Good day. And welcome to the KVH Industries Fourth Quarter and Year End 2018 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Don Reilly. Please go ahead, sir..

Thank you, Operator. Good morning, everyone. Thank you for joining us today to discuss KVH Industries' fourth quarter results and our guidance for the 2019 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 and Brent Bruun, the company's Chief Operating Officer. The earnings release is available on our Web site 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 Web site.

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 third quarter Form 10-Q filed on October 31st and our 2018 Form 10-K, which we expect to file later today, and the company’s other SEC filings available directly from the Investor Information section of our Web site.

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. Overall, we had a very good quarter with revenues of $43.8 million, that’s a 12% increase from Q4 last year. This was driven by our Fog product revenues, which increased 33% along with an 87% increase in VSAT shipments compared to the fourth quarter of 2017.

It was a $1.2 million Fog order that we were counting on in Q4 that came in as planned, but customer pushed deliveries out into 2019. Had that shipped, we would have been within our guidance range for revenues and EBITDA. Everything else mostly came in as expected for the quarter.

For 2018 as a whole, we delivered solid performance with revenue up 7% to $170.8 million despite the fact that we don't recognize any immediate revenue on VSAT shipments into our new AgilePlans program. In addition, we entered the year with four key strategic goals and successfully delivered on all of them.

We launched a new global HTS satellite network, pioneered and rapidly grew a new service driven business model, made significant headway in our TACNAV AP&T projects and achieved the technological breakthrough in our photonic chip technology. Now, let's take a look at each of these initiatives and our Q4 results in a bit more detail.

In our mobile connectivity business, we continued to see rapid uptake in our AgilePlans subscriptions. In the fourth quarter, AgilePlans shipments increased 94% over the fourth quarter of 2017, represented 62% of commercial maritime VSAT shipments. Monthly ARPUs and margins for AgilePlans subscriptions continue to be higher than traditional sales.

Traditional hardware sales remain a vital part of our business, and I'm happy to report that fourth quarter VSAT product sales also increased more than 80% over Q4 2017.

As a result, we shipped a record number of VSAT systems with an increase of more than 87% for the fourth quarter and more than 90% for the full-year compared to the same period in 2017. We're also beginning to see the benefits of compounding AgilePlans subscriptions.

Together, these led to an increase in quarterly airtime revenue of $2.1 million or 13% year-over-year. Rolling out our new global HTS network and aggressively building our AgilePlans connectivity as a service business model for the top two strategic initiatives for our mobile connectivity business.

The combination of these two has proven to be incredibly popular with our customers. We also expect that the margins will continue to grow as our subscriber mix continues to shift towards our mini-VSAT broadband HCS network and towards AgilePlans in 2019.

With the rapid growth of our AgilePlans program, we expect the new business model to be cash flow breakeven by the middle of the year just 24 months after launch. In fact, we expect the whole AgilePlans program to be cash flow positive for the full-year 2019.

To help accelerate the shift to our HTS network, we have continued our transition to an all HTS products family. In late 2017, we launched our 60 centimeter 24 inch TracPhone V7-HTS.

Since then, it became the fastest growing SATCOM product in our history, thanks for the appeal of downloads as fast as 10 megabits per second worldwide and simultaneous high-speed and unlimited use data channels. While recently we produce our new TracPhone V3-HTS in November.

This 15 inch system is the world's fastest, lightest, smallest marine VSAT antenna. It offers download speeds as fast as 5 megabits per second, which is faster than many competing 1 meter VSAT antenna. Its size and price range are perfect for smaller leisure, fishing and commercial vessels.

In near future, we expect to complete the shift to our all HTS suite of products. During 2018, we had to carefully manage our cost and capacities as we launch the HCS network, while maintaining our high quality of service on our existing network. As we increase subscribers, we've grown our bandwidth plans for HTS.

At the same time, we've manage our cost of customers' upgrade from the legacy network onto the new HCS network. While there's been a bit of margin pressure along the way, we expect that we should see increasing margins starting in the second quarter and ending the year significantly higher. This is not a seamless of transition as we could hope for.

In our training business, we've been very successful in launching new products and capabilities in 2018. The pace at which existing maritime training customers are upgrading to our new video tell performance manager continues to accelerate. We've already migrated more than 6,500 vessels to the new platform.

