Martin Kits van Heyningen - CEO John McCarthy - CFO.

Ric Prentiss - Raymond James Rich Valera - Needham & Company.

Good day, and welcome to the KVH Industries’ Q3 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to John McCarthy, Chief Financial Officer. Please go ahead, sir..

Okay, thank you. Good morning, everybody. Thanks for joining us today to discuss KVH Industries’ third quarter results and our guidance for the fourth quarter and the 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 today’s call, you can access a webcast replay on our website. If you are listening via the web, feel free to submit questions to ir@kvh.com.

This conference call will contain certain forward-looking statements that are subject to a number of assumptions and uncertainties that may cause our actual results to differ materially from those expressed in these statements. We undertake no obligation to update or revise any forward-looking statements.

We will also discuss certain non-GAAP financial measures and you’ll 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 14th of this year. And the company’s SEC filings available directly from Investor Information section on our website. So, at this time, I would like to turn it over to Martin.

Martin?.

Thanks, John, and thank you all for joining us today. I’m pleased to report very solid third quarter results. Revenues were at the high-end of our guidance at $45.8 million, which is up 3% from $44.5 million in Q3 of last year.

For the quarter, our adjusted non-GAAP earnings exceeded our expectations coming in at $0.27 per share, which is more than double the $0.12 per share, we achieved in the third quarter of 2015 and well above our guidance. This solid performance is reassuring as a momentum of our growing business was able to offset short-term economic challenges.

The impact of the currency exchange rates reduced our revenues by $1.2 million in the third quarter, due to the fact that many of our value-added training and entertainment services are built in British pounds.

On a broader basis, global economic issues have adversely impacted shipping rates due to lower demand, leading to reduced investment and new services and technology by some commercial shipping customers. The low price of oil has also been a factor, hurting our mobile broadband customers in the offshore service vessel market.

The good news is that we’re finally seeing some signs of stabilization, if not an improvement in these areas. The Baltic Dry Index, a popular assessment of the cost of shipping raw materials by sea has doubled since the beginning of the year.

Customers in the commercial shipping market are beginning to explore the cost-saving benefits of better broadband services, which are both considerable and wide-ranging. We’ve also seen encouraging improvements in crude oil prices have recently received sizable orders from fleets of offshore vessels and workboats, which hasn’t happened for a while.

In our guidance and stabilization business, we continue to see the good interest and new sales coming from emerging markets for self-driving cars, and the unmanned air systems like drones.

We’ve also received strong indications that the big military orders, we have anticipated are still moving forward, even though we have yet to receive the actual orders.

So, this good news in each of our major business areas that I’ll cover with you today, start off with the top-level overview, covering the highlights, and then John will cover the detailed numbers and outlook for the fourth quarter.

Starting with our mobile broadband business, the overall revenues for the third quarter were $36.5 million, which were down 3% from $37.8 million in the third quarter of last year.

The results this year include the impact of currency, which reduced our quarterly revenues by $1.2 million to on a constant currency basis, our revenues were incrementally higher than last year. Unit sales of our VSAT system were up 10% year-over-year.

We received several large fleet orders for our mobile broadband services in the third quarter from commercial shipping companies. We have visibility of about half a dozen more promising fleet prospects in our sales pipeline.

Our existing customers are also transitioning to new usage-based pricing plans, which are now growing to account for 53% of our total VSAT subscribers, which has also resulted in an improvement in our monthly ARPU sequentially from the second quarter.

Usage-based pricing allows KVH to provide each of our customers the fastest speeds our service can deliver, which makes our service noticeably better than our competitor services to their strategy of constraining consumption by throttling speeds and a contended network.

News market data published this summer by NSR estimates KVH’s share of the Ku-band Maritime market at 29% of the active users, which is more than double our closest competitor and just slightly less than the next three largest competitors combined.

While we’ve been working diligently to ramp our unit sales above the currently quarterly rate of 200 to 250 units, the sales level is still significantly higher than any of our competitors. So, we continue to gain market share. It’s actually impressive that we’re able to maintain the sales rate, despite the declines in some market segments.

