Good day, and welcome to the KVH Industries, Inc. Second Quarter 2018 Earnings Conference Call. Conference is being recorded. At this time, I would like to turn the conference over to Mr. Don Reilly, CFO. Please go ahead, sir..

Thank you, Operator. Good morning, everyone. Thanks for joining us today to discuss KVH Industries second quarter results and our guidance for the 2018 third 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 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 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 Form 10-K filed on March 2nd and our 10-Q, which is expected to be filed later this afternoon, and other filings -- and other SEC company 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?.

Thanks, Don, and good morning, everyone. Thank you for joining us today. I'm pleased to report that our second quarter results demonstrate the solid growth that we outlined at the beginning of the year.

Quarterly revenues increased 7% to $43.4 million compared to the second quarter of 2017, and EBITDA was $2.9 million, exceeding and at the high end of our guidance, respectively. More importantly, we made tremendous progress on our strategic initiatives, and the results are now reshaping the company.

In our mobile connectivity business, we reached a new milestone, shipping of our 8,000 VSAT systems and achieved record performance on many levels, including record quarterly bookings, activations and shipments. In fact, we successfully shipped almost as many VSAT systems in the first 6 months of 2018 as we shipped in all of 2017.

VSAT unit shipments were up 100% compared to last year's second quarter, and we're in an all-time record by far compared to any quarter in our 10-year history in the maritime VSAT business, where we're seeing a nice trend. Year-over-year unit shipments were up 16% last Q4 and 62% in Q1 of this year and now 100% in Q2.

Much of this was driven by the performance of our AgilePlans Connectivity as a Service Program. AgilePlans bookings were up 33% sequentially from Q1 and were multiples higher than the second quarter of 2017, which was our first quarter of AgilePlan sales.

We expected AgilePlans to be successful, but the market response of demand has been even stronger than we anticipated. I believe that this success is a result of the broad appeal of our all-inclusive, no commitment program in the commercial market combined with our new high-throughput satellite global network.

We're being selected both by smaller fleets of only 5 or 6 vessels as well as larger organizations such as a recently announced contract with Nordic Hamburg to deploy the AgilePlans package on 25 vessels before the end of this year.

As a result of this accelerating demand, we're continuing to expand production capacity and improve our operational efficiency. Unit shipments were not only up 100% compared to last year, but they were up 29% sequentially. The revenue margin and the bottom line benefits of AgilePlans will steadily increase as more of these systems come online.

As we have discussed previously, we do not get the short-term benefit of immediate hardware sales as this is a subscription program. But as each new unit comes online, the recurring revenue compounds. June was our biggest month ever for AgilePlans installations, but the benefit of those installations won't be seen until Q3.

Despite increasing the pace of installations, 40% compared to the first quarter, we still grew the backlog that we carried into Q3, which bodes well for future revenue growth. While AgilePlan orders and shipments continue to rise, it's also important to note that traditional VSAT hardware sales were also higher year-over-year.

We're seeing strength in the leisure market and continue to win competitive bids in the commercial markets around the globe. For example, we just announced that Brazil-based Transpetro chose our TracPhone V7-HTS system with a five year airtime contract for 45 tankers.

Also, we are expanding our business with existing customers, illustrated by our announcement that BW Group, a long-time KVH customer, has not only extended our contract for existing vessels but will also be adding the TracPhone V7-HTS and the V11-IP systems to 45 additional vessels.

Another vital part of our VSAT business is the ease with which our traditional TracPhone V7-IP customers can convert their existing systems to HTS units. We offer an easy upgrade path for existing customers.

Then, they get to enjoy all the benefits of our HTS network like faster speeds, dual channel and better coverage, while we retain them as existing subscribers for our airtime business and as we move the vessels onto the new network.

We've had a fairly large number of conversions or upgrades so far, but it's important to note that we don't count those in unit shipments or in new subscriber totals. Overall, since we launched the V7-HTS and went live in December, we've seen the fastest adoption of a new product and service in KVH's history.

With the original mini-VSAT network, it took us almost two years to get as many subscribers as we got in the first six months of this year on the new HTS network. Even with all of this, we're not standing still as illustrated by the recent introduction of several new products and services.