The capabilities of this system are resulting in higher levels of customer satisfaction, reduced churn and stabilized subscriber levels and a competitive edge over our competition. This business has been declining in recent years, and we're optimistic that the new software and capabilities will stabilize this business and return us to growth in 2019.

On the leisure marine side, we had a very strong quarter for our TracVision in motion satellite TV antenna systems. Bucking the trend of cord cutters on land, we saw sales of our track vision marine satellite TV systems in record high in the fourth quarter. Moving on to our inertial navigation businesses.

Our run of double-digit revenue growth for our FOG products continued for the eighth consecutive quarter, with 33% increase over Q4 of 2017. Our strong inertial sales growth is built on an increasingly diverse customer base.

For example, the fiber optic gyro based products we shipped in Q4 are being deployed on applications ranging from remote weapon stations and high-end camera stabilization, to autonomous people movers and driverless cars.

Demand is strong for our entire product line, including fiber-optic gyros, inertial measurement units and a premier inertial navigation system. Our customers encompass established firms and startups, commercial and military users, initiatives on land, sea and air and both domestic and international buyers.

Result is much more consistent sales pipeline, supported by a broader foundation than we've had in the past. We've also continued to make good progress in our pursuit of several significant military opportunities. In 2018, our TACNAV 3D system was tested in multiple field trials and outperformed the programs back on every occasion.

And during the fourth quarter, we received an order for around 20 TACNAV 3D FOG based systems that will be a part of formal competition for our large U.S. Army program, which is part of their assured position navigation and timing initiative. We will be delivering these systems later this month. At which time, testing will begin.

This program represents an opportunity for many thousands of units, larger than any program we've ever been involved with. While not in our formal guidance, we've also seen significant activity in the large Middle Eastern TACNAV projects that's been delayed for several years.

We received formal RFPs from five different prime contractors, all asking for the same KVH equipment with firm delivery dates. We hope to have further developments to report on this as the year progresses. And finally, a key strategic initiative for 2018 was a successful development of our photonic chip technology.

As promised, we shipped the first prototypes of our photonic chip based IMU before the end of the year to autonomous vehicle developers for testing. These were our first-IMUs built with our photonic chips. And I'm thrilled to announce that they were also the best-performing IMUs we've ever produced.

We have key automotive OEMs now doing side-by-side testing with this new prototype with a photonic chip inside against our standard fiber-optic gyros that they're using today. Our existing FOG and FOG based IMUs already provide a higher level of precision than MEMs based inertial system.

That's why our current products are on use for being tested on more than 20 different autonomous vehicle platforms today.

With the development of the photonic chip based FOG, we expect we'll be able to provide an inertial sensor with equal or greater precision to our existing products but at a price that we anticipate will be competitive with MEM system when produced in high volume.

We believe that this is truly a disruptive technology for safe, precise autonomous navigation, and it will also transform our fiber-optic gyros and inertial systems for other applications. We recently received our first patent on this technology and have several more in the pipeline.

We're accelerating our investment in this technology now and we're pushing towards commercialization and mass production. We're now in discussions with several potential strategic partners that can help us scale and become a supplier to automotive companies. We hope to conclude that effort in 2019.

So in conclusion, we ended 2018 having made outstanding progress in our critical strategic initiatives. Now, we're in execution mode, building on those developments.

Looking ahead to the rest of 2019, we set aggressive strategic goals for the company, among them; to accelerate our subscriber growth on our HTS network, both through new customer acquisition and upgrading existing customers; push into Marine IoT market with a new subscription service; commercialize our photonic chip-based FOG by the end of this year; maintain our momentum in pursuit of military AP&T programs and to improve profitability and earnings.

I believe we've got the right products, the right services and the right people to achieve these goals. Our strategy and plans have positioned KVH well for the future, and we will be focused on delivering long-term shareholder value. Now, I'd like to turn the call back to Don for the numbers.

Don?.

Thank you Martin, as Martin mentioned earlier, our fourth quarter revenue came in at $43.8 million, which was slightly below our guidance range, primarily due to the timing of a large FOG order, which was in fact received during the quarter but scheduled for shipment in 2019. This compares with $39 million we recorded in the fourth quarter of 2017.

Revenue from our mobile connectivity segment increased $2.6 million, and our inertial navigation revenue increased $2.2 million from the prior year fourth quarter. Product revenue for the fourth quarter was $16.8 million, an increase of $3.1 million or 23% from $13.7 million in the fourth quarter of the prior year.

By segment product revenues in our inertial navigation segment increased $1.6 million or about 22% and in our mobile connectivity segment increased by $1.5 million or 24%.

Within our inertial navigation segment, our FOG business continued its solid top line revenue growth, growing approximately 33% this quarter, while TACNAV sales decreased by 6% compared to the 2017 fourth quarter.

In our mobile connectivity segment, the increase in product sales was driven primarily by $1.6 million increase in Marine product sales with respect to the Agile program, shipments increased 94% compared to the fourth quarter 2017 and approximately 47% of our total unit shipments this quarter and 62% of our commercial shipments were in connection with this offering.

Service revenue for the fourth quarter was $27 million, $1.7 million increase or 7% from $25.3 million in the prior year. Mini VSAT broadband airtime revenue was up approximately 13% from the prior year fourth quarter, offset somewhat by lower content and training revenue.

For the fourth quarter, our consolidated gross profit margin decreased to 39.1% as compared with 46% in the fourth quarter of last year. From a segment perspective our mobile connectivity gross margin was about 39%, down seven points from last year, mostly due to the impact of our new HTS network.

While our inertial navigation gross margin decreased about 6 percentage points to 41%, mostly or somewhat due to product mix, particularly the impact that, that mix had on the overhead absorption in our factories, but also we do see much lower margins on our NRE businesses this year.

Operating expenses for the fourth quarter were $19 million, down slightly from $19.1 million in fourth quarter to the prior year. For the fourth quarter, these changes in revenue, margins and operating expenses resulted in the loss from operations of $1.9 million compared with loss of $1.1 million recorded in the Q4 2017.

And mobile connectivity segment decrease generate an operating profit of $0.5 million, compared with $2 million last year, while our inertial navigation segment had an operating profit of $1.1 million for the quarter compared with an operating loss of $100,000 last year. Our unallocated loss increased $500,000.

For the fourth quarter, our net loss was $1.8 million as compared with a net loss of $1.7 million recorded in the same period last year.

On a non-GAAP basis, which excludes amortization and intangibles, stock based compensation, employee termination, and other non-recurring costs, transaction-related fees or exchange transaction gains and losses, tax effect of the foregoing to the change in our valuation allowance and certain other tax adjustments, we have net income of $200,000 compared with $2 million last year.

EPS in the fourth quarter was a net loss of $0.11 per share compared to a net loss of $0.10 per share in the same period last year. Non-GAAP in the fourth quarter was income of $0.01 per share compared to $0.13 per share last year. The decrease in non-GAAP EPS was due to the impact of the Tax Cut and Jobs Act passed in December last year.

The non-GAAP purposes last year, we excluded the impact of the TCJA from PPS, which approximates $0.10.

Our adjusted EBITDA for the quarter was $2.6 million, compared with $3.8 million recorded in the fourth quarter of last year, and for a complete reconciliation of our non-GAAP measures, please refer to our earnings release that was published earlier this morning. Total backlog at the end of 2018 was a very robust $14.5 million.

Backlog for our inertial navigation products and services at the end of December was $11.5 million, and for mobile connectivity segment was $3 million. Of that total backlog amount, approximate $10.5 million is scheduled to be delivered during 2019.

Our cash flow from operations was $3.4 million, an increase of $1.3 million compared to the 2017 fourth quarter. Capital expenditures were $4.4 million and our net debt was $13.8 million, up $9.7 million in the end of 2017. With that, I'll now turn to our outlook for the first quarter and full-year of 2019. Guidance for the first quarter is as follows.

Revenue is estimated to be in the range of $41 million to $43 million, and GAAP EPS to be in the range of negative $0.33 to negative $0.22 per share. Non-GAAP EPS is expected to be in the range of negative $0.15 negative to $0.08 cents per share. And adjusted EBITDA is estimated to be to be between negative $1 million and positive $1 million.

The full-year, revenue guidance is $180 million to $195 million. Our expectations for full-year GAAP EPS is a range of negative $0.56 to negative $0.22 per share. Our non-GAAP EPS is expected to be from negative $0.07 cents and positive $0.17, and our adjusted EBITDA range is from $10 million to $16 million.

At the midpoint, our 2019 revenue guidance represents an increase of about 10% compared to 2018, and our EBITDA guidance represents an increase of 35%.

Paraphrasing our earnings release somewhat, we will be heavily focused on migrating legacy VSAT customers to our new HTS service over the course of the year, which we expect will positively impact our gross margins. Our AgilePlans program enters 2019 with great momentum and by the end of the year should be a cash generator.

Our fog business continues to grow, and we have a strong backlog and during the year. As Martin said, we have very positive feedback coming from our Middle-East customer regarding the large TACNAV orders we have been anticipating, and we have not include those orders in our guidance.

And will be highly focused on investing in our new photonic chip-based FOG and are to commercialize this new product by the end of the year. We expect the first quarter to be the lowest of the year, and expect to see improvements in both revenues and earnings as the year progresses.

This guidance assumes there will be no significant changes in foreign currency exchange rates. For 2018, we expect our capital expenditures will be in the range of $15 million to $20 million. This concludes our prepared remarks, and I'll now turn the call over to Martin and to the operator to open the line for Q&A portion of this morning call.

Operator..

Thank you [Operator Instructions]. And our first question comes from Rick Prentiss with Raymond James. Please go ahead..

A couple of quick ones to start-off, so there is obviously the one order that slipped the customer signs or pushing into 2019 $1.2 million.

Is that coming in one 1Q or is that expected later in the year?.

It’s going to be spread through the year. So their program is for the defense program, and their programs slipped to the right a little bit. So it's all going to be in 2019..

And obviously, the Middle East TACNAV orders that we've been watching for a while, sounds still positive on it.

Can you remind us of what the current thought or the scale of that combined orders might be on a revenue basis, as this is our local partners? What should we expect the margins that you would get on that equipment might be, just as we watched specifically come in?.

Yes, so in terms of overall scale, we still expected to be in the $40 to $50 million range. The local partners, depending on whether if there is any local content required, which is unclear at this stage. So I don’t know really have a good comment on margins.

But overall our -- because these -- this type of business is somewhat -- margins are above our traditional products and hardware sales. So we expect and we expect it to be better than then the corporate average margin for sure..

And obviously, it's a big order that -- it's a big elephants are getting that now we good. Before we've gone in December, the strategic initiatives for '19, obviously, highly focused on getting the move to the high throughput satellite area.

And you positive gross margins, it want to be upfront cost those and some encouraging customers move over with some incentives on the equipment or how should we think about the past through the year of that focus to get people onto high throughput satellite, so you can turn-off the other networks side?.

So that's in our -- you're correct that is baked into our guidance. So we are -- that's why you see -- we saw lower margins in Q4 and we expect lower margins in Q1. But the impact throughout the year, we expect to be really dramatic in terms of the improvement in gross margin for our VSAT airtime.

So yes, we may support them through upgrade plans, but we will be doing it selectively with customers who are big customers. So the net-net of that is going to be improving margins..

Just might be a little dampened in the first part of the year as you have VSAT move over?.

Exactly, yes..

And then final one from me on the rapid part of questions was you also mentioned you're going to invest in the photonic chip. Is that OpEx, is that CapEx, what does the investment mean and scaling and timing of what that is.

Is it something with the production?.

So it's OpEx in the R&D line.

So transitioning it from working prototype to ready for prime time use in some of our standard products, so our first before it goes to automotive it will be we want to build it into our own gyros for use in our standard product line, so we start to get experience with it and scale and then there is also CapEx required for -- but that would be for the automotive side, that would be scaling for production.

And that would be somewhat upfront, but it'd also be somewhat contingent upon actually landing large orders. So that CapEx requirement is not necessarily significant this year, but there is a CapEx component..

And actually there was one other one….

No, I was also going to mention that as I said in my script, we're also looking for some strategic partners so that that may reduce or eliminate some of that CapEx requirement. In other words, if we have someone else do some of the manufacturing, for example..

Makes sense, and the final one from me was you also mentioned the customer facing aspect for the electronic service model is that bringing on customer care people and is that kind of just trying to take a what that magnitude of cost might be, obviously you said you're going to be positive breakeven and positive on the segment.

So just taking through where that would hit and how much we might be looking at..

I'll let Don answer the cost side of the question.

But you're right, so it's customer service people, it's also, we actually created new senior position of core customer care and service and customer experience because as even though we’re not seeing a lot of revenue through these AgilePlans, because they're compounding monthly, it's a lot of unit so we really focus on making sure that we're delivering great customer experience, our churn on the AgilePlans has been almost zero in terms of percent.

So we need to keep that because as you know, we don't have long-term contracts with these customers, so we're earning their business every day. But I'll let Don answer the cost impact question..

So, the cost is included in our budget in 2019, and it's up over half million dollars, less than a million dollars, so between a half a million and a million dollars..

On an annual basis?.

Yes..

Okay, great, thanks so much guys..

We will now take our next question from Rich Valera of Needham & Company. Please go ahead..

Martin you obviously had a great year for many VSAT shipments both Agile and non-Agile and nice to see that converting into some service growth acceleration. So just wanted to know how you're thinking about that business for 2019.

You obviously have a tough comparison on the unit shipments, I don’t think it will be likely to be generating 90% or 100% unit growth numbers. So, how do you think about unit shipments potentially this year? And then the service growth now that you've gotten over that thorough the double digit comp.

Do you think that's sustainable as we move through 2019?.

While, I think on the unit shipments, you're right. I mean this quarter, I think off the top my head I believe the year-earlier number that was already growing double digits. So this 90% came on top of double digit growth.

But we expect to continue double-digit growth for unit shipments in 2019, but you're absolutely right, it's not like as the 100% percent triple digit growth. But that should translate into double-digit airtime growth, services growth, continuing throughout the year..

And then you mentioned the AT&T program and it's something you've got here first, you got 20 unit order related to that. What are the next steps to getting towards a major order on AT&T.

What do think the timeline is there?.

So this is part of a rapid development program for the Army, but rapid in the world of defense, it's not the same thing as you and I think that was rapid. So realistically, you're looking at 2020 of that not as 2019 event..

So are there any milestones that we should look for in 2019, towards getting there..

So, there are two or three primes being evaluated so the purpose is really the technology bake-off to see which one works best. We're optimistic that ours works best, but you never know anything. So I think we'll get feedback by year-end how we are doing..

And then with the photonics-based FOG look. Again, any milestones we can look for this year. I know your goal is to get that to a commercial, fully manufacturable commercial solution.

Is there interim steps we can look for to gauge your progress as we move through the year?.

Yes, I think we will be updating on a quarterly basis. But we do expect to cut it into a product this year, so that'll be a good milestone. And there is also a large development contract that we are working on for a military customer. And we are also anticipating, we will be cutting it into that as well.

So we do an unanticipated benefit of this development as it turns out it works really, really well. So actually the very highest end product that we're developing for military application, we're probably going to put it in that as well, and that's a very large funded development program..

What do you think the qualification to be like for this products, since it's fairly I guess revolutionary relative to the FOG, the military traditionally used.

Do you think you can get this qualified in the full amount of time or would do you think that process is going to be like?.

Well, the hard thing is to get it in a time of qualification, because once as you know for military program. Once the product is fully qualified, it's almost impossible to get them to look at anything new again. So that's why we're planning on cutting it in during before the qualification phase so the entire product will be qualified with this in it.

So we'll go through all the full battery and it's a aerospace application. So it's probably the most demanding one. So I think that we've qualified for this, we'll be highly confident..

We will now take our next question from Jim McIlree with Chardan Capital. Please go ahead..

Martin, you talked and ask in response to Rich's question about the AT&T, you talked about two to three prime being evaluated.

Are you bidding with those primes, or are you just attached to one or two of them?.

We are teams with one of them, and I shouldn’t say team we are aligned with one of those. We are working with the other two. So depending on how it goes, we are optimistic that we might participate no matter who wins depending -- if the technology trials goes well but remains to be seen.

One other thing I would just like to point out is that we have these trials, we have all this great stuff going on. But we've been doing a lot of development work, all that's been expense in 2018. So, it's always challenging when you have expense, but no revenue.

So really encouraged by, that there's a formal test going on, be that the programs in lease are heating up, and we're actually getting orders for our TACNAV FOG. It's not a material contract, but it was between $1 million and $2 million. We've got just the other day for TACNAV 3D to fiber-optic gyro based.

So this market finally seems to be developing and I think we are pretty well position for that now..

And then John is it possible to indicate for the annual guidance, the annual revenue guidance.

How much of that is from mobile connectivity and how much from inertial NAV?.

It's a range, so it gets hard, obviously, we didn’t break the range down by segment. Just give me second I can give you kind of at least a rough answer.

Yes, we traditionally have spend about 20, it's traditionally been about 20% I think within these programs and growth in the FOG I might increase if you want it percent wise, it might be up to 25% would be a range off the top my head..

Yes, I think that's exactly. I would say 75-25 split is probably accurate..

And then Martin, earlier you talked about cash flow breakeven on the AgilePlans. I just want to understand better how you get there. Is this all a function of scaling the network or is there some -- let's say upfront -- not necessarily upfront, but duplicative cost that you will be able to eliminate as the transition takes place.

Is this mostly a function of scaling it or is there also a meaningful element of cost reduction?.

There're really two separate points there. One is the cash flow breakeven really just talks about the install base of Agile customers, generates enough cash -- positive cash flow to fund the growth in new customers for which we supply the equipment.

So that's been a cash drain for us for the last 24 months or so, and we expect that to change by midyear. So that's on the cash flow side. On the network side the issue there really is one of margin. So we're effectively running two networks now.

And as people move over, the margins will be increasing because yes, we will be decreasing our spend on the old network as we as we upgrade customers. So it's been a tricky thing to manage in terms of how much bandwidth we buy in the new network, as we migrate customers over, but I think it's gone really well.

And I would say people are adopting the new network faster than we anticipated which is great. But that also means that we've scaled costs a little bit faster than we thought originally and that's what we're pointing to for Q1 and this year. But by year end and throughout the year, we're expecting strong growth in airtime margins..

From a scaling perspective, maybe it's helpful to think about it this way. So we've shipped a significant number of VSATs since the Agile program over the last couple of years, cash flow drain, but those units are now cash generating in 2019. We'll obviously ship more units but the units that we'll ship, that will be cash flow negative.

We have the positive cash flow from last two years of deployment that will offset that. So it should increase like that going forward too..

And so the old network, is that turned off or de minimis by the end of the year..

No, I think for legacy customers we're going to continue to add for at least three years. And the network is not going to go dark on anybody. So we're just encouraging people to migrate, it improves our margins and improves their customer experience and speed.

But we're not doing any type of a forced migration so the people are happy with their data speeds they can keep them..

Chris Quilty with Quilty Analytics. Please go ahead..

First some quick numbers questions.

Don can you give us the exact mini VSAT revenues and margins?.

Airtime, do you mean?.

Airtime revenues were just over $18 million and the margins on those were above 30%.

So you expect that 30% to move up over the longer term as you migrate the networks to what level? I mean, is it 40% or 45%, or 50% or by the end of '19? Should we be at a certain level?.

I think, you're thinking about the right way. And by the end of 2019, we're internally targeting margins of 40% or so. And again, that will be weighted average across all customers for both in both networks. But that's a huge improvement, and it would have a very significant impact..

And I mean as you migrate the networks, I mean historically you're releasing transponders over a multiyear periods for your old network, and presumably with the new network you're able to procure, and I'll call it smaller chunks as they managed service.

Is that true first, and second part of the question is given the fact that this transition is happening quicker than expected.

Did you get potentially stuck with longer term leases than you anticipated on the old transponder services, and is there a way that to resell that capacity if need to be?.

So, no to both to your questions. So the HTS that when we created it, of course we wanted to have a global coverage, we wanted to have super high speeds everywhere. So we bought enough capacity that with independent of the number of subscribers.

So obviously on day 1 we had zero subscribers and we have global network that was 10 megabits per second by 3. So we're now at a point where that network is sized correctly for the number of subscribers we have and we're anticipating adding a lot more subscribers.

And at that point, yes you're correct we'll be buying bandwidth incrementally as the subscribers get added. And no, we didn’t get stuck with any unwanted bandwidth on the old network and we've got a business arrangement in place that allows us to wind that down very elegantly on as we migrate customers, while still maintaining the global coverage.

So we have some government customers on their, and some VVIP customers in aeronautical. So it's important that we maintain the existence with that network..

And I think you mentioned that you've seen very little churn on the AgilePlans, but I know you've got at least one competitor out there that's offering $10,000 bounties for KVH and tenants are you seeing impact for those types of efforts?.

We have not yet.

I mean, our AgilePlans -- the irony is that the potential Achilles heel of the AgilePlans was in the reason that we were reluctant to try it before we did is that without a long-term contract they in turn will go through the roof, instead it's been the exact opposite that AgilePlans program has by far the lowest churn of any of our services.

And it's not only below single digit percentages, its single-digit units. So it's really workout great for us. And no, we have not seen any traction. And the market reaction to that $10,000 bounty is really I think back fired on them, because the perception is that your product most really be that they have to pay somebody $10,000 to take it..

I think also last quarter, so you were still fighting to manufacturing capacity issues on the antennas.

Are you through those issues at this point?.

We have -- the factories have done a great job, both factories and keeping-up with demand. We did carry a pretty substantial backlog into 2019. So we've got a lot of installations to do, so most of that is driven by customer availability of vessel. So it's not being held-up by cost delivering products..

And the two years into collectively, the HCS product, and AgilePlans I think originally you hit a lot more of the leisure and yachting market.

How successful, are you seeing the product and in larger enterprise customers and commercial customers?.

The vast majority of our VSAT business now is enterprise commercial customers. So your leisure as a percent has continues to decline, so it's still around 25% to 30% of our installed base. But in terms of new subscribers, the vast majority is large commercial fleet customers.

And just a quick add, the HTS network has only been about a year not for two years..

To follow-back on one issue, when you mentioned two to three -- on the TNT effort and you're in I think. You mentioned two to three competitors.

Are they competing with a fog like technology or an entirely different technology just to get a clarification?.

So not 100% sure what everybody else is using. But they are also testing different systems that are different and Agile antennas, different distribution systems, different GPS. So there is -- it's a system not a single -- this is not -- they are not testing just our product they are testing our product built into something larger..

Don, just a question as I model out the -- both the R&D and SG&A going into 2019, it sounds like you had on the R&D side, a good portion of development work on the photonic side.

Should we look for a little bit more moderation in the R&D growth? And if you can give us maybe a ballpark of either growth in OpEx or individual items?.

So R&D, we don’t expect R&D to come down in '19. We are continuing to invest in the commercialization of the photonic chip, that'll take an additional investment. It's not going to be up double-digits -- it could be up double-digits, but in the neighborhood of $1 million to $2 million in 2019..

And on the SG&A?.

On the engineering side. In SG&A, we expect -- marketing will be up a little bit.

Martin I think described it on another question or described on the call that we're investing in our services organization, it's part of our let's say ongoing migration to becoming more of a service driven company with a greater proportion of our revenues coming from service activities.

We’re investing in our service organization to make sure our customers' experiences, that's an additional investment. I think I might have answered that to neighborhood of half a million to million dollars next year..

And final question here, just macro level. You got a pretty wide EBITDA forecast $10 million to $16 million for 2019. Obviously, if a big TACNAV order comes in, that's one item that can move it. But what are the other issues as you look at 2019 that can push it towards the upper end of that range..

ARPUs, we're expecting a significant growth in FOG business. I mean all indications support that but the FOG is coming lower than we expect, or greater than we expect. We have this in our budget. So that's a big variable..

Also, the mix between HTS and the old network, so I think the pace of migrations will have an impact on it. So all of those are estimates that are built into that somewhat wider than normal range, and as you mentioned there is military and FOG orders that are similar binary..

There are no further questions in the queue sir..

Okay, great. Thank you very much everyone. Thanks everyone..

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect..