million..

$3.8 million. And for Q3 you’re looking at 43 to 47, but that includes I'm assuming a full quarter of Videotel.

If you axe out Videotel's and you’re down Q-to-Q and I’m just trying to understand why that is? What’s going down on a quarterly basis to result in that?.

$3.8 million. And for Q3 you’re looking at 43 to 47, but that includes I'm assuming a full quarter of Videotel.

If you axe out Videotel's and you’re down Q-to-Q and I’m just trying to understand why that is? What’s going down on a quarterly basis to result in that?.

The big thing is TACNAV. So we've shipped the majority of that $5.2 million order. So sequentially from Q2 to Q3 the major delta is decline TACNAV revenues..

And then the reason for the increase in Q4 is you’re expecting consumption of TACNAV?.

And then the reason for the increase in Q4 is you’re expecting consumption of TACNAV?.

Correct, we have backlog already in hand for Q4 and we also have other contracts that are pending. So what we’ve done is deferred any TACNAV that’s not a backlog currently in Q3. So that’s not in our guidance at this point. So that’s the only thing that’s declining sequentially..

Okay.

And then the unit orders I think that you referred to of 250 for the mini-VSAT, how much lower than 250 was it for the quarter?.

Okay.

And then the unit orders I think that you referred to of 250 for the mini-VSAT, how much lower than 250 was it for the quarter?.

I don’t want to give the exact number but it was below -- not materially below that number, but it was usual. So that’s why I pointed it out. So, and it was also unusual that we had very high activation. So it was kind of a strange quarter. So we had low hardware revenues but very high activation.

So we hadn’t seen that before, which is why I mentioned it. And based on what’s happened in July, it was just an anomaly. So maybe from channel -- because it doesn’t take a lot to move this. We’re talking about 20 or 30 units. That’s a change from our estimate but -- it doesn’t take a lot for that to happen.

So we did see a drop in VSAT hardware sales in Q2 that we do not expect to reoccur and so far in July it has not and we're on a solid base to do 100 systems [indiscernible] or so. So it’s looking good, but it definitely caused our hardware revenues to be low in Q2, which was disappointing.

But if it’s coming out of the channel, that wouldn’t actually bother me..

Right.

Okay, so you’re not talking about half the number of units?.

Right.

Okay, so you’re not talking about half the number of units?.

No, no, no, no.

Still in the ballpark of….

Still in the ballpark of….

10%. We've been pretty consistent about giving you a range and I didn’t want to mention it..

And then I mean I think we’re all kind of waiting and hoping for acceleration in that number because of KVH Media.

Is that still a reasonable expectation; that you get an acceleration in the number of mini-VSAT sales per quarter?.

And then I mean I think we’re all kind of waiting and hoping for acceleration in that number because of KVH Media.

Is that still a reasonable expectation; that you get an acceleration in the number of mini-VSAT sales per quarter?.

Yes, absolutely, we think that these new services that are just coming online, we’ve got the entire IP MobileCast network up and running now. We’re just starting to deliver immediate servers. We activated people in the second quarter, upgraded their software so they could actually watch our media content on their hardware and the live event.

So I think we’ve got tremendous feedback. So I think that this absolutely has to change the growth rate that we’re on..

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

Just wanted to revisit the guidance. If you take the midpoint of your prior full year and then the midpoint of sort of third and fourth quarter guides, it’s actually down around $15 million, it looks like if you assume roughly $6 million a quarter for Videotel.

So first I just wanted to confirm that you are assuming about $6 million a quarter for Videotel. If not how much? And if that’s the case, $15 million seems like a big delta to attribute to just TACNAV. So I'm wondering if there are other factors that led to the lighter second half than we had been for previously..

So I think part of the confusion is that we hadn’t updated full year guidance at the end of the last call. We’re still within the range. I think perhaps you were assuming the midpoint of the range but given that Q1 was not at the high end of the range, so that probably wasn’t a good assumption. So then Q2 came in light.

So that’s, I think that’s probably the biggest discrepancy. So in terms of where we look now versus where we were at the end of the quarter really the only major change in our outlook for Q3 and Q4 right now is the FOG business.

So TACNAV is expected to be low in Q3 which was the answer to your previous question, but strong in Q4 and on plan for the year. FOG we’ve taken down significantly. So we’ve taken $5 million or $6 million out of FOG in the second half of the year in terms of our own internal forecast based on what we just saw in Q2..

Can you give a rough -- for guidance and stabilization as a whole, anyway you can kind of quantify what you’re expecting for the second half either relative to the Q2 base line or year-over-year?.

We’re anticipating a roundabout $20 million or so, maybe little higher. We have been very conservative in our focus based on the run rates. Martin -- that was a significant contributor to the overall reduction in annual guidance..

So we also have this contract that's starting. So we’re going to start to see some engineering revenues as we begin work on this other contract that I mentioned. So really just to recap, if you want to look at the difference between our outlook today and our outlook at the end of the last quarter its FOG, that’s the big difference.

We’re were expecting to see a rebound in FOG and at this point we’re taking it out of the forecast..

Got it.

And can you just say what you’re roughly expecting for Videotel in the second half as well?.

Subject to all the purchase accounting processes happening, we’re estimating $11 million and $12 million..

Great.

So you're not losing, you don’t think much revenue to like deferred -- loss of deferred from purchase accounting at this point you think?.

We’ve assumed a similar patent that we had with KVH Media, based on the similarities of the business..

And then I just wanted to confirm, the $1.4 million of intangible amortization, that’s for the entire second half.

So it's sort of a 700 per quarter run rate and is that what we would assume going into ‘15 as well?.

That’s per quarter. Baked into the forecast..

Got you.

So do you expect to be presenting your results with that kind of pro forma-ed out as well since I think that’s kind of the way we’d probably like to look at them?.

We’ve talked about that a lot internally Rich, and I think that the answer is probably yes next time. We didn’t want to do it this quarter but I think probably net quarter we will take a look at whether we should take out the amortization of intangibles..

Rough numbers is like $0.09 per quarter which is clearly very material in the context of your business. Seems like it would behoove you to clarify that.

And then we could probably back into this, but can you say roughly how much incremental OpEx you expect from adding in Videotel in the third quarter?.

Excluding any acquisition related costs, we’re anticipating something in the order of $3 million..

Per quarter?.

Yes. But that includes the…..

That includes the amortization, that’s a GAAP number?.

That’s a GAAP number..

So it's really about half of that if you were to back out the amortization?.

No we’re assuming amortization of a little $100 million but that [indiscernible] get amortization for KVH Media..

Okay. I thought you said it was $1.4 million per quarter of amortization from just Videotel..

No, no that's the whole company..

For the entire company, okay, I’m sorry..

So, about 1 million of that is Videotel..

And we’ll take our next question from Chris Quilty from Raymond James..

First is a cleanup.

Peter can you give us the breakdown of antenna sales by antenna types?.

First is a cleanup.

Peter can you give us the breakdown of antenna sales by antenna types?.

It's till approximately 60% V7-V11 and 40% V3..

I’m sorry 50% V3?.

I’m sorry 50% V3?.

40% V3..

And 50% V7 and then the balance was V11..

And 50% V7 and then the balance was V11..

Yes, he was combining the V7s and V11s just as big antenna versus small antenna. The reason we group it that way Chris that the V3 is a metered plan and V7 and V11 are both on fixed rate plans. So there are different ARPUs..

Okay, got you.

So have you seen any -- at least between the fixed rate, any shift between V7 and V11 or any impact in terms of large fleet orders?.

Okay, got you.

So have you seen any -- at least between the fixed rate, any shift between V7 and V11 or any impact in terms of large fleet orders?.

No, it’s been relatively consistent. So no surprise that they’re in the mix..

Okay. And Peter you give us a service breakdown and I just didn’t catch the numbers I think in the quarter for KVH Media versus referring services.

Can you give that again?.

Okay. And Peter you give us a service breakdown and I just didn’t catch the numbers I think in the quarter for KVH Media versus referring services.

Can you give that again?.

Yes, we can. For Q2 it was 19% KVH media, 74% airtime VSAT and Inmarsat..

Okay.

And then the balance was what?.

Okay.

And then the balance was what?.

We had some final installation services under the Saudi contract and we had some other NRE that we incurred as well, but relatively small amount..

Okay. The TACNAV contract that you’re working, that's one of the $10 million to $15 million size contract that you had talked about previously..

Okay. The TACNAV contract that you’re working, that's one of the $10 million to $15 million size contract that you had talked about previously..

Yes..

Yes..

And again you’re reasonably confident that you would see hardware shipments by the fourth quarter?.

And again you’re reasonably confident that you would see hardware shipments by the fourth quarter?.

Well, we’re confident that we’ll see hardware shipments on other programs. We don’t have that in our guidance for Q4 from a hardware point of view, no. Our guidance does not include hardware shipments under that particular contract..

Okay.

And can you give us a sense of what you’re seeing in terms of customer update or IP multicast services or package types, whether you’ve got people on 30 day 60 day trials and what the conversion rates are, some sort of event, can you express in pretty strong [indiscernible] that it will be a big update, can you give us any nuances on what you’re seeing?.

Okay.

And can you give us a sense of what you’re seeing in terms of customer update or IP multicast services or package types, whether you’ve got people on 30 day 60 day trials and what the conversion rates are, some sort of event, can you express in pretty strong [indiscernible] that it will be a big update, can you give us any nuances on what you’re seeing?.

Yes, what we’re seeing so far is big free customers are interested packages that are in the $500 to $700 a month range, which is kind of where we expected. Some of these fishing offshore guys are surprisingly interested in more of the high end packages, like what we call a platinum package.

We’ve done a lot of sort of free activations where we upgrade people in the background and then tell them that they have a new capability, that they didn’t know about and get them to try it. So too early to tell what the conversion on that is. So those are people that aren’t in the sales process. We’re just letting them know they got a new capability.

As part of new -- every new proposal obviously where we’re pitching this hard, I think the exciting thing is that we’re now, with Videotel and Headwin media, I think we’re selling to the same customer. I think the challenge we had a little bit in the past was when we’re trying to sell VSAT to NewsLink customers. They were selling to the HR group.

We’re selling to the IT group. And we didn’t really get much of a cross selling benefit. The training and the media and the news products are all being sold to the same person or department within the new organization.

So that’s why we think this is going to be different this time, because we really didn’t good a job of cross selling a year ago when we got the news link and KVH media group on board. So I think that was a bit of a disappointment and now we’re targeting a different customer and we think that we’re going to get a very different result.

So that’s why we’re…..

And that customer is on the HR side, or the Op side now..

And that customer is on the HR side, or the Op side now..

It’s on the HR side. So the HR department typically handles crew welfare, crew entertainment, crew retention hiring and training. So that’s a key difference. The IT department typically isn’t thrilled about any kind of entertainment running on the network. So it’s a different purchase..

And we do have a follow up question from James McIlree from Chardan..

Peter any acquisition expenses in Q3?.

Yes there will be. We’re anticipating that they will be lower than.

Peter, are the acquisition expenses included in the EPS guidance?.

They are included, yes.

And then in response to Rich’s question you said -- I think you said 20 million in guidance and stabilization revenues in the second half. But it sounds like it will be Q4 loaded. That is Q3 will be lower than Q4.

Do I understand that correctly?.

Yes that’s correct..

And it also sounds like TACNAV is going to be a very small number in Q3?.

It’s going to be pretty small. So that's the sequential decline and we have a significant backlog for Q4 shipment in hand signed. So it does not include some of these other contracts that I mentioned because we don’t expect those to ship in Q4..

And then lastly.

So on the FOG revenues, are the FOG revenues at a stable level now but just lower than what you thought they would be or are you thinking that FOG revenues are going lower versus Q2?.

We don’t think they’re going lower. We do think they’re going higher but at this point we’re trying to be much more conservative than we have been because we’ve been wrong for two quarters in a row..

Okay. So it’s not that FOG has gotten worse.

It’s just it hasn’t gotten better at the pace you expected?.

Right. So there are a lot of positives here. We keep talking about FOG because we miss the revenue number but the new products are performing incredibly well. We’re getting the design wins to some incredibly cool projects.

So we do expect to see an uptick here as these things go into production and the short-term benefit that we’re already seeing is that the margins are getting better because the new products are more sophisticated system sales like 1750 IMU, which carries a higher margin.

Product like the CROWS were very low margin product because it was a high volume product originally. So there are some benefits here and we do expect to see things improve. We just don’t want to count on in Q3..

And finally I think at times or usually you give backlog for the guidance and stabilization business.

What is the backlog?.

Backlog is $14 million.

Which is…...

3 million down from March..

Okay.

So $14 million, did I hear that?.

It is correct..

And we do have a follow up question from Rich Valera..

Peter I was wondering if you guys can [indiscernible] your expected net interest expense per quarter given the increased borrowings for the Videotel acquisition..

Can you repeat the question Rich?.

Net interest expense you expect in 3Q and beyond given the increased borrowings for the Videotel acquisition?.

The net will be probably 250 expense..

And we have a follow up question from Chris Quilty..

One more on the commercial fine [ph] products. At least in my sense, those revenues have been kind of $3 million to $5 million a quarter for the last year and half or so.

Is there anything in the pipeline that you see that would maybe double or triple those revenues and I'm not saying in the next 12 months but over the long-term, is there that type of growth potential in the product line and customer base?.

Yes. We’re being designed into some programs that have a potential to be very large. In fact we’ve invested millions of dollars in factory expansion. So we think that there is significant potential here which is why we continue to invest. We’ve completely revamped our product production line to go to a one piece flow line.

So we think there's opportunities in automotive that will be significant..

And automotive would be larger than stabilized cameras or robots?.

Yes..

And we have no further questions at this time..

Great. Well, thanks for listening everyone and as always feel free to contact Peter and myself directly either via phone or email and we will get back to you promptly. Thank you..

And once again ladies and gentlemen that does conclude today’s conference. We appreciate your participation today..