Don Reilly - CFO Martin Kits van Heyningen - CEO.

Ric Prentiss - Raymond James Rich Valera - Needham and Company Jim McIlree - Chardan Chris Quilty - Quilty Analytics.

Good day, and welcome to the KVH Industries Incorporated, Fourth Quarter and Year-end 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I'd like to turn the conference over to Don Reilly, Chief Financial Officer. Please go ahead..

Thank you, operator. Good morning, everyone. Thanks for joining us today to discuss KVH Industries’ fourth quarter results and our guidance for the 2018 first quarter and full year, all of which is included in the earnings release we published this morning. With me on the 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’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, and you will find definitions of these measures in our press release as well as reconciliations of these non-GAAP measures to comparable GAAP measures.

We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading Risk Factors in our third quarter Form 10-Q filed on November 2nd and our 2017 Form 10-K which we expect to file later today 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?.

ARPUs, Churn and growth rate. When we conceive this new business model, we wanted to do something that would move the needle and significantly change our trajectory.

We would only consider the success if we put more subscribers on the network simply exchanging sold units for subscription units on a one-to-one basis with the risk, but that would be a failure. Secondly, with no contracts and no commitments, another risk was that people would use the unit for couple of months and then return it.

That would be expensive for us. And lastly, we had an attractive entry price of $499 a month that was all inclusive. If everyone locked in only at that lowest rate, our margins would potentially have been a challenge. Well after three quarters, here is what we know.

Units were up 16% in Q4 compared to last year, and looking forward into 2018, we now expect unit volumes to increase dramatically. We recently announced a new AgilePlans contract with E.R. Schiffahrt and then started deployment on their 60 vessels for example. We have many other fleets coming on board. And most importantly, sales were accelerating.

Second, and despite having no commitment subscriptions, not a single unit has been returned from a customer’s vessel. And lastly, the ARPUs are 30% higher, than our non AgilePlans subscriptions, and they are tripled that entry level offer.

So, the potential risks of this new business model simply are not an issue, as these strong results have demonstrated. Unit volumes, which are a leading indicator for future revenues, are up overall.

And as a result, our AgilePlans momentum has increased -- the momentum in our AgilePlans has create a substantial VSAT backlog in Q1, in fact our biggest concern going into the first half of the year, how we can accelerate our pace of installations, so that we can activate units faster and get them generating subscription revenue.

We were a bit conservative in our production and installation planning and now we are investing to match the increasing demand. As you know, part of the appeal of AgilePlans is the unique combination of hardware, services and value added content.

In our content business, we have been seeing declines in the total subscribers for our Videotel training services. But in September, we launched the Videotel Performance Manager to the brand new software platform. It’s been very well received with more than 2,800 vessels using it now and over 150,000 end users already on the platform.

We stopped the decline, and in Q4, we saw increase in total net subscribers and we expect further growth in 2018. Not only will this drive improvements in our content business, it will further push demand for our AgilePlans solutions.

Our other major strategic initiative for mobile connectivity was the launch of our new high-throughput satellite or HTS network, which we announced last November. This new global mini-VSAT network went live in December is getting great reviews from our customers.

Coupled with our new TracPhone V7-HTS hardware, we’re now delivering download speeds as fast as 10 megabits per second, which is capable of streaming HD content and supporting live onboard video conferencing anywhere within our global coverage area.

At 3 megabits per second, our upload speeds are now 6 times faster than before, we have also created a significant competitive differentiator with our new -- our unique hybrid data plans, that provide both high speed channel, that builds by the gigabyte and a simultaneous unlimited use channel.

These new plans, the higher speeds coupled with 25 million square miles of additional coverage, are not only providing a significant competitive advantage over competing networks, but also accelerating the demand for AgilePlans solutions that are now available on this new high-speed network.

Going forward, we plan to extend the HTS platform with the development of new products and services in 2018. As part of this effort, we have established a great working relationship with Intelsat, our HTS satellite partner.

The network is performing extremely well, with outstanding on board uptime and throughput, resulting in very happy customers in the commercial, leisure and super yard markets. On Wednesday, we also announced a new $4.5 million investment in KVH, by SKY Perfect JSAT, which builds on the strategic partnership we announced last November.

We are using their new satellites in Asia, which have provided us with much better speeds and capacity in this critical region. Working together, we can leverage our technologies, and our strength in order to provide the faster reliable global connectivity and value added services that the maritime industry needs.

Intelsat and JSAT have a history of working together and are planning to launch a new satellite in this year that will provide Epic Satellite coverage over the Pacific Ocean.

So, our two partners are fully supportive of our efforts in the maritime broadband area and together we have created a new next-generation network with features and capabilities currently unmatched in the industry. Moving on to our inertial navigation business, we continue to see strong growth in the fiber optic gyro sales on a year-over-year basis.

Q4 was the fourth quarter in a row of double-digit growth and we expect that trend to continue in 2018. We currently have around $9.2 million in backlog for fiber optic gyros and inertial measurement unit systems.

It’s clear that our FOG business is enjoying significant momentum, especially when we consider that our total FOG revenue for all of 2017 was $19 million. The demand for our highest performing systems, our inertial measurement units has been particularly strong.

This mix is causing some production bottlenecks that are capping our growth in Q1, but it should be cleared up by the end of Q2.

I am also pleased, that we are continuing to make excellent progress on our photonic chip, after achieving our target insertion laws and other technical parameters, we achieved another milestone this quarter by building our first prototype gyro based on this new chip.

While there is still much development to be done this is another milestone for us, and provides further evidence toward the flexibility of our approach. We are currently working on a low cost optical chip packaging solutions and working with foundries and production companies. Each iteration of the design shows further improvement.

We have already provided fiber optic gyros for the majority self-driving cars that are on the road today and our goal is still to be able to deliver a spec complaint prototype with the new chip to key customers by the end of the year.

Our ability to mass produce high performance fiber optic gyros will be critical to the success of the driverless car industry. During 2018, we will be looking to establish relationships with partners or customers who can help us build the process quality and production capabilities at mass scale to bring this technology to market.

Within the military market, we continue to work toward signing the large international orders for our TACNAV systems, while we expect those to happen in 2018 we’ve not including them in our short-term or annual guidance.

Currently discussion are underway about the relative value of domestic content in the customers’ country, many countries in the Middle-East and Asia are looking to develop local content in their defense procurements, so this is fairly typical. Here in the U.S. in Q1, our TACNAV 3D FOG based product recently underwent a new round of test by the U.S.

Army at a military installation as part to be assured position navigation and timing initiative. This program recognizes the dependency on GPS alone puts military forces at risk due to household jamming. Our tactical navigation systems are un-jamable and also provide the performance of -- and also improve the performance of GPS overall.

Our previous demonstrations to the army showed impressive accuracy in the absence of GPS, and the latest testing was meant to demonstrate immunity to electronic counter measures. Based on preliminary feedback our systems performed well as expected.

So, in summary we set some aggressive goals for the company in 2017 and took the risk to invest in new technology, new markets, and new business models, and I am proud to say we achieved those goals. We rolled out major new products and services and made tremendous strides in the development of new technology for emerging opportunities.

Our business model transformation continued in the fourth quarter, and we are very pleased with our results, and our momentum entering 2018. Now, I would like to turn the call over to Don to look at the numbers.

Don?.

Thank you, Martin. As Martin mentioned earlier our fourth quarter revenue came in at $39 million, which was within our guidance range, this compares to $43.9 million recorded in the fourth quarter of 2016.

Revenue from our mobile connectivity segment decreased $1.7 million, and our inertial navigation revenue decreased $3.2 million in the prior year fourth quarter. Product revenue for the fourth quarter was $13.7 million, a decreased of $4.9 million or 26% from $18.6 million in the fourth quarter of the prior year.

By segment, product revenues in our inertial navigation segment decreased $2.8 million or about 27% and in our mobile connectivity segment decreased by $2.1 million or about 25%. Within our inertial navigation segment, our FOG business continued its solid top-line revenue growth growing approximately 18% this quarter.

TACNAC sales declined this quarter as the prior year included deliveries on in large TACNAV contract that concluded in the fourth quarter of 2016. In our mobile connectivity segment the decline in product sales was driven partially the launch of our AgilePlans subscription model.

With respect to the Agile program approximately 45% of our total unit shipments this quarter and 65% for our marine commercial shipments were in connection with this offering. Service revenues for the fourth quarter remained steady at $25.3 million, comparable with the prior year.

Mini-VSAT Broadband airtime revenues was up approximately 3% from the prior year fourth quarter. And for the fourth quarter our consolidated gross profit margin increased to 46.1%, as compared with 43.5% in the fourth quarter of last year.

From a segment perspective, our mobile connectivity gross margin was 45.8%, up about 5.6 percentage points, while our inertial navigation gross margin decreased about 6.2 percentage points to 47.2%, primarily due to lower TACNAV sales which unfavorable impacted the overall product mix for the segment.

Operating expenses for the fourth quarter were $19.1 million, down 1.5% from $19.4 million in the fourth quarter of the prior year.

The year-over-year reduction is a result of lower variable compensation i.e., bonuses and profit sharing of $1.5 million, and lower consulting cost of about $0.6 million, partially offset by higher employee separation cost of $1.2 million along with higher personnel cost in general.

The employee separation cost were incurred in connection with certain actions we took in the quarter, as we consider these separation cost to be discrete nonrecurring items, we have excluded them from our computation of adjusted EBITDA and non-GAAP EPS.

The lower variable cost compared to last year was related to timing as we trued up those cost in the third quarter last year, but this year as we still expected the large international orders would be received before year-end. We adjusted those cost only in the fourth quarter when we realized we would not get those orders this year.

For the fourth quarter, these changes in revenue, margins and operating expenses resulted in the loss from operations of $1.1 million, compared with the loss of $0.3 million recorded in Q4 2016.

Our mobile connectivity segment generated an operating profit of $2 million compared with $1.8 million last year, while our inertial navigation segment had an operating loss of $0.1 million for the quarter compared with operating profit of $2.5 million last year. Our unallocated loss decreased $1.5 million.

Our overall effective tax rate for the fourth quarter was negative 21.4%, which reflected the tax expense on our foreign earnings. For the fourth quarter and full year 2017, 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 non-cash item, we’ve excluded this reserve when computing non-GAAP net income and EPS. The impact of the newly passed Tax Cuts and Jobs Act did not impact the effective tax rate for the fourth quarter of 2017 though the valuation allowance recorded on U.S. deferred tax assets.

And we do not expected to have a significant impact on our tax rate in 2018. For the fourth quarter, our net loss was $1.7 million, as compared with a net loss of $6.8 million recorded in the same period last year.

On a non-GAAP basis, which excludes discrete items, intangible amortization and stock-based compensation expense, we had net income of $2 million compared with $2.2 million last year. EPS for the fourth quarter was a net loss of $0.10 per share compared with a net loss of $0.43 per diluted share in the same period last year.

And non-GAAP EPS for the fourth quarter was $0.12 per diluted share, which was significantly higher than the guidance range we provided for the quarter. Our adjusted EBITDA for the quarter was $3.8 million compared with $4.3 million recorded in the fourth quarter of last year, also significantly higher than our guidance range.

For a complete reconciliation of our non-GAAP measures, please refer to our earnings release that was published earlier this morning. Our cash flow from operations was $2.1 million, an increase of about $2.4 million compared to the 2016 fourth quarter.

Capital expenditures were about $2.6 million and our net debt was mostly unchanged from the prior year quarter at $4.1 million, down $1.8 million from the end of 2016. With that I'll now turn to our outlook for the first quarter and full year of 2018.

Please note that this guidance includes to the impact of adopting ASC 606, which I will discuss more in just a second. Our guidance for the first quarter is as follows, revenue is estimated to be in the range of $39 million to $41 million and GAAP EPS to be in the range of negative $0.25 to negative $0.19.

Non-GAAP EPS is expected to be in the rage of negative $0.07 to negative $0.03 per share and adjusted EBITDA to be -- is estimated to be between $0.5 million to $1.5 million. For reference, we adjust our -- we reported adjusted EBITDA in the first quarter of 2017 of negative $0.8 million.

For the full year, our revenue guidance is $166 million to $180 million. Our expectations for full year GAAP EPS is a range of negative $0.44 to negative $0.21 per share, our non-GAAP EPS is to be from $0.12 to $0.28 per diluted share and our adjusted EBITDA ranges from $12 million to $16 million.

At the midpoint, our Q1, 2018 revenue guidance is even with Q1, 2017 with lower VSAT product sales largely the result of success of our AgilePlans programs, whereby revenues are not recognized immediately, but instead are generating recurring service revenue, which is recognized overtime, and also due to the change in our revenue recognition policy.

As you know all public companies in the U.S. were required to adopt a new revenue recognition standard on January 1, 2018.

For us that new standard is expected to reduce revenue and adjusted EBITDA in the first quarter by $0.5 million and $0.1 million respectively, and in the full year by $4 million and $1 million respectively and for the full year non-GAAP EPS by $0.04. These amounts again are reflected in the guidance amounts that I provided.

This guidance assumes there will be no significant changes in foreign currency exchange rates. In 2018, we expect our capital expenditures will be in the range of $15 million to $20 million.

So wrapping up, as Martin said earlier, we made really great progress on key strategic initiatives in 2017 and we're starting to see the benefits of those initiatives this year. The rollout of the new high-throughput satellite service is complete.

The introduction of AgilePlans has gone very well and the momentum at the start of the year is very encouraging. We've made really great progress towards developing our low cost FOG for autonomous vehicles and we're on track with our TACNAV technology to support the critical military demand for APNT.

2017 was an important transition year, and that transition continues into 2018. That concludes our remarks. And now Martin and I would be happy to take questions from anyone with questions. Thank you.

Operator?.

Thank you. [Operator Instructions] We'll go first to Ric Prentiss with Raymond James. .

Hi, good morning guys. .

Hi, Ric. .

Couple of quick questions if I could, obviously the large international sales in the pipeline, it sounds like you still expect to make the sales, but out of guidance. And what base, on what kind of magnitude those contracts are keeping your back bucket. But also kind of what the delays might be.

And have you already -- I think you said you've done a lot of the building already. But just kind of an update on that that's out of guidance..

Sure. So, yes, we do still expect the orders this year. And we just don't feel comfortable with the timing quarter-by-quarter. In the past we've demonstrated that this is not something that's easily forecastable. So that's why we didn't put in the guidance. So you're correct we’ve purchased on a material previously.

So we have a high degree of confidence in it. Customer is still adamant that contract's moving forward. There are some ongoing discussions now about some local content, which for us would probably mean local installation and calibration brackets cables that type of thing.

So no impact to our overall program, but just these are types of things that are fairly typical with procurement and we're seeing more of it now as countries want to develop indigenous defense business of their own. So they want to spend their defense money in a way that helps local companies too.

So that's the overall status, in terms of the scope or size of the orders we're still in that order on the order of what might be shippable this year maybe on the order of $15 million at the upside..

Great. And one of the other things that was interesting in fourth quarter to us is your G&A costs came down a little bit. And Don I think you mentioned a little bit of it on the call, but just trying to think of is $6 million kind of a new level now that you're done with some of the initiatives.

Or how should we think about the G&A line going forward?.

The fourth quarter is a bit of an aberration we -- as I mentioned we had to true up some of our variable compensation, which created fourth quarter versus earlier quarters what would have appear to reduce our run rate.

Don is being polite; he is politely saying that you took my bonus away..

The money I had own it. And then we also -- we had some discretion and I guess every quarter has some discretionary consulting costs that we pulled back on the note during the quarter.

So I’d say the fourth quarter -- I’d say for 2018, versus 2017, I’d say 2017 is a pretty good indicator of what we expect in 2018, fourth quarter run rate might be a little bit lower due to some of these one-time cost reductions, I would say..

Okay, that makes sense, it helps. And then maybe from a larger picture side, obviously you are making some good progress on the product chip. As we think about the autonomous vehicle marketplace, which could be quite large.

Help us understand, what’s important to you from a strategic standpoint, as you look at potential manufacturing foundries, partners, distribution, help us understand as we’re kind of looking at the landscape, having worked on the product side of it, how are you looking at approaching the market side of it and what the market might mean?.

Right, so up until this point, we have been basically selling what we have, which is our standalone fiber optic gyro, which works super well there is incredible accuracy and it meets all the requirements of the current and future self-driving cars that are on the road and that are being designed.

So we have got a product that works great, and everybody is using that today, not everybody, but the most people you think that today in their self-driving vehicle.

So our interaction with customers has been here is our product that works great, don’t worry about the costs, because we are working on this new thing that will deliver similar performance, but at price points that are something is much more comparable to the types of things that they would need.

So on -- that’s on a customer side, I think in terms of partnerships, what we are looking for is foundries that can produce that scale, we currently are working with two different ones that have delivered proto types and then the next big challenge is packaging, taking working devices and packaging them in larger volumes.

And looking out a little bit further, so that’s sort of technology side or a practical side, looking out a bit further, we think that it would be great to work with people who are tier 1 suppliers already, so that we can leverage things that they are doing rather than try to enter the automotive market at scale with a single product from a company that’s not currently a tier 1 supplier like KVH..

And just remind us back on the price point and the scaling.

What are you anticipating the goal to be as far as price points and scalability as far as number of FOGs per car at what price point you want hit for FOG?.

Yes, I think that right now our gyros are fairly expensive they self around call it $2,000 an excess in medium volumes and the goal is to reduce that by roughly in order of magnitude. So in quantities of millions we are in the $200ish range..

Great, that helps a lot obviously a big shift from investment year to growth year. So glad to see getting back on that growth path..

Yes, thank you. .

Thanks. .

And we will go next to Rich Valera with Needham and Company. .

Thank you.

Martin you mentioned that unit I think shipments were up 16% year-over-year, wonder what they look like quarter-over-quarter? And if you can give any commentary on kind of maybe orders for units -- total orders for units quarter-over-quarter, I know you gave some numbers for the AgilePlans, but I just -- I am not sure how much that’s capturing of a shift to AgilePlans versus actual increasing units of total -- order of total units? Thanks..

Right, so the encouraging thing is that regardless of business model, total units is increasing. So we are going into -- so we started to see that in a tangible way in Q4, where total units were up 16% year-over-year, they are all….

Was that quarter-over-quarter?.

Sequentially. Yes when we compare to the fourth quarter of last year, it was up 16%..

Right, versus the third quarter of 2017?.

I don't have that number off the top of my head, but going into Q1 and looking at 2018, we are looking at -- what we would consider dramatic growth, very significant growth in the 30% to 40% type of growth range, which is a huge development for us because that's what we've been really striving for is to -- we're hoping that this AgilePlans would really change the momentum.

And it really appears as though it’s doing that..

And what's that 30% to 40% relative too?.

The prior year total units..

Got it.

Are you thinking about that for 2018 as a whole or just the first quarter, just want to make sure I was clear on that?.

Well, I think as both..

Got it. .

So, again if you look at the guidance as those unites get installed, you don't see a big jump in revenue right away, because they are build monthly now. But that's okay, that's exactly this how this business model is supposed to work.

So, the increasing units obviously is a great predictor of future revenue because once you're installed they generate revenue for us for four to five years typically..

That makes total sense. And then just understanding, orders are a predictor of future growth and that sounds great.

If you look at your revenue growth for the mini-VSAT service line you were actually started the year kind of with revenue -- year-over-year revenue growth in the 6% to 7% range and kind of finished the year with the last two quarters in the 2% to 3% range, so kind of a deceleration of revenue growth as you went for the year.

Just curious, what is the dynamic there is that decreasing ARPU or what is that and how would you expect that to trend as you head into 2018? Do you expect that year-over-year growth to start accelerating as we head into 2018?.

Yes, we do expect it to accelerate, so part of that was that we launch those new networks we announced it in November we went live in December. So, starting now this quarter we're seeing the benefits of that with increased demand.

And I also mentioned that the ARPU on the AgilePlans is surprisingly high, it's about a triple the entry level plan and it's 20%, 30% higher than our previous ARPU. So, we do expect service revenues to accelerate going into 2018..

And just for reference Steve, full year growth in mini-VSAT airtime revenue was over 4%, 4.5%. And unit volumes in the fourth quarter versus the third quarter, so sequentially increased about 30%..

Okay, that's a great number. It sounds like some nice underlying momentum there.

So just on the JSAT deal, it wasn't clear to me sort of what you guys -- obviously very nice and a great vote of confidence that they wanted to put some money in at a nice premium, but could you talk about anything else you guys are doing together maybe from a marketing prospective, is there any sort of incremental go to market capability you get from these guys or something on the product side that you get from this sort of collaboration, anything, any color there Martin?.

Yes, so we're integrating their satellites and their hubs into our network. So that will have -- so we’ll be using their satellites in Asia, they are also developing a new satellite along with Intelsat that we’ll launch this year, which will give spotting coverage over the pacific, which will be a great addition to our network.

We already have coverage there, but it's through a global beam [ph]. And we're working on them on some value added services and some -- they're interested in pushing internet of things type technology into the commercial markets in Japan, which is really aware there a very strong obviously..

Great.

And one more if I could just on the inertial navigation business, could you give the actual revenue of that business in the fourth quarter? And then how are you thinking about that business in 2018 on a year-over-year basis like what’s baked into your guidance for that business?.

Sure, I’ll let Don answer the number question specifically, but we are looking at -- we have seen double-digit growth now for four quarters in a row on the fiber optic gyro side, leading up to TACNAV for a minute because that’s lumpy, but this is the based inertial map which is used for drones and guidance navigations, stabilization that business is being growing now last four quarters double-digits.

So we are expecting that kind of growth to continue in 2018. And as I mentioned we have already received a number of big orders in Q1 and we have got backlog over $9 million. So we are looking at that trend continuing..

So, there is a schedule in our earnings release which shows revenues and operating income for our segments for the fourth quarter and full year, but I will tell you the whole number for our inertial navigation in the fourth quarter was $7,834,000..

Got it, that’s the number I was looking for, thank you.

I am sorry, just one more if I could? I know you commented on G&A, I think, you said Don that you told G&A would be flattish year-over-year in 2018, can you talk about the other OpEx items about sales and marketing and R&D how you think that it would potentially trend year-over-year?.

Sure, R&D I think will be up slightly, but high single-digits or even low single-digits. G&A should be relatively flat, and sales and marketing should be flat or down..

Right, so we work pretty hard to try and get our total OpEx to be as close to last year’s actual as possible. So that’s what we work towards..

Got it. Alright thanks very much for taking my questions. .

Thanks, Rich. .

And our next question will come from Jim McIlree with Chardan..

Hey, Jim. .

Good morning, Jim. .

Yes, good morning, thank you.

Just a little bit more on this unit growth in VSATs, what was the unit growth for the year in VSATs?.

Yes, good question. Just give me a second I will get it for you. Why don’t you ask your next question while I look that up, do you mind. .

Yes, that’s no problem.

So the guidance -- the revenue guidance for the year just roundish numbers we are talking about a $15 million increase and it seems like TACNAV is flat that’s how you are kind of looking at it?.

Yes, I think without forecasting these international orders TACNAV overall would be flat to down and FOG would be up. So, inertial NAV in total is up..

Right. So the FOG you expect the continuation of the growth that you have seen over the prior quarters.

And so the big increase is coming in the mobile connectivity and I am just trying to figure out, how that happens because you have got -- I know you have this big increase in unit sales expected in 2018, but it’s going to come in as mostly service revenue increases, right? So is that where we are looking for the big increase is that airtime or is that also coming out of content and training?.

Right, so obviously we have many different parts of the business in both hardware and services and content. So -- but you are right, the unit growth in revenue in the VSAT business will be only in the primarily in leisure segment which is still purchasing hardware.

So all of the commercial not all but the vast majority we think will be moving towards AgilePlans, which as you know will be recognize monthly. But we still have the TracVision hardware we have, VSATs for leisure and other non-commercial maritime markets..

I see. So you’re expecting a -- I am sorry..

The total unit volume year-over-year is down about 10%. .

Okay.

And then so Martin it sounds like you are expecting a strong consumer market this year?.

I think the consumer market will be good this year, I mean, it’s been generally the leisure marine market trends to follow the stock market, which where it’s today, but it’s generally been up which is good for people in the leisure marine market, buying boats and thing. So, yes we expect the consumer market to be good in 2018..

Right. Okay, yes, I think that’s it for me. Yes, great, thanks a lot and good luck. .

Thanks, Jim. .

We will go next to Chris Quilty with Quilty Analytics..

Thanks. Martin, I want to follow-up last quarter, you saw a little bit of disruption from the hurricane activity and it seems like you did things transition down of that fairly smoothly.

Have you seen any knock-on impacts?.

No, I think that’s generally behind us. So I think that you saw some disruption in people not going to the Caribbean so air time usage on the leisure side was down just because people weren’t traveling there like Saint Martin and Saint Barts are going to be hit pretty hard, sort of popular places, so obviously Puerto Rico as well.

So -- but I think as addressed that hasn’t been part of our planning process going forward. So I don’t think it’s a big issue..

Got you. And we’re kind of dancing around the unit issues; I would love it if we actually got some hard numbers at some point, but fair to assume that you are now breaking through that sort of 250 to 300 unit barrier that you have been stuck in for years..

Well, I think that our goal is certainly to do that in 2018 that was not the case in 2017..

Well, after you’ve grown 30% to 40% unit volumes that would get to there. .

Yes. .

So another question on HTS and HTS capacity, Intelsat is really the only satellite operator that’s built out a global KU infrastructure, do you -- what is your strategy in terms of securing capacity, I know on the aviation side those guys have had very different strategies of spot market or long-term buys, what do you see coming down the pipe in terms of capacity and how you want to position relative to your competition? And what do you see your largest competitors in the KU space modeling speed cast doing, with HTS..

I haven’t seen -- answering last part of your question first, I haven’t seen specifically what they are doing or no big announcements of global coverage.

Overall it seems like there is a lot of capacity coming online, there is -- it looks like the number of satellites are increasing and Intelsat has plans for additional Epic Satellite and I mentioned in my prepared remarks that they are working with JSAT on a satellite for Asia, which will be an Epic Satellite.

So from our perspective, it looks like there was going to be a lot of capacity, which should help us on the cost sides since we are a buyer. And I think that one of the things I like about our strategy is that it’s very nicely bundled solutions that really solve real customer problem.

So it’s becoming less and less about who has got the cheapest megabit per second as opposed to who can solve my IT problem on my ship in the middle of the ocean reliably. And solve all my other content and service and support issue.

So, we are seeing that that’s really becoming the key differentiator here, who can get the installed and activate and serviced. So I see capacity come online, I see cost coming down, which is good for us and speeds are going up which is good for the customer. So….

Great. Talk about the content business, obviously a portion of the content is now being bundled into the AgilePlans and call it giving it away for free.

Where do you see the content business going in 2018 on an independent reportable line and is that have one of the drivers for what you have seen in the higher ARPUs or what factor is driving that for your AgilePlans?.

Yes, I think internally we are very careful to point out that we don’t give anything away for free. So in other words people think all you get free hardware now, free content, free this, free that, that's actually not the case. So it's in a bundle where we sell everything and the adjuster is the amount of data that they get.

So, that's how you get to the price point. So, for the $500 plan you get certain number of megabytes that are included with that. So just having said that.

But you are right, there is a switch between people buying content as a standalone product and buying it as part of the AgilePlans and as that business continues to evolve, we expect that transition to continue.

Now we are seeing that some customers are also now buying the movie package or they’re buying so that we are up selling them to buying more content. The one area where we're having a problem was on the training side, we actually had lost some subscribers over the first half of the year.

First three quarters really, which as I mentioned we got a really fantastic new product, this Videotel Performance Manager, which is just state of the art software and UI and administration tools for training and managing the status of individuals on board.

And that's turned that business around we're now seeing positive growth in Q4, we expect to see positive growth on a constant currency basis next year in terms of the number of subscribers..

But it sounds like on an overall basis when we look a content the transition towards AgilePlans will probably continue to cause content to be down again in 2018, is that fair?.

It’s flat to down as probably a reasonable estimate, but again we're using content to leverage our business and our business model. So, if we can grow our subscriber base by 30% on the VSAT side and content stays flat. But we're able to leverage that content to do that, that's a great win for us..

I'll take that trade. So final question just on the FOG business, the FOG overall product line have been pretty flattish for years and you finally seem to be getting some traction on it. Would you attribute that to specific product introductions that you’ve had within the last two years, and you’ve had a couple.

Or is it more indicative of an end market where a lot more of the world is moving towards autonomous and excluding vehicles, but other things drones?.

Yes, I think the autonomous everything is clearly having an impact, but you are right, it's the products that are really selling well are our new products, these inertial measurement units that combined three fiber optic gyros, three accelerometers and software into a single product. And that's really been the big driver in terms of sales growth..

And you seem to indicate in your commentary, I think, it was last quarter or the Q that you think eventually the photonic chipset might be integrated into the -- your or call it legacy products and help drive down the costs or is that pretty easily transferable?.

Well, the hard part is creating the chip and the product. The easily transferable is definitely true, in other words, if we had the product in hand, it would be very easy to integrate into our standard products. So, the answer is, yes, our plan is if this things works, the way we hope it'll work, we will use it in everything..

Awesome. Hope that soon..

Great, me too..

And that will conclude our question-and-answer sessions for today. I would like to turn the conference back over our speakers for any additional or closing remarks..

Great. Thanks again and as always Don and I are available for any follow-up questions. Thank you..

Thank you..

That does conclude today's conference. We thank you for your participation. You may now disconnect..