In addition to our new airtime plans, we believe KVH have created significant competitive advantages that will help us win new customers as the maritime markets recover and maritime broadband services start to be widely adopted.

We’re the only maritime satellite service provider that designs unique onboard hardware that is simpler, more reliable, less costly and specifically built for our services making an easier to install than our competition.

Our hardware platform not only manages broadband connectivity for our customer but also helps to manage their onboard networks using the server that’s built into our integrated control unit.

Having an onboard server built into every one of our systems provides great opportunities to extend our core connectivity into the management of the onboard data and the internet of things applications, which will be the backbone of the next-generation of the new cloud-based services.

We manage our own network and implement innovative strategies by multi-casting and background data transmissions that are fundamentally less costly, often by several orders of magnitude to competitors, who aren’t able to tailor their onboard hardware and network technology to implement these types of advanced approaches.

We control access to data with digital rights management encryption, so major movie studios and other companies with proprietary content allow KVH to distribute it over our network. We create content, including video, animations, and our Videotel training business, and audio and multi-language news services in our KVH Media Group business.

KVH's capabilities are unique and enable us to interface with our customers at many different levels. It helps solve their problems more efficiently and more completely than any of our competitors. One major area where we focused on is our strategy for fielding our next-generation network.

It's like most of the satellite owners are targeting the aviation and maritime segments as a significant opportunity. Much of the new capacity will enable us to offer higher speed, as we continue to improve our network.

There have been discussions of excess capacity causing a bandwidth clot that lead to the commoditization of service and falling prices in maritime markets. That's hurt the share price of most of the satellite companies. But it's one of the world's largest customers for maritime bandwidth, we see this as great news for KVH.

Imagine how Starbucks would feel about falling coffee bean prices and you will understand how we feel about falling airtime costs. As a market share and innovation leader, we're in a great position and have every intention of staying a step ahead of our competitors with the services that are both faster and lower cost.

Our Alicia Marine business continues to be strong, especially in the North American market, where we have a dominant market share and have earned the loyalty of customers and distribution channel partners.

Last month, KVH again won the National Marine Electronic Association product awards for both our TracVision, Satellite TV Systems, which won the 19th year in a row and our TracPhone Satellite Communication System, which won for the 14th year.

Looking at our content and training business, although revenues were down compared to last year, this was attributable to the fact that this business is built in British pounds, as I mention. On a constant currency basis, this business grew about 3% over the third quarter of 2015.

We're happy to see this business holding its own in light of the challenges facing the overall shipping industry, which is our primary customer base. Although, it's still small, our IP-MobileCast service had revenue growth of 54% year-over-year and getting a stronger foothold in the market.

The previously mentioned fleet order included IP-MobileCast is part of their services and both BW and Seaspan, two major fleets that just upgraded their mini-VSAT service to our new usage-based plan are also using IP-MobileCast as part of their overall packages.

We're seeing traction in the market as word-of-mouth endorsement from vessels, equipped with IP-MobileCast start to filter through the shipping industry. Our digital newspaper service continues to do well as a standalone product.

For example, our new distribution agreement with Inmarsat to provide news link to their fleet broadband customers, we've already added more than 1000 subscribers this year, bringing our subscriber count to over 9000 ships worldwide. Commercial maritime markets are challenged by new frequently changing regulations.

By turnover a sea fairies, smaller crews and increasingly complicated technology onboard ships. All of which create a great need for training.

We believe we are very well-positioned with Videotel, our training service, to win a large share of this growing market by enhancing its delivery technology, content creation capabilities, alliances with other industry stakeholders that benefit from a better-trained workforce and relationships with new types of distribution partners.

We're developing an exciting new maritime platform which will be previewing at a trade show in Manila later this month. Moving onto our guidance and stabilization business, which includes both our Fiber Optic Gyros and our TACNAV military navigation products.

Revenue was $9.4 million for the quarter, up 38% from $6.8 million for the third quarter of last year, driven largely by our TACNAV products. The TACNAV orders we had originally forecast to ship in Q4 still have not been received.

We've had written confirmation from the contractor that TACNAV is included in the vehicle specifications, we've also had extensive discussions about quantities of vehicles, cable links, and other critical design specifications. The vehicle contractor has built some of the vehicles and shipped them to the end customers' country.

We purchased long lead inventory items and still plan to build the order this quarter as we're prepared to fill the order quickly. We understand that this is frustrating that we don't have the order yet, but it's the nature of international defense sales and they're inherently difficult to predict in terms of timing.

But we still could ship this order in Q4, if we received it in the next few weeks. Our policy is to only include book defense business in our current quarter guidance. This order would also require an export license, which typically takes four weeks.

So, at this point, it would be a cutting too close and far too risky to leave it in our guidance for Q4. Nevertheless, TACNAV opportunities are growing and we're very optimistic about our future prospects for this part of the business. Last month, at the Association of the U.S.

Army Show, we attended meetings related to the Army's requirements for position, navigation, and timing. We discussed the Army's new priority in addressing the vulnerability of GPS due to adversaries’ ability to impede or deny GPS at a variety of ways. The U.S. Military is dependent on GPS for the wide-range of applications.

From tactical navigation of combat vehicles to the timing synchronization of mission-critical, tactical communication systems. In August, U.S.

Army Secretary, Eric Fanning announced a new rapid capabilities office with the specific mission to provide forces with the ability to obtain and trust position, navigation, and timing information, while operating in conditions that deny access to GPS.

This is exactly the benefit offered by TACNAV and its unjammable position and orientation and timing capabilities. The scope for this opportunity is the high priority and the total long-term potential opportunity could involve equipping up the 45,000 combat and combat support vehicles in the U.S. Army.

Turning to our Fiber Optic Gyro business, we are continuing to see ramping sales from customers building solutions for the self-driving car market. We anticipate shipping about 250 automotive gyros this quarter, trouble [ph] still small indicates the pace at which this opportunity is starting to develop.

The annual run rate of business from this segment is currently about $3 million per year and growing.

While NDA has prevented us from discussing specific programs or end-user customers, who are working directly or indirectly with more than a dozen companies, including major automobile manufacturers, tier 1 suppliers and technology companies that are helping to pioneer this new industry.

We’re also investing in R&D to develop the next-generation technology, we’ll need to produce high-precision Fiber Optic Gyro that is mass-producible and can be sold at an acceptable cost for automotive industry customers.

The other emerging opportunity, where KVH has a very good foothold, in the commercial drone market, where our Fiber Optic Gyros are used to provide image stabilization, for dynamic aerial surveying to the metagraphy and the other applications were high-resolution is essential. While the U.S.

Military used drones for many years, with the current inventory of over 10,000, the commercial market for similar systems is just starting to take off. As of March 2016, 4,000 exemptions have been granted to the FAA, by the FAA for commercial drone operations.

They estimate by 2020, annual sales of aerial drones will top 7 million units, nearly 40% of which will be for commercial applications. The class of higher-end drones with an average price of $40,000 is projected to grow from about $1,300 this year to over 50,000 in 2020.

Applications for high-end drones will include industrial inspection, agriculture, aerial surveying and even package delivery. We've been designed into all of these applications and expect to see many of these take off in the near future.

So, in conclusion, we're very happy with our results from Q3 and we believe that we have a great foundation for each of our major business areas going forward. The commercial maritime markets are still facing the headwinds of difficult economic conditions but appear that the things are stabilizing.

We have confidence that KVH's position is getting stronger, we’re extending our market share lead and there were going to be an excellent position to capture the growing sales that every leading market research report is projecting for the maritime broadband markets in the years to come.

We are excited about this emerging opportunity and self-driving cars and drones, which have significant revenue potential outside of maritime or defense. And in the military market, it’s important to keep the projected defense contract delays in perspective.

The important point is that GPS vulnerability that we’ve recognized for years is finally becoming an urgent issue for Armies around the world. And now, I'd like to turn the call back over to John for the detailed financial results.

John?.

All right, thank you, Martin. I would now like to discuss some more detail of the financial results of the company for the third quarter. As Martin mentioned earlier, our third quarter revenues of $45.8 million were at the high end of our guidance and a 3% higher than the third quarter of 2015.