First, our Videotel Performance Manager has been upgraded with a powerful new feature called task-based competency, which enhances the ability for fleet managers around the globe to measure the effectiveness of crew training.

This is a major part of the new software and content play that we expect will help revitalize growth in our subscription maritime eLearning business. We also launched our new TracPhone LTE-1 communication system. The addition of cellular communication solution is a logical expansion of our marine suite of products and services.

This product is attractive both to current customers, who might want to use it as a complement to their KVH VSAT system and more importantly, to an incremental category of leisure and coastal commercial customers, who might not have the need for a full VSAT solution.

The TracPhone LTE-1 is a fully integrated communications system with everything in a single compact dome. The dual high-gain antenna array offers coverage more than 20 miles offshore and gives robust coverage, thanks to our use of multiple LTE-Advanced service carriers.

When offshore, the system provides data speeds that are up to 10 times faster than personal cellphones and offers the convenience of built-in WiFi as well as below deck networking. The resolution makes it easy for customers to add fast Internet to their boats while generating a new recurring revenue stream for KVH.

Early demand and shipments are strong. And while the LTE is currently designed for use in U.S. waters, we're actively working to expand coverage to other regions as well as offer a global solution.

And finally, we recently announced an exciting new sales opportunity for our TracVision satellite TV systems under the terms of the new distribution agreement with Garmin. They selected our TracVision systems for use as part of their full bridge packages.

Now this new arrangement partners KVH with another leading marine brand while creating minimal disruption to our well-established leisure marine sales and support network. Now moving on to our inertial NAV market. Our overall revenues were up 50% compared to last year's second quarter. FOG revenues were up 34% year-over-year.

That's now the sixth consecutive quarter of double-digit growth. We achieved a new quarterly record for production and shipment of our higher-value inertial measurement units and continue our efforts to increased capacity to meet the high demand for these systems. Last month, we also introduced the new variant of our highest performance 1775 IMU.

This new version now includes precision 25G accelerometers, making it an ideal solution for highly dynamic applications with high levels of acceleration, vibration or shock such as aerospace applications, including satellite launch rockets. The most exciting news is the tremendous progress we've made on our new photonic chip.

We've achieved performance results faster than expected in the development cycle for our photonic chip-based fiber optic gyro. The latest batch of chips represent a big technical breakthrough. We are now meeting or exceeding all of our target gyro performance measures. For example, we're seeing bias over temp values of 0.5 degrees per hour.

Now you recall that when we went into this effort to develop something, we were trying to develop something that would be suitable for our autonomous vehicle customers, but in fact, the performance of this new chip-based FOG is better than or equal to our best all-fiber gyro.

So with this specification compliant prototype now in hand, I'm extremely confident that we'll be able to deliver test samples to automotive customers later this year. In addition, the performance and cost benefits are such that we anticipate incorporating this groundbreaking technology in every one of our gyros in the future.

In the meantime, we're working on packaging technologies that can scale to automotive-type volumes. So in conclusion, we're beginning to experience the growth we anticipated at the start of 2018. We're pleased that we've been able to execute on our strategic initiatives even while keeping our operating expenses below last year's actual's.

Our innovation for the future continues with a full pipeline of new products and services anticipated for later this year and into 2019. We carried a strong backlog and momentum into Q3, and we remain confident that we're on the path towards higher revenues and increased shareholder value.

Now I'd like to turn the call over to Don for some details on the numbers.

Don?.

Thank you, Martin. As Martin mentioned earlier, our second quarter revenue was $43.4 million, which was slightly above our previously announced guidance range. This compares to $40.5 million recorded in the second quarter of 2017. As you know, we implemented the new revenue recognition standard, ASC 606 this year.

The impact of that new standard was a decrease in the second quarter of about $200,000. Product revenue for the second quarter was $16.2 million, an increase of $1.9 million or 13% from $14.2 million in the second quarter of the prior year.

Service revenues for the second quarter was $27.2 million, an increase of $1 million or 4% from the $26.2 million recorded in the second quarter of last year. Revenue from our inertial navigation segment increased $3.2 million and in our mobile connectivity segment decreased about $300,000.

By segment, in our inertial navigation segment, product revenues increased $2.7 million or 48%. Our FOG business continued its solid top line revenue growth growing 34% this quarter, while TACNAV sales more than doubled compared to last year.

