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

Thank you, operator. Good morning, everyone. Thanks for joining us today to discuss KVH Industries third quarter results and our guidance for the 2018 fourth 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 this afternoon, and the company’s SEC filings available directly from the Investor Information section of our website.

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

Martin?.

Thank you, Don, and good morning everyone. Thank you for joining us today. I'm pleased to report that our third quarter results reflect a continuation of the strong momentum that drove the first half of our year.

Total revenues for the quarter was $43.5 million, an 8% increase over Q3 of last year, while adjusted EBITDA for the quarter was $3.2 million, up from $1.8 million the same time last year. These results were all in line with our guidance.

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

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

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

In addition we continue to improve our delivery and implementation efforts for AgilePlan orders. The results of these efforts were record installation with a 27% increase in field installations over last quarter. Most fleets are selecting the TracPhone V7-HTS, which we introduced one year ago today.

This was and remains of revolutionary product for maritime VSAT. It delivers download speed as fast as 10 Mbps worldwide, a level of performance that's never been possible in a 60 centimeter antenna.

All V7-HTS systems come with a high speed data channel and a separate unlimited data use channel, both of which are supported by our next generation global network that we launched in cooperation with our partners Intelsat and SKY Perfect JSAT.

Since we began shipping the V7-HTS in December last year, we've seen positive responses both commercial and the leisure markets, which is reflected in our quarterly VSAT results.

Now, we've applied that same innovation to an ultra-compact system the TracPhone V3-HTS, announced this morning and scheduled to be unveiled at the Fort Lauderdale Boat Show in just over an hour.

The V3-HTS is the world's fastest, lightest, smallest, maritime VSAT system at only 14.5 inches in diameter and 25 pounds, it delivers speed as fast as 5 megabits per second, down and 2 megabits per second up using the same network that serves the V7-HTS.

Not only is this the fastest ultra-compact VSAT system, it's also faster than some computing 1 meter VSAT antennas.

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

The TracPhone V3-HTS's fast data speed combined with its small size make internet connectivity and HD quality streaming available both smaller powerboats and sailboats along with commercial vessel such as work boats and offshore fishing boats that don't have room for large satellite communications antennas.

It also has an affordable entry level airtime plan that starts at $99 a month for 200 megabits. We are very excited about the potential for this new product. It’s the newest addition to our HTS product line. We expect shipments to our global sales channel and customers worldwide to begin today.

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

Now Singtel will be providing its maritime customers with KVH's SATCOM products and service offerings, including AgilePlans. Result is expanded visibility for our products and increased access around the AsiaPac region, which bode some of the busiest ports and largest fleets in the world.

We believe this is a great opportunity that not only reinforces our leading position in the maritime industry, but it validates the quality, performance and value of our VSAT solutions. In other mobile connectivity news, although revenues were lower for the quarter we are beginning to achieve the turnaround for our content and training business.

The launch of our Videotel Performance Manager platform and the new task based competencies make us optimistic that our content business will return to growth, as we saw an increase in the number of subscribers in Q3.

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

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

We continue to see strong interest in our TracPhone LTE-1 system, which was introduced at the end of the second quarter.

The cellular based communication system deliver faster speeds and extended coverage offshore here in the United States, to be used both as a standalone solution on smaller boats as well as complement to our VSAT systems on larger vessels. And over the next few months, we'll be adding new partners bringing us new coverage and global roaming.

And finally, we're very proud of our commitment to outstanding products, services and support, and the customer experiences that were recognized again by the members of the National Marine Electronics Association.

The marine professionals who comprise the NMEA honored our TracPhone V7-HTS and our TracVision TV-3 with their annual product excellence awards in September. This marks the 21st consecutive year that a TracVision TV system has won and the 16th year that a TracPhone SATCOM system has received this honor.

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

Fiber optic gyro sales rose over 50% year-over-year, this was our 7th consecutive quarter of double-digit growth in this market. We're continuing our efforts to expand our capacity to match the high demand and we've recently fully staffed the second shift at our facility in Illinois.

This jump in demand is a result of customer requirements for high performance and lower cost in applications like Airborne autonomous platforms, imagine stabilization, mobile mapping and the general move towards autonomous everything.

Our system's easy integration, compact design and outstanding accuracy, performance and reliability make them an ideal choice for these applications. In addition, remote weapon stations which have been a core part of our business for many years continue to need our systems.

Thanks to our ability to meet the critical pointing requirements to these high precision weapon systems. We've recently received a $2 million order from a stabilized weapon supplier and that's a sign that this part of our market is starting to grow again. On TACNAV side our business, we saw a $900,000 decline in sales year-over-year.

However, we're seeing some very encouraging signs in this industry. For many years ours was one among the few voices that raised concern about GPS vulnerabilities and the value of inertial navigation system as both a compliment and a backup for GPS. Now the U.S.

military is coming onboard with this issue and army is setting aggressive schedules to deploy assured navigation, position and timing solutions on thousands of vehicles in the coming years.

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

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

Separately, we continue to make progress towards our goal to align with a strategic partner in the automotive space, so we can take full advantage of the possibilities of this new technology. So in conclusion, Q3 continued the momentum we built in the first half of the year.

We're making outstanding progress on achieving this strategic initiatives we set for ourselves at the start of the year, including the expansion of our HTS efforts launching new products, developing groundbreaking photonic technology for the inertial nav market, building our AgilePlans customer base and pursuing the military assured navigation market.

I feel very positive about our continued development pipeline for innovative products and services. And I believe we're on the right path for continued growth for the year, for the year as a whole and into 2019. Now, I'll turn the call back to Don for the numbers.

Don?.

Thank you, Martin. As Martin mentioned earlier, our third quarter revenue was $43.5 million, which was within our previously announced guidance range, this compares to $40.4 million recorded in the third quarter of 2017. As you know, we implemented the new revenue recognition standard ASC-606 this year.

The impact of that new standard for the third quarter was a net decrease of about $400,000. Product revenue for the third quarter of 2018 was $16.3 million, an increase of $2.2 or 16% from $14.1 million in the third quarter of the prior year.

Service revenue for the third quarter was $27.2 million, an increase of $0.9 million or 3% from $26.3 million recorded last year. Revenue from our inertial navigation segment increased $2.4 million and our mobile connectivity segment increased $0.7 million. By segment, in our inertial navigation segment, product revenues increased $1.8 million or 27%.

Our FOG business continued its solid top line revenue growth, as Martin mentioned growing over 50% this quarter, while TACNAV sales decreased about 55% compared to the prior year. Non-recurring engineering service revenue increased about $0.5 million compared to last year.

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

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

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

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

Operating expenses remained flat at $19.3 million for the third quarter of this year and last year. For the third quarter these changes in revenue, margins and operating expenses resulted in a loss from operations of $0.9 million compared with the loss of $1.8 million recorded in Q3 of 2017.

Our mobile connectivity segment generated an operating profit of $1.5 million compared with $2 million of last year. While our inertial navigation segment had an operating profit of $1.9 million for the quarter compared with $400,000 last year.

Our unallocated loss from operations increased slightly $100,000 by -- to $4.3 million from $4.2 million last year. Our overall effective tax rate for the third quarter was just under 16% which reflected the tax expense on our foreign earnings.

For the third quarter of 2018 we recorded a valuation allowance on deferred tax assets generated by the net operating losses incurred in the U.S. as required by accounting rules. As we consider this valuation allowance to be a discrete non-cash item, we've excluded this reserve when computing non-GAAP net income and EPS.

For the third quarter, our net loss was $1.2 million as compared with a net loss of $2.4 million last year.

On a non-GAAP basis, which excludes amortization of intangibles, stock-based compensation, employee termination and other non-recurring costs, foreign exchange transaction gains and losses, the tax effect of the foregone and the change in valuation allowance we had net income of $700,000 compared with $400,000 last year.

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

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

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

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

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

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

The reduction in our full year revenue and earnings forecast also reflects lower than expected TACNAV orders, which impacts earnings more significantly due to high margins earned by these products. The decline being attributable to somewhat to the recent clinical tensions in certain international markets.

And higher operating expenses associated with the launch of our new V3-HTS product that Martin described as well as our continuing investment in long-term initiatives such as our new photonic chip-based FOG.

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

Our guidance for the fourth quarter is as follows, fourth quarter revenue is estimated to be in the range of $44 million to $48 million and GAAP EPS to be in the range of negative $0.10 to negative $0.01 per share.

Non-GAAP EPS is expected to be in the range of $0.02 to $0.09 per share and adjusted EBITDA is expected to be between $3 million and $5 million.

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

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

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

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

For 2018 we expect our capital expenditures will be in the range of $15 million to $18 million, and this assume that there will be no significant changes in foreign currency exchange rates. So that concludes our prepared remarks. I’ll now turn the call over to the operator to open the line for the Q&A portion of this morning’s call.

Operator?.

Thank you sir. [Operator Instructions] Our first question comes from Mr. Jim McIlree with Chardan Capital..

Yes, thank you. Good morning..

Good morning..

Can you indicate how much the TACNAV reduction -- how much you’re expecting the TACNAV reduction to have on guidance so it make sense..

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

So TACNAC....

So you would….

I would say TACNAV what we expect with the TACNAV would have brought us closer to the high-end of our range. So the upside that we are expecting doesn’t look we'll have it. So we come down within the range now is because that comes out of a higher end..

Okay. And I know it's difficult to predict what's going to happen on the political front. But it seems like it's delayed more than gone.

Is it a reasonable expectation?.

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

Okay. And Martin you mentioned a strategic partnership on the photonic chip.

Can you elaborate a little bit on what you're looking for? Is that a distribution or a product integration or a tech transfer or partial sale or what do you kind of looking for there?.

Yes. So what we're looking for is a strong credible partner who can help bring this product to market and help us deliver at scale. So we've been very successful in getting our product in front of the key decision makers.

We've been successful getting it designed into prototypes and I’d most of the self-driving cars on the road today have some of our technology in it. But in order for us to be part of these programs when they transition to high volume manufacturing.

We feel it would be very helpful to have a strong partner who has credibility and again scale to succeed in that market. So that's what we're looking for..

And I know it's difficult to predict, how long it might take to accomplish that.

But just best guess what do you think it takes in terms of the time to get a partnership?.

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

All right. And you said you're delivering samples to customers this quarter.

What are the steps after they get samples?.

So these are customers who are buying today's product and they're happy with the performance.

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

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

Okay, great. Thanks a lot. Good luck with everything..

Thank you..

Thank you. Our next question comes from Rich Valera with Needham & Company..

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

Is that a fair assessment?.

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

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

Any color there will be appreciated?.

Yes, so seasonally Q3 is one of the slowest of the year. So it was great to see such strong performance in Q3. So we expect Q4 again to be strong. So we're just very pleased that the momentum is continuing and that we've been able to accelerate the pace of installations and delivery.

So we're down to in the 30 to 60 day lead time in that range, which is for actual installation on vessels on a global basis, which is pretty good..

And Q2 was an overall record for the company versus any quarter of any year in shipments, but Q3 was a -- this Q3 of 2018 was a Q3..

I think Q2 was not....

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

Is that fair?.

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

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

Fair enough..

It was a Q3 record..

Got it, perfect. And then just wanted to understand the dynamics around the mini-VSAT airtime and subs. So it sounds like your subs grew 9% year-over-year and I think you said airtime revs grew 6%.

And I'm not sure if that's overall airtime or if that's mini-VSAT airtime, but wondering why they're not sort of growing at, at least the same rate?.

Yes, so if you imagine that you're adding subs on a linear fashion during the three months for the quarter let's say just to make math easy you add 100 subs during the quarter then on average you've added 50 subs for the quarter because it was zero going in and 100 exiting.

So if you look at the revenue for the quarter it would be the equal of 50 times of ARPU. So it's almost exactly half when it's linear.

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

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

Right..

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

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

So it’s always compared -- yes, right so it's always compared to the prior years of both the revenues compared to prior year and the number of subs. So the only confusing thing is that subs are reported on the last day of the quarter, that's the growth in total subscribers.

But the growth in airtime revenue is based on the average number of subscribers if you will. Meaning the number of days that the subscriber was paying money..

Right..

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

Got it, fair enough. And just wanted to be clear, I think historically you guys have actually given the airtime revenue number.

Do you have that convenient can you actually tell us what that was?.

Yes. It was just $18 million..

Got it. And then just wanted to revisit this TACNAV large order situation.

So Martin is it fair to say that and I think the answer is yes, but there is a handful of large orders we've identified in the past at least two if not three that one of which I think we already have sort of semi built in an inventory and others that are various states of completion.

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

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

So no reason for us to put it into Q4 guidance. So -- but I just stress that nothing bad has happened what you are thinking this may not positively impact the timing, and that's all..

That's a fair point. And then final one.

I know you gave the percentages for FOG and TACNAV, but could you actually give the actual dollar numbers for those in the quarter?.

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

Got it. Okay, that's it for me. Thanks gentlemen. Appreciate it..

Thanks..

All right, thank you..

Thank you. Our next question comes from Chris Quilty with Quilty Analytics..

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

Yes. Just one second. I'll just read it back from my script..

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

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

Got you..

And our air time margin was 32%, say 32.5%..

Okay.

So that's down a little bit, what was driving the decrease in margin?.

Well, it's actually up sequentially as we expected. So I'll let Don speak to the specific numbers. But just from a color point of view. So as we added the ACS network at the very end of last year, we're effectively running two networks. So as we add subscribers that's coming onboard and the cost are being spread over a larger number of subscribers.

So we're actually pretty pleased that we saw the turnaround in Q3 with margins improving sequentially. We expect that trend to continue into Q4 as we get more and more people on our HCS network..

So the margin did actually improve quite nicely from the second quarter. But second quarter had like as we mentioned some onetime cost and some other issues. So it's improving, we expect it continue to improve. 32.5% yes..

Okay..

So probably not improving as fast as we might have hoped or expected, but still definitely improving and our confident level continue too..

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

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

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

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

So we're pretty happy with the way things are going. And the gross margin while I agree with Don we're not as happy with that as it could be, the trend is up. So that's moving in the right direction as well..

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

I think like 45% is that another sector?.

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

So that’s not a negative so -- but then we’ve seen no reduction in the demand for Agile and the typical commercial sales still going Agile..

Okay.

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

Yes, actually the content business, which we call our training and content together was actually down and that’s what I addressed in my prepared remarks where we have new software and new features and we’re starting to see the number of vessels grow this quarter. I think there was an increase in the net number of subscriber.

So we do expect that to return of growth on the revenue line, but we haven’t seen that yet. So that was down year-over-year this quarter..

Got you. And the FOG business is doing really well, I mean it’s supporting most of your operating profit at this point.

What’s your outlook as you go into 2019? Do you have sufficient visibility either with customer contracts or pipeline that you think the business can continue to grow at the sort of double-digit rates into 2019?.

I think so, I think basically at this point we don’t have obviously Q4 guidance yet, but we’re looking at the trends and we haven’t seen anything that tells us that these trends are going to be reversed. And that’s true both for our VSAT business and for our inertial nav business.

So we’re on a nice positive trajectory with more customers and customers who are getting their products to market successfully and were designed in. So we’re optimistic that that trend should continue..

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

It’s pretty broad based, I mean there’s some big drone stuff in there, but there is also autonomous vehicles on a sort of daily basis we get these again nice order yesterday for $0.5 million for autonomous vehicles for inertial measurement unit. So it’s very -- when I think about our FOG business there are so many different applications.

So it’s really is that autonomous everything now. So we’re seeing a lot of different opportunities there..

Got you. And final question just on back to the mini-VSAT business.

When you look at seasonality obviously Q4 how we get some softness, are you seeing any issues that are impacting the business on a regional basis either European or Asia Pacific region that give you concern?.

No, the European sales and bookings have been very strong Asia is especially strong. We see on a global basis you always have some regional players that are in the market, but we haven’t seen anything new there and we’re really optimistic with our new product.

We’re going to address a whole another segment it’s dramatically faster both up and down in terms of forward to return link speed. So we are expecting that growth to continue..

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

Yes, so that’s right. So the V3 HTS won’t be part of the AgilePlans. It’s a straight hardware sale relatively affordable hardware cost compared to V7, but with a speed and the pricing we think it’s going to be a great replacement for L-band systems that are out there for fishing, workboats, just to hold another category.

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

Perfect. Congrats on the good results..

Great. Thanks, Chris..

Thank you. Our next question comes from Rick Prentiss with Raymond James..

Hey, good morning guys..

Hey, Rick..

Hey. Wanted to do a couple of follow up questions. First, on the guidance when you mentioned the political tensions in the TACNAV side. I didn't think you'd ever put it in a couple of those large international TACNAV orders.

Is that still the case or this is just some extra TACNAV you had in the kind of two or three that were big and an inventory hadn't been in guidance....

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

Right. But the really very large one that weren’t in guidance and still are not in guidance as you wait for those to kind a get cleared..

That's correct..

Okay. And then on the AgilePlan a follow up on one of the Chris's question. You mentioned I think 64% of commercial sales took Agile this time. That was down a little bit, where do you think that heads overtime? Should we think of it in the 60s does it get back into 70s. Could it really hit 80% as you think about what the take rate of Agile could be.

And was there any impact on that ability to fulfill the sales because you had to get your production capabilities up?.

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

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

Right. And just really it facilitate sales like you said. Okay..

It's like do you want your software on the cloud or do you want it on premise. And the big software companies don’t really care what your preference is as long as you become a customer of theirs..

And you have both options available. Yes. And then as far as gross margin, you've touched on a couple of times that there has been improvement and you expect further improvement, but maybe you're not as happy at the pacing.

Can you help us understand where you think you could head to on those margins and how long it would take benefit it’s going a little slower than you think?.

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

Okay, that make sense. And then you touched on it briefly also that you've redone your debt to get some lighter covenants.

What are you looking to do there, what was the kind of the real catalyst to redo the debt and the get the covenants less restricted?.

So the first reason is the debt was due on July of 2019. So I wanted to get out in front of that. So then I have to report the debt as current. So that was the real driver quite honestly. But since we were doing that, we work with our bank partners to increase the revolver.

And to make the certainly on the covenants less restrictive so that we don't run up against covenant issues that we happened to have coming in. CapEx requirement in any particular month that eats cash.

So the old requirement the debt covenant the leverage ratio was 1.5, the new covenant -- the leverage ratio requirement is 3.0 scaling down to 2.0 at the end of the term, but it gives us at least a year or more of a very high leverage ratio allowing us to borrow against the revolver if we need it.

But in any event not to run up against cash flow constraints that could affect our ability to invest..

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

I'm not sure that that would really be part of this. So at least in my mind I see this as more as Don mentioned that bank deal was coming due in 2019 in anyway where we entered into the agreement years ago we hadn't envisioned the AgilePlan. So it makes sense to get the debt agreement to match the realities of our business model as it is today.

And maybe they were very supportive in doing that. So, I don't think it really relate to raising money for FOG or photonic chips or anything like..

It is really tied to the AgilePlan because obviously you have to capitalize some of that equipment and just if you have strong sales or you want to be able to meet the capital you will need to leverage..

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

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

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

Great, well have a good Fort Lauderdale Boat Show, it looks like the exciting day with the product launch down there..

Yes, we're looking forward to it. Thank you..

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

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

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