The primary drivers for this growth were a 66% year-over-year increase in guidance and stabilization product revenues and partially offset by a 75% decrease in our engineering services revenue and an 11% decrease in our content and training revenues.

It’s important to note that recent weakness in the British pound adversely impacted our third quarter content and training revenues by approximately $1.2 million or 14% of content and training revenues and 3% of total third quarter revenues. On a constant currency basis, content and training revenues actually increased 3% year-over-year.

Third quarter service revenues to $26.8 million decreased 7% year-over-year mainly due to decrease in our engineering services and content and training revenues.

In the third quarter of 2015, we provided a significant level of engineering services that pertain to a large sale of non-standard [ph] products that were delivered in the fourth quarter of 2015 and throughout 2016. In the current quarter, we did not have a similar sized project underway.

And as previously mentioned, our content and training revenue decreased year-over-year due to the weakness in the British pound. Looking at the airtime subscription portion of our service revenues in the third quarter, airtime revenues was 17.1 million, which was flat from the prior year with the prior year.

We said airtime revenues were slightly up from the prior year. However, continuing its trend, Inmarsat FleetBroadband revenues were down 17%. So, when compared to Q2 of 2016, the airtime revenues were up 7% with virtually the entire increase attributable to VSAT airtime with both subscriber activations and ARPUs being stronger than the second quarter.

And this continues a positive trend for us as our second quarter airtime revenues were up 4% compared to Q1 and our second quarter subscriber activations and ARPUs were also higher than Q1.

Now moving on to product revenues, total product revenues increased by 22% to $19 million in the third quarter and most of this increase was attributed to TACNAV revenues which were offset by a decrease in mobile communication product sales of $200,000.

Our guidance and stabilization hardware revenues of $8.9 million were $3.6 million higher than the third quarter of 2015 or a 66% increase. And as we have discussed, this is primarily due to the high-end TACNAV revenues.

In the third quarter, we’ve reported the consolidated gross profit margin of 46%, which compares to 44% in the third quarter of 2015. This increase correlates to the increase in TACNAV revenue, which generally carries higher margins and of course drove a higher product margins for the quarter.

Our product margins for the third quarter were 42% compared to 34% in the third quarter of last year. Overall service margin was 49% for this quarter and 50% in the third quarter of last year, while our VSAT airtime gross profit margin was 37% in the third quarter, up 1% from the 36% that we reported in the prior year.

And as Martin mentioned, usage-based airtime plans are favorably impacting our margin. As it relates to our third quarter operating expenses, we recorded $18.2 million, which was down 7% or $1.4 million year-over-year.

And of course, there were increases and decreases but the key driver was the reduction incentive compensation resulting from the lowering of our financial outlook for the reminder of the year. For the third quarter, net income was $2.9 million compared to a net of $0.5 million recorded in the same period of last year.

The GAAP EPS for the third quarter was $0.18 per share compared to a net loss of $0.03 per share recorded in the same period last year.

The non-GAAP EPS for the third quarter, which excludes discrete tax items, intangible amortization, and stock-based compensation expense was $0.27, which exceeded the guidance we provided last quarter of - ranges of $0.08 to $0.13. That was primarily due to our increased net income.

Our adjusted EBITDA for the third quarter was $6.7 million compared to $4.2 million recorded in the same period of last year and exceeded the range of $3.8 million to $5 million, we provided last quarter. For a complete reconciliation between GAAP and non-GAAP measures, please refer to our earnings press release that we published this morning.

Concerning backlog for guidance and stabilization products and services at the end of September was approximately $9.2 million compared to $13.7 million at the end of the second quarter and we expect to ship and recognize roughly $7 million of this backlog this year. Okay. Let’s turn now to our outlook for the full year guidance.

We are revising our revenue guidance down for 2016 to a range of $174 million to $176 million from our previously reported guidance of $190 million to $210 million.

We are estimating fourth quarter revenues to be in the range of $42 million to $44 million, given that we do not yet have the anticipated TACNAV orders in the backlog yet, we are removing them from our fourth quarter guidance. If these orders would have been received and shipped in the fourth quarter, they would add at least $15 million of revenue.

And now, let me turn to our forecast for earnings EPS, EBITDA, and non-GAAP measures. There are a lot of numbers here. If it’s helpful, all these measures are also included in our earnings release.

For the fourth quarter net loss is projected to be in the range of a net loss of $1 million to a net loss of $0.2 million and for the full year, we are projecting a range of net loss of $1.7 million to a net loss of $0.9 million.

The GAAP net loss per share for the fourth quarter is projected to be in the range of $0.06 loss per share to $0.01 loss per share and for the full year, we’re projecting a net loss of $0.11 per share to a net loss of $0.06 per share.

Non-GAAP adjusted EBITDA for the fourth quarter is projected to be in the range of $2.4 million to $3.5 million and for the full year, $13.6 million to $14.7 million. The non-GAAP diluted EPS for the fourth quarter is expected to be in the range of $0.05 to $0.10 of income per share and $0.36 to $0.41 of income per share for the full year.

As a reminder, a portion of our revenues in costs, as we’ve discussed are denominated in the pound sterling and we’ve seen significant currency fluctuations over the past year. This updated guidance that I just provided assumes that there will be no further fluctuations in exchange rates.

With that, I would like to turn things back to the operator for the Q&A portion of this morning's call..

[Operator Instructions]. And we’ll take our first question from Ric Prentiss from Raymond James. Please go ahead..

Hey, Ric?.

Mr. Prentiss, please check the mute function on your phone..

All right, next question..

All right, we’ll take our next question from Jim [ph] from Chardon [ph]. Please go ahead..

Yeah, thank you and good morning.

Martin, you talked about a big growth rate in the IP-MobileCast in percentage terms, can you just kind of frame how big IP-MobileCast is right now in dollar terms?.

We’re not going to talk about revenue till it’s material, so it’s a significant part of the product offering, but it’s still small in terms of total revenue.

So, we’re not going to break it out for competitive reasons, but what we’re seeing is that it’s a big differentiator when people are selecting the service and also it’s encouraging the people who don’t buy it, a year or later they do buy it. So, people are coming around even after the fact, which is also very encouraging.

One thing we’ve done just recently with it, which company is really appreciated, so we’ve been able to multi-cast our corporate videos, so in one case, we had more of better customers that had an important safety video that they prepared, they want to send that out to their entire fleet.

We had multi-casting that out and people can watch on their iPad’s or on the TVs in the common areas, right. That’s a really unique capability that the people appreciate..

Okay.

You mentioned the self-driving, the autonomous vehicles and I think you said that you’re at like a $3 million annualized run rate, is that correct?.

Yes..

Okay, can you discuss how you think that might will allow for you, is this a market where it’s going to be your modest growth until you - modest growth for let’s say, a couple of years and then you get a big hockey stick or is this something where you’re close to getting a big deployment and that we can see a big step function upwards in revenues? Just trying to kind of understand how the market might develop for you?.

Yeah, so typically with these kind of market-changing innovations, it’s very difficult to predict the adoption patterns, so sometimes there is a step function probably, where all of a sudden nobody wants to buy a car, they don’t have the feature and other times, it’s a slow growth and a lot of pilots and trials, then it takes years to roll out.

We’re not really sure which one this is going to be, but in terms of scale for us even when major automotive car company starts doing pilot production, a limited release those are still big, big numbers as far as we’re concerned.

So, tens of thousands or hundreds of thousands is still huge for us even though that’s tiny compared to the $90 million or $100 million cars that are produced every year..

And along that track, it seems like this is the kind of product that would follow the typical automobile introduction, where they deliver it or they put it on the high-end vehicles and then migrated downwards as prices and demand..

I think that's true, yes. But then you've also got car companies and independent startups that have different ideas. Obviously, the startup companies are doing it from day one, and it's just part of the product. And you also have the ride-sharing market where people are going to not necessarily sale cars per se, but sell rides.

So, that's a different business model. So, I think there are so many moving parts here. It's kind of hard to predict the take rate, but it's definitely exciting place to be..

Okay, I got it. And I know you didn't say Uber, Lyft, and Tesla, but I'll just say it. So, it sounds like if you get those disruptive either manufacturers or providers trying to come up with the new model or to change the market than that could have a different kind of implication for you versus if you are just selling it to....

Yeah, so I think that at the high level, the new entrants don't care about disrupting their current business because they don't have a current business. Entrenched incumbents, we'd like to add those features so they can continue to sell cars as opposed to nobody owning a car, but you just buying rides. And I think it's going to be a mix.

So, I don't see why anybody would not want this feature in the future if it's safer and better than doing at the old fashion way..

All right, got it.

And have you - can you either bracket or help me understand kind of what type of dollar content per vehicle would be reasonable for you to get either in the early stages of this if it's a traditional rollout or in the latter stages of this when it's a ubiquitous product?.

So, there are different approaches. Some customers are putting in our full INS system, some are putting in our INU, which is three axes of fog and three axis rate. Other customers are putting in single axis sensors, but then putting in two of them for redundancy.

Most of the systems, system architecture involves two of everything for safety reasons to steering mechanism, to braking mechanisms. So, they're all different approaches, but in general, while you're in the prototype stage the unit prices are still fairly expensive and more than $1000.

But our goal is it in production, in high rate production and apply these as high hundreds of thousands or low millions, it would be in the $200 range per axis..

Okay. And then the number of, I'm going get my thorough wrong the number of the axis would be dependent on what it is the customers trying to accomplish..

Right. If they are putting a three-axis system, obviously be three. If they're doing single axis, it'd be one unless you do redundancy in which case it would be two per vehicle..

Right, okay, okay great. That's really helpful. Thank you. And John, I just want to make sure I understand the guidance for Q4. It kind of sounds like the entire change in guidance is just pulling the TACNAV order.

And so, when we look at Q4, the guidance in stabilization business is down a little bit versus Q3? And is there anything in the mobile broadband business that I need to be aware of either on a seasonal or a year-over-year basis on that special this quarter versus again either versus Q3 or Q4 of last year?.

I think at the top level, how I'm thinking about it is sort of the TACNAV came out. And then we have a little bit more currency impact. And that sort of we'll get you to their whole decrease in the revenue guidance. Everything else is sort of like the little pluses and minuses, those will be the two big items I point to..

Okay.

Is there any significant change to the OpEx line in Q4 versus Q3?.

No, you know Q3 we had part of a little bit of reversal incentive comp that we won’t have in Q4..

And so, that means that your - that the Q4 sales and marketing for the G&A which - wherever that came from is going to be a little bit higher than Q3 because you don’t have that reversal, am I hearing that correct?.

Right, again there’s a lot of pluses and minuses but that’s true on that play..

Okay.

And so as far as that $15 million TACNAV, maybe at this quarter, it seems like a long shot but maybe this quarter and are you confident that’s a first half next year thing, or you just don’t know, it could be first half, it could be second half?.

, Well, I am pretty sure, I have lost all credibility in this. So, but yes, we definitely expected it by now and we certainly expected our level of confidence includes combining the parts and building it. So, we have high level of confidence otherwise, we wouldn’t have done those things..

Okay, fair enough, that’s good. And I mean to be fair this is the difficult customer that you know this customer set is very difficult so, you know I am - I think we’re all kind of aware that things pretty now yet push to the right, so whether to be so harsh on yourself? Anyway, thanks a lot. Appreciate it..

Thanks..

And we’ll take our next question from Rich Valera, with Needham and Company. Please go ahead..

Thank you. Just wanted to ask a question on the mini-VSAT airtime growth which was described I guess as very modest, I am assuming that’s kind of low single-digit.

My question is that’s coming off a quite easy comp last year, which was already heavily affected apparently by the oil and gas pressures and really suggests if you're looking at minimal growth year-over-year on a subscriber model that you've added minimal net new subscribers on an annual basis.

I am just wondering sort of what is driving that, I mean understood we had some pressures last year from the oil and gas situation but you know we’re now good three-quarters into that and I would have thought by now most of those would have already churned off and wouldn’t be necessarily creating incremental churn.

So, what’s going on in that business and why can’t you grow it when you’re adding 200 to 250 or more gross subs per quarter, why isn’t that business growing..

Well, I think if you look at the sequential, we had pretty good growth sequentially from Q2 both in terms of total dollars, which was off the top of my head, I am going to say double-digit growth sequentially ARPUs have been up, this is now the second or third quarter. So, we are seeing improvement sequentially as we move through this period.

But the whole industry, you know it’s not just oil and gas, the shipping industry is also pretty heavily affected, you see major shipping companies, look at Maersk reported those with low results today I think. So, it’s - the industry isn’t in tough shape. So, we think they are doing well, but the ARPUs being up sequentially is a good sign.

The growth adds was a good sign, but as I said we are not, we’re not saying that things are getting better here, we’re saying that it looks like things have stabilized. So, that’s for us, that’s good news..

Could you give us what that revenue number was, to me you said airtime revenue just for my own modeling purposes?.

So, yeah it’s - for the third quarter it’s $16.6 million..

Got it. And then just with the overall guidance, you know your old range was 190 to 210, your new range is call it 175-ish, so if you get the $15 million order that brings you $10 million shy of the midpoint of your old range.

I understand there is some currency impact there, but I hard to believe there is $10 million of currency impact within one quarter.

So, can you bridge the rest of that shortfall relative to the midpoint of your old guidance for me?.

Yeah, the - as far as TACNAV goes the $15 million is what we recently purchased at risk but the order themselves was more than double that size. So, not - going in, back in July we weren't sure whether we would get the total amount of the order, whether we get part of it. So, we chose to build from that risk.

And that $15 million represents about 20% of one order and a 100% of a smaller order. So, that's so those two numbers aren't exactly correlated. Also, what happened in the intervening period is that the customer decided to buy one of our newer products which added about to the total order would add about $10 million to it.

So, the overall scale of the order is larger than just the $15 million. So, as of today, that's what we would, if we got the order today, we would ship $15 million of that order, which is different than shipping the whole order, which we would have done and we got the order say in August..

And I guess I'm confused is the whole order roughly double the 15 or at one point you said 15 was 20%.

I just wanted to be clear on what that will put the entire order size was?.

Yeah, so the total orders that we talked about here are more than $40 million..

Got it. Okay..

So, it's difficult to reconcile, because you'll have pluses and minuses when you give guidance in terms of airtime and currency and training. But if you just want to focus on the TACNAV piece have the entire order come in and shipped, we would have been above the high end of our guidance range..

Got it. And then just moving on sort of the media side of the business. You brought a couple of properties, and so far, it seems that you've - I mean clearly some currency issues there. But it doesn't sound like we're kind of seeing the growth we would have like to see in that sort of media properties.

Just I was hoping you can sort of just talk about how you see them since you brought them.

And what maybe have been some impediments that to them growing at the rate you would have liked?.

Yeah. So, there is a couple of different things here. One is, let's call the legacy media business. Part of our goal there is to destroy that business, right. So, we want to take the DVDs by mail and news link by email and convert that to IP-MobileCast.

So, when we churn those customers, that comes out of the legacy media business, but that's our strategy. We want all those customers to convert to IP-MobileCast. So, that's the part of the answer. The other part of the answer is they're operating in the same segment as the mobile broadband business is, which is primarily commercial shipping.

So, the commercial shipping is 99% of the business for the Videotel training services. And it's a very high percentage of the legacy media business as well. So, we have exposure there to the overall market conditions. But we are actively working on some new products that we think will make a big difference in the training space.

We're looking at integrating some exciting new capabilities for training relating to onboard, other onboard activities and the internet of things type activities that we're heavily focused on. So, we think it's a great fit and we're very optimistic about the long-term..

And can you give any color on the economics of switching the customer from the old DVD subscription business to the MobileCast to you? What's the revenue and or profit contribution you see from the customer in those two modes?.

Yeah. So, I mean at the low end, it sorts of a 10 DVD a month customer. They're at $150 to $200 range per month IP-MobileCast Bronze package start at $295 a month. Typically, they also get news link or sports link. So, that adds another 100 to 200 to that. So, it's a higher ARPU customer, it's a higher margin customer.

There is no physical media creation, shipping, handling all that stuff goes away so margins are better and the revenue is higher..

Am I sure with the MobileCast customer also be in that media of revenue pocket?.

They are not so right now it’s still part of the mobile broadband VSAT revenue bucket..

Got it. Okay, that’s it for me thank you..

All right. Thanks, Rich..

And we’ll turn it Ric Prentiss again from Raymond James. Please go ahead..

Thanks.

Can you guys hear me now?.

Yup..

Good, I don’t when I went silent and then it drops me off so glad to be back on.

Appreciate the color on the autonomous car market what about your thoughts on kind of scaling the drone markets for us, I got two millennial kids and they’re excited about both autonomous car and the drone stuff, so walk us through what the drone opportunity might look like?.

Well, so our products are really expensive so they’re not for the Karma type drone, the Go Pro drone or low-end DGI, so these are for commercial applications, these are people who use the drones every day for work.

So, for aerial surveying where you need to take photographs that are geo-reference, so you can take every pic on the photograph and report it flat long. Those kinds of guys need all precision they can get and our products as good as they are, which is barely good enough for those types of application because it’s really a hard application.

So, those of the drones itself for more than 40,000 bucks some of them sell for 100,000 bucks and there is thousands of that built year now and that’s going to be growing to 50,000 of those.

And then that’s kind of the aerial surveying industrial market and then you’ve got things like packaged delivery, which just really not a market today but potentially could be big someday.

So, there’s just a lot of exciting things that people are doing with drones, whether it’s speed to delivery or package delivery or surveying or inspection pipeline, about the ground pipeline or electrical tower inspection, electrical cable so there’s a lot of different applications that require the kind of precision that we have..

And when you think about your product going into those type of drones, what kind of SKU price are you talking about?.

Yeah, I mean the lowest price product we have now is about $10,000 and the highest price one we have is about $20,000 in terms of IMU, so it’s in that range right now..

Okay, I think during earnings season we all we take the pizza delivery on the sell side..

We see if I can Vector one in for you..

As we….

Vector 1 there Ric..

As we - I think last quarter you mentioned the TACNAV had about a $100 million in the pipeline so as you think about what happened with this order that every day you got commitment you started to build it, how should we think about what the pipeline is looking like then in the ‘17?.

Yeah, I think there is no big change in terms of the pipeline so I think that’s still a good number to use if you look at U.S. opportunities or maybe some new things that we didn’t know about but related to U.S.

Army opportunities and requirements that are popping up but I wouldn’t put those in the pipeline yet because there’s no formal funded program that we’ve already won.

It’s kind of what we talk about in the other slide, when we talked about pipeline it’s projects that we know about that are apparently funded where we’ve been selective, so that’s kind of what we call the pipeline but U.S. Army stuff is not in those numbers yet..

Okay.

And given the slipping of the order we all gathered it’s a lumpy business tough here to all lockdown, should we consider that within ‘17 maybe that total order of $40 million for these couple of projects could come in within the calendar year then, at that slow level?.

I would certainly hope so and that would be our expectation yes..

Okay. That makes sense.

And then one final question from me, obviously, you talked a little bit about the high throughputs - capacity coming online pricing for megabit coming down as customer benefits can you help us scale that part of business what magnitude are you guys paying today for that service in your cost and as we think through with that might be a benefit into the future then as these high throughputs come online..

I don’t want to disclose our exact cost per megabit per second but in an order, just to put to give you a sense, we are talking about our cost going to have what they are and that’s our internal goal in terms of new capacity.

So, it doesn’t mean that the total company cost will go to half and as we add capacity as we get on new satellites, we are looking to cut our cost in half..

That helps a lot. Thanks a lot..

Great, thanks..

And we have no further questions at this time. I’d like to turn the conference over to our speakers for any additional and closing remarks..

Great, thanks for your time and as always John and I will be available afterward for any 101 discussions. Thank you..

This does conclude today’s conference. You may disconnect at any time and have a wonderful day..