Non-recurring engineering service revenue increased about $500,000 compared to the prior year's second quarter. In our mobile connectivity segment, product revenues decreased by about $800,000 or 9%. The decline was largely driven by the impact of the AgilePlans subscription service.

With respect to the Agile program, approximately 56% of our total unit shipments this quarter and 72% of our commercial shipments were in connection with this new offering, which allowed us to achieve yet another record high total in VSAT shipments. The adoption of the new revenue recognition standard 606 also negatively impacted this segment.

Service revenues in our mobile connectivity segment increased $500,000 due to an increase in our mini-VSAT Broadband airtime service revenue of $800,000 or 5% offset somewhat by our lower content and training revenue of about $300,000.

Sequentially, our mini-VSAT Broadband airtime revenues were up about 5% from the first quarter of 2018 and 8% in the fourth quarter of 2017. For the second quarter, our consolidated gross profit margin decreased to 41% as compared with 44.7% in the second quarter of last year.

From a segment perspective, our mobile connectivity gross margin was 41.2%, while our inertial navigation gross margin was about 40.3%. Operating expenses for the second quarter of 2018 were $19 million, down about 2% from $19.4 million in the second quarter of last year.

And so for the second quarter, these changes in revenue, margins and operating expenses resulted in a loss from operations of $1.2 million compared to the loss of $1.4 million recorded last year.

Our mobile connectivity segment generated an operating profit of $1.1 million compared with $2.6 million last year, and our inertial navigation segment had an operating profit of $1.6 million compared with about $400,000 last year. Our unallocated loss from operations decreased by about $500,000 to $3.9 million from $4.4 million last year.

Our effective tax rate for the second quarter was negative 32.4%, which reflected the tax expense on our foreign earnings. The second quarter and the first half of 2018, we recorded a valuation allowance on deferred tax assets generated by the net operating losses incurred in the U.S. as required by accounting rules.

As we consider this valuation allowance to be a discrete non-cash item, we've excluded this reserve when computing a non-GAAP net income EPS. For the second quarter, our net loss was $1.3 million as compared with a net loss of $2 million recorded in the same period last year.

On a non-GAAP basis, which excludes amortization of - intangibles, stock-based compensation, employee termination and other non-recurring costs, foreign exchange transaction gains and losses and the tax effect of all of those things as well as the change in the valuation allowance, we had net income of $600,000 compared with $700,000 last year.

EPS for the second quarter was a net loss of $0.08 per share compared with a net loss of $0.12 per share in the same period last year. And our non-GAAP EPS for the second quarter was $0.03 per diluted share compared to $0.04 per diluted share in the same period last year.

Our adjusted EBITDA for the second quarter was $2.9 million compared with $2.3 million recorded in the second quarter of 2017. And for a complete reconciliation of our non-GAAP measures, please refer to our earnings release that was published earlier this morning.

Net cash from operations was breakeven in Q2 of this year compared to cash provided of $2.4 million last year. Capital expenditures were $4.3 million. And our net debt was $11.5 million, up from Q1 due to the additional capital expenditures, mostly attributable to our Agile program and our new HTS network.

Total backlog at the end of June was $13.2 million. Backlog for our inertial navigation products and services at the end of June was approximately $11.5 million. Of this amount, approximately $8.3 million is scheduled to be delivered during the remainder of 2018. With that, I'll now turn to our outlook for the third quarter and full year.

Our guidance for the third quarter is as follows. Third quarter revenue is estimated to be in the range of $43 million to $45 million and GAAP EPS to be in the range of negative $0.10 to negative $0.05 per share. Non-GAAP EPS is expected to be in the range of $0.03 to $0.07 per share and adjusted EBITDA between $3 million and $4 million.

At the midpoint, our Q3 2018 revenue guidance represents an increase of about 9% compared with the third quarter of last year, primarily due to higher expected FOG sales in our inertial navigation segment and higher airtime revenue in our mobile connectivity segment. For the full year, our guidance is unchanged.

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 expected to be from $0.12 to $0.28 per share, and our adjusted EBITDA is expected to be in the range of $12 million to $16 million.

I would point out that although our full year guidance remains unchanged, the further success or acceleration of our AgilePlans program could negatively impact the amount of revenue and earnings we will be able to recognize this year. Also, as you know, public companies in the U.S.

were required to adopt the new revenue recognition standard on January 1, 2018. For us, that new standard is expected to reduce revenues and adjusted EBITDA in the third quarter by about $0.5 million and $1 million, respectively, and in the full year by $2.5 million and $500,000, respectively.

The full year estimate has been reduced somewhat from our estimate earlier in the year. As you can imagine, it's difficult to forecast this impact with precision as the amount is significantly impacted by the mix of our customers. These amounts are reflected in the guidance we provided.

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

So that concludes our prepared remarks, and I will now turn the call over to the operator and open the lines for the Q&A portion of this morning's call. Thanks.

Operator?.

Thank you. [Operator Instructions] Our first question comes from Chris Quilty of Quilty Analytics..

Martin, I know, last quarter, you mentioned that you were impaired in your ability to ship VSAT units due to some production constraints with the shipments up 100% this quarter.

Is it fair to assume that you've cleared all the production hurdles? Or is there still some unmet demand?.

There's still some unmet demands. We booked more than we shipped in the quarter, so we did build backlog. We were hoping to bring it down. So -- but I think that, generally, the larger constraint is now installations -- field installations. So back-through production, I would say, is no longer a constraint..

And so again, we've had six months of AgilePlan shipments. We've seen units go up just from a timing of install and customer billing.

When do we really -- when do you expect to see the revenue ramp start to pick up? Does that start to show in Q3? Or is it more of a Q4 event or rolling into the early part of next year?.

I think it starts in Q3, and then you'll see it ramp again in Q4. So for example, there's a bit of a mismatch between subscriber growth because a lot of those subscribers came on at the end of June. So June was a big month for installs and activations. So you will see those in Q3. But the backlog we have now is, round numbers, almost a quarter's worth.

So as those get activated, you'll see more of a significant jump..

And what are you seeing in terms of the ASP for those plans the -- trend wise basic versus customers choosing to add on packages and services, then training and movie content and whatnot?.

So overall, the ARPUs are coming in about where we expected. So the -- we are seeing less the 11s than we were earlier in the year because we launched the V7-HTS. It's a much -- well, it's a less expensive product. It's faster. And the global coverage now is really good enough for most customers.

So they're -- but if you look at the V7 ARPU, it's held up very well. So it's -- people are buying much more than the standard package, so like 100% -- more than 100% more than the standard package in terms of revenue per customer..

Don, a couple of quick housekeeping questions. Can you give us the mini-VSAT gross margin in the quarter, also the backlog for the guidance and stabilization business? And one clarification from the script.

I thought I heard you say that TACNAV sales more than doubled, but at least the way I crunch the numbers, it looks like TACNAV sales were less than $1 million and down. So if you could provide some color on that..

So well, those are a lot to think about. Let me address that. So TACNAV sales were about $1.4 million in the second quarter of this year versus about $600,000 in the second quarter of last year. And our VSAT product margins were....

I think the service margin -- the service gross margin is typically what you provide..

Yes. Okay, so I -- yes, [Indiscernible] that was probably in the neighborhood of just over 30%, a little less in the second quarter of this year. We expect to recover that in the third or the fourth quarter of this year and going forward, especially as the HTS network matures and no more customers come online. It's a little lower in the second quarter.

We had some onetime costs that came through and developments that brought the margin for the first -- the second quarter down a little less than where we used to. But no real surprises more or less baked into our guidance and it's expected to recover again in the third quarter, fourth quarter and beyond..

Q3 should be closer -- back to 35%. So this is the normal startup of HTS. So we've had a really good take rate on the HTS product, so we expect the margins for Q3 to bounce back around 35% and continue to grow from there as we continue to add subscribers..

And bigger picture on TACNAV, large orders still on the pipeline, things progressing..

Yes, I mean, that's still in our long-term forecast so working, as I mentioned on last call, with the local companies for -- to add multiple content, which is a new requirement that's being added to this program. So we're working with several companies who want to be our local partner.

And that is progressing but progressing slowly, so we don't have it in our near-term guidance..

Our next question comes from Rick Prentiss of Raymond James..

Start with a bigger picture question. The loud headlines out there about trade wars obviously affects the market but more interested on what you guys are seeing down on the ground or on the sea.

What are your customers feeling about what trade wars might mean? And then how are you thinking about how it might affect you?.

Yes. I think, so far we haven't seen any impact, and we haven't included any impact from that in our guidance. So for us there, none of our products are impacted as of now. So I think the macro picture around tariffs is the global trade is still continuing, so it's unclear what, if any, impact it would have on us.

We haven't seen any boycott of our products or anything in China or Asia. So so far so good for us. And the impact of costs and materials could hurt us a little bit, but materials, metals and things like that are not a significant part of our cost in most of our products.

So of course, we do use aluminum, but I don't see that really impacting us very much..

And then as you think about the Agile product, kind of piggybacking on Chris' question, obviously the ramp we would expect would continue to accelerate as you've been adding the shipments and the installs and the revenues start to build.

Can you envision the day where you might actually start breaking that out separately? Because our modeling shows that it could get up to 10%, 20% of revenues over time as you build that base given the success we've seen..

Yes, I think we probably will do that. Traditionally, what we do is we wait until something is material enough so that tiny variations in monthly results don't impact big percentages as we report things. But I agree with you that over time this is going to become the core business, so we will start breaking it out..

And obviously, putting on a subscription model gives you even better visibility as far as the growth goes. How is the visibility on the rest of the business? And as we start thinking on 2019, you've given us third quarter update.

But how is the visibility of the business as you look out into '19? And then how should we think about the potential of what the photonic chip might mean to 2019 and beyond?.

So I think, as a company, our visibility continues to get better because more and more of our revenue is recurring. So I think that bodes well. And in our fiber optic business and our TACNAV business, it tends to be driven by backlog. So we have pretty good visibility, for example, in Q3.

We've got a pretty decent backlog for our fiber optic gyro product already. As far as 2019 goes, obviously, too early to give guidance there, but we do expect to see the full impact of all the Agile products we've been shipping. So those will start, we'll get 12 months' worth of revenue from those.

In the photonic gyro, that is probably too early for the autonomous market in 2019, so I would say that would be more of a 2020 for automotive. But we do hope to get that into our standard product, which would lower our costs significantly going in at some point starting in 2019..

The Iridium Certus product has been talked about quite a bit. I know you guys have both offerings out there.

How should we think about what Iridium Certus means into your marketplace? But also, just in general, is it another arrow in the quiver? Does it help costs? How are you thinking about the Certus product being launched here later this year?.

We think it will help us. It's a very nice backup. We've been using the Iridium OpenPort as a backup for a couple years, but that product is very long in the tooth and not very capable compared to what Inmarsat has. So this new Certus product should be better, faster new satellites, so it should be a great service for us.

But again, we use it as a backup. So customers want to have -- they've got pole-to-pole coverage, so you're never out of service. But it's very expensive compared to VSAT and very slow compared to VSAT. So it really is a back-up service. I mean, they've got speeds of 300 kilobits per second, and we're at 10 megabits per second.

So it's not something you would choose unless you needed it for emergency..

Our next question comes from Rich Valera of Needham & Company..

So I'm thinking about, there, very strong unit shipment quarter, Martin, and I was wondering, I know you don't want to give exact units, but if you'd give us sort of a rough level of where that is. I mean, you'd historically talked about it would be a 250 to 300 range, and I'm guessing this was north of that, maybe north of 350.

Can you confirm kind of what perhaps level the shipments were this quarter relative to historical?.

Well, significantly above any other quarter, above historical and outside of the previous ranges and north of the numbers you're describing..

And then it sounds like in your prepared remarks that your orders were in fact actually stronger than those shipments.

Is that correct?.

Yes, the orders were beyond that range again, so that was a very strong bookings quarter, again, an all-time record for bookings, for shipments, for activations, for installations. So it's just a really strong quarter.

And it's -- again, you see there's a little bit of a mismatch between these record numbers, and you don't see yet record revenues and earnings because of the way this revenue is being recognized.

So -- but that gets better every day as the units come online and we start recording the revenues, so -- and then compounds in perpetuity with this business model..

So we should expect to see something north of the 5% airtime growth, I would think, in 3Q and 4Q.

Is that a fair figure out of that?.

Yes..

And it sounds like just from a shipment perspective that you have a good shot of at least matching the second quarter shipments in the third quarter given your backlog.

And I'm not sure, are you actually continuing to increase your fulfillment capacity? And kind of where do you stand on that?.

We are. We are. So we're trying to get the average time from order to installation to be under 60 days. We're getting close, but we're not there yet. So that's something we continue to work on in Q3.

So Q3 traditionally is the slowest quarter of the year in the commercial market this summer, particularly in Europe, so it's not -- so -- but we do expect, optimistically, again, triple-digit growth year-over-year..

And then on the photonics project here, it sounds pretty encouraging where you are there. Just wondering what additional development is there to get this into production to kind of effectively put this technology into the products that you ship on a daily basis.

What are the development milestones that need to take place between here and there?.

So right now it's related to packaging. The best way, most reliable way and cost-effective way to package the device and then -- so that's really the next big step, which is a -- I don't want to underestimate the amount of work that's involved in doing that, but I do want to say there's no invention involved in that.

I mean, there's a lot of work and reliability studies and testing and qualification and things like that, but we were really kind of shocked at the results, what we got from this next -- this latest batch of chips. We expected to get an incremental improvement.

We were addressing four big issues from the previous design, and all four of those issues were resolved and the thing just worked, which normally doesn't happen. So I think we're ahead of schedule now..

And then just a couple of bookkeeping ones.

Could you give the FOG revenue for the quarter and the May VSAT hardware revs?.

So FOG revenue for the quarter was $6.3 million. And....

And the mini ...

So one second.

So mini-VSAT product revenues were -- so just mini-VSAT was $2.4 million, so that excludes TVRO and other [products], right?.

The next question comes from James McIlree of Chardan Capital..

I think that you guys were asked for the guidance on stabilization backlog, but I don't recall hearing an answer..

That was [stonewalling]..

That was [stonewalling], yes. But it's also in my script, but I'll say it again. The total backlog was $13.2 million and for inertial navigation was $11.5 million. And $8.3 million of that is scheduled to be shipped this year..

And maybe this was in the script as well.

But what is the Agile subscribers as a percent of the total subscriber base?.

We haven't given that number, and we won't until it becomes more material. So we've shipped many thousands of units over the last 10 years. So right now it's 72% of new commercial shipments and about 56% or so, 52% of all shipments going out the door. So it's a rapidly building..

But it's not -- but as you can imagine, it's not significant yet from our total subscriber base, but it is becoming a bigger share every quarter..

So it's been available for one year now but the installed base has been built over 10 years. So....

And so from a disclosure standpoint, where does that revenue show up? When you're showing us the mobile connectivity sales, are you splitting apart the hardware versus the service component of that contract? Or are you just throwing everything into product sales or broadband airtime?.

It's all in airtime. And we don't bill it separately. The customer won't even recognize the hardware component of it. We simply, in our own -- for our own analysis purposes, we attribute a hardware component, but as far as the customer is concerned, it's a monthly charge, monthly airtime charge. And we recognize -- we record it that way..

No, understood, understood, okay. And so going forward, you would expect to continue to categorize that in the broadband airtime line until it maybe gets big enough and you segment it all out..

Correct..

Okay, right..

So if you look at a high-level head, every Agile unit in product sale over the last year, that's on the order of $10 million to $20 million of revenue. So it's a significant, I don't want to say, deferred revenue because it's not the correct accounting term, but it is a revenue that's in the pipeline, could be recognized in future periods.

So -- and that's not -- and again, that doesn't show up in our 606 adjustment. So some people look at that and say, they don't have that big an impact due to 606." We have to keep in mind that the Agile revenue isn't being changed under 606, but it's also -- because it wasn't being recognized upfront under 605 either.

So all this revenue is still a significant impact in terms of revenue recognition, but it's not due to 606 if that makes any sense..

And we think that all those Agile shipments, had they been product sales, would have been a significant increase in current reported revenues. But it's also unfair to think that all other Agile shipments would have been product sales, I mean....

We think that, that's a very good point. So we are very confident that this new business model has significantly moved the needle, and if we hadn't done that, we certainly would be [down about] 100% growth. So....

And Martin, that $10 million to $20 million that you threw out just now, is that an annual number or that's sort of over the line [Indiscernible]?.

Yes, that would be an annual number..

And so it would be unfair to say, okay, well, let's just throw $10 million into revenues next year because that's something that cumulates as the subscriber base grows..

Yes, right. So that's -- we're amortizing the equipment over 4 or 5 years [Indiscernible] airtime as well..

All right. And as far as the photonic chip goes and I just want to understand relative to the autonomous vehicle market, can you kind of map out the -- what happens from here? I think you mentioned sampling with the auto companies at the end of the year.

So -- and then what? So what's like that next 2 or 3 years for that market, again, just the autonomous vehicle market?.

Yes, that's probably the most difficult thing to forecast, is the success of all the different players. We've sold to about 27 different companies, players in the autonomous vehicle space. There's about 20 that have our product that they're using now in some type of prototype or test.

So it's very difficult to say is 2020 the year, is it -- what's going to happen because every -- all these programs are top secret and it also depends on the acceptance. So our goal is we're designed into a whole bunch of prototypes now which is great, but our goal is to stay in there when these transition to production.

And there's nothing that we can do that will accelerate them getting to production, but there are things that we can do to be ready so that we don't get designed out.

And that's what we've been trying to do with this photonic chip, and that's why we're so excited about the results because we now have a path to a very low-cost, super high-performance gyro that's never been done before. So this is really a first..

And these design ins that you're talking about would be for a specific model at a car company. Is that right? So GM would say we're going to put it into this line..

Yes. I think design ins....

And they would design somebody into that..

I think design in is too strong a word because these are still experimental prototypes for the car companies. We're in many platforms, and we think that we have the opportunity to stay in as they go to production..

And so when it does get formally designed into an automobile, I know you have some experience with the auto market, so that time period from, let's call it, RFP to decision of design in and then from design in to production, you can probably, I guess, time that out just generally. I'm not looking for a specific forecast..

I mean, some of our potential customers are concerned that they're moving faster than we are and others are moving slower than we are. So we've told the people that end of '20, we'll be able to deliver automotive-qualified products.

And there are some players in this space that think that they would be producing vehicles in the 50,000 to 100,000 a year quantity by that time, but I would have to say that we don't really know the timing. We can say it's unlikely to be 2019 for any significant volume..

We have a follow-up question from Chris Quilty of Quilty Analytics..

Martin, I just want to get a qualification.

When you talked about transitioning all of your legacy products to the photonic chipset, does that mean all of the infrastructure that you've built up out in Tinley Park from fiber optic drawing towers, winding capabilities, all that stuff eventually gets written off and I guess [indiscernible]?.

So the parts that this replace is the difficult to manufacture individual components like couplers and polarizers and splitters, the modulators eventually. But the fiber optic gyro is still used as a fiber, so our current fiber production will continue.

And the reason I mentioned that we think that we'll be ready to start putting in some of our products in 2019, but talking about 2020 or beyond, that would be for a full automotive qualified. And then do we have a customer who's ready to go on production at that point.

But there's absolutely zero plans to write off anything, so we expect to be expanding production in our Tinley Park facility. In fact, we're working on starting a second shift now because we're very busy there and we're hiring..

And so probably fair to assume, the other customer that has a very long qualification process to shift from traditional design, that photonic chip set, would be the military?.

No, but to be honest with you, we were really planning on using this in our high-end products. So it's kind of a bit of a surprise. So now we're reevaluating what we're going to do with it. But my personal opinion is we'll probably put it in everything eventually, including military products because it's more reliable and more stable..

And lower cost to produce..

Yes..

So one final question, which is just AgilePlan. It's only been out there for 6 months or so.

Any competitive moves that you've seen in the market? Or what are competitors doing evaluation wise or announcements or pricing in order to counter your position?.

Well, AgilePlans has been out for a year. The HTS network has been live for 6 months, and I think it's a combination of those 2, which is really accelerating things. I haven't seen any specific response from the market. I think price in commercial has always been sort of where our competitors like to play, is on the low price side.

So -- but no, I haven't seen any specific response..

At this time, we have no further questions in queue..

Great. Well, this time, we'll wrap it up, and if anybody needs to speak with us directly, feel free to give us a call or e-mail. Thank you..

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect..