Good day, and welcome to the KVH Industries, Inc. Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Don Reilly, Chief Financial Officer. 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 2019 third quarter and full year, all of which is included in the earnings release we published this morning.

With me on this call is Martin Kits Van Heyningen, the company's Chief Executive Officer; and Brent Bruun, our Chief Operating 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'll find definitions of these measures in our press release as well as reconciliations of these non-GAAP measures to comparable GAAP measures.

We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading Risk Factors in our Form 10-K filed on March 1, 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?.

Thanks, Don. And thank you for joining us. Q2 was certainly a busy quarter with the sale of our Videotel Maritime Training business in mid-May. I'd like to walk you through some of our results and then look more closely at that sale and what it means for the company and for our shareholders.

Total revenue for the second quarter was $41 million, including Videotel, for half the quarter, which compares to our guidance of $40 million to $41.5 million, which also included it.

But since we concluded that Videotel should be classified as a discontinued operation, the reported revenue in our earnings release excludes Videotel, which brings it to $39.2 million. Earnings were down year-over-year, primarily due to product mix.

Yet our Q2 EBITDA still improved sequentially from the first quarter of this year, and we expect that the back half of the year will improve significantly each quarter.In our mobile connectivity business, we're seeing very positive progress.

For the second consecutive quarter, airtime revenue grew by double digits, growing 10% year-over-year for the second quarter, an increase of $1.8 million. This was driven by a 13% increase in total subscribers.

AgilePlans revenue increased more than 200% from Q2 last year and is still on track to be cash flow positive in the second half of 2019.AgilePlans represented 70% of our commercial maritime VSAT shipments and 56% of total VSAT shipments for the quarter.

Total VSAT shipments increased 10% versus the prior year, setting a new all-time record for quarterly shipments. Most importantly, our airtime gross margins increased just under 35% a 5-point improvement compared to the first quarter of this year. This is great progress towards our goal of exiting the year with an airtime gross margin of 38% to 40%.

This improvement reflects the growing number of subscribers on our new HTS network, and our efforts to migrate existing customers to the new network.

With the recent launch of the V11 HTS, we now have an all HTS product lineup.While we continue to support our entire customer base on both networks, we're no longer promoting the TracPhone IP series, and we've made the decision to reserve for the modems used for the ArcLight network.

Our partner, Intelsat gave us some incentive to speed up the migrations and to stop selling the ArcLight systems. We have a seamless way for our customers to upgrade to the new network, but they're not required to upgrade.In our Inertial Navigation business, Q2 sales decreased $1.4 million or 14% compared to the second quarter of 2018.

Following 8 consecutive quarters of double-digit FOG growth, we had set very aggressive goals for 2019. Q2 FOG product sales were flat with last year, and our TACNAV sales have decreased in that same period. We have orders for TACNAV in backlog for Q4 delivery and anticipate at least one other significant order.

Looking ahead, we're going to be more conservative for FOG sales growth for the remainder of the year to reflect our current pace of sales. Nevertheless, we have a strong pipeline of opportunities and continue to get designed into new platforms.

As these systems go into production, we expect to see a return to strong FOG growth.The biggest news of the quarter was our May 13 announcement that we sold our Videotel Training Business to Oakley Capital for $90 million on a cash-free debt-free basis.

As we discussed in our call following that announcement, we've been looking at ways to fund our capital needs, either through a secondary offering or through a strategic partnership. We decided selling Videotel was a better path forward, enabling us to raise a significant amount of capital in a non-dilutive way, while exiting a declining market.

It was also an opportunity to get a premium price for the business and maximum benefit for our shareholders.We think we achieved this goal, given that we recorded a $54.5 million pretax gain. It's important to note that bundling Videotel training content is a valuable differentiator for end-to-end SATCOM solution.

And therefore, we've retained the rights to include their training content in our AgilePlans product at no cost for the next three years. The deal is closed, and we've received the proceeds from the sale at the end of June.

Our first step, which was to substantially repay all of our outstanding debt, and even after this, we still have more than $65 million in cash on our balance sheet.Now we're giving very thoughtful consideration about how to invest a portion of the proceeds in our strategic growth opportunities and in projects to improve operational efficiencies that will provide faster growth and higher EBITDA.

We're focusing on large and growing markets, where our products and solutions deliver against unmet needs. And for the balance of 2019, we plan to increase our investments by up to $3 million in these key initiatives. First, we intend to promote the continued expansion of our AgilePlans program.

The 200% year-over-year revenue growth in Q2 illustrates the strong demand for our AgilePlans solutions as well as the compounding benefits of our growing subscriber base. Our goal is to grow this population as quickly and as efficiently as possible on the new higher-margin HTS network.

To do so we'll be expanding our marketing and demand generation initiatives, especially with our key service providers around the globe. This is significant -- there is significant growth in this market as more than 30,000 vessels are set to convert from older slower L-band services to VSAT service in the coming years.

At the same time, we're starting the process of digitizing our sales and service delivery business platforms to achieve greater efficiencies, improve margins, enable us to scale the business more effectively.Our second initiative is also in the marine market.

In early June, we announced -- we introduced KVH Watch, our new Internet of Things, Connectivity as a Service product for remote equipment monitoring and real-time intervention by maritime equipment manufacturers.

With remote monitoring, manufacturers connect in real-time to minimize expensive service calls and ensure that their equipment is performing at its peak for maritime operations. We've already proven the value of this approach using Watch as our own proactive monitoring tool. We use it for every VSAT system deployed around the world.

IoT is essential for maintaining and optimizing complex equipment at sea. But until now, equipment manufacturers have lacked an affordable VSAT IoT solution. For cybersecurity and business reasons, manufacturers are not able to access the ships' IT networks.

Likewise, owners and operators don't allow external companies to connect to their primary vessel communications. So our new service will be targeting the equipment manufacturers, not the vessel owners.

We followed the successful business model we established with AgilePlans for this new market, so that we can offer KVH Watch for one monthly subscription fee to a customer base that cannot afford their own dedicated VSAT antenna.

This new product enables us to solve an unmet need, the delivery of high-value IoT data in real-time and the ability for high-speed intervention for software updates and remote tech support for equipment on vessels anywhere on the globe.IoT connectivity represents an exciting new addressable market for us as well as an incremental business opportunity that leverages proven platforms within KVH.

These include our current HTS network, award-winning TracPhone VSAT antennas, our service platforms, and our proven AgilePlans model.We're now going to increase the pace of development in our software platform for IoT as we bring this exciting new business model to a new customer segment.

We've already signed up our first partner for KVH Watch, Kongsberg Digital. KVH Watch will provide IoT connectivity for their Kognifai data ecosystem and vessel insight service.

Preparations are underway to launch a pilot program, and we're already in active discussions with other customers who want to be part of this ecosystem, where each is connected to our dedicated IoT VSAT system onboard.And finally, we're now accelerating our investment in our core photonic chip technology, which we see is a true game-changer and the most significant development in fiber optic gyro technology in decades.

We continue to make excellent developmental progress and are now in the process of hiring additional optical engineers and funding outside vendors to help with packaging technology.

We remain on track to have our photonic chip-based gyros designed into our precision IMUs by the end of this year as planned.We're kicking off the development of a simplified electronics design that can then be reduced to a single custom integrated chip that will dramatically reduce the size and cost of the electronics to match the similar gains of the photonic chip.

Today, FOG products are already being tested and used in more than 30 different autonomous vehicle platforms, including public transport and people movers, such as the driverless vehicles deployed by May Mobility.We expect these applications will be the first to adopt our photonic-based gyros, and we're on track to have our first commercial product available by year-end.

We've also designed our new photonic chip into a military aviation program and expected to be qualified by year-end with production starting in 2020.

It's important to note that our existing inertial systems already offer the size, weight, power and performance parameters necessary for a wide range of applications, including advanced driver assist systems or ADAS as well as Level 4 and 5 autonomous systems that are in development.We also plan to fully integrate our photonic chip technology into Assured Position, Navigation and Timing or A-PNT.

So our A-PNT product or TACNAV product will include our new photonic chip gyros starting next year. Extensive testing by the U.S. Army using our existing inertial systems began early this year for an 8,000-vehicle program scheduled for down-select in October. Based on our performance, we've been asked to bid on Phase 2.

Since the Army's goal is to eventually field A-PNT solutions on up to 100,000 vehicles, our photonic chip timing looks like, we'll dovetail perfectly with this large potential opportunity.

Not only will it support our planned automotive solution when autonomous platforms are ready for large scale deployment, but our new photonic chip will be ubiquitous across our entire inertial systems product line.

We should begin to see reduced cost and better margins on existing products next year in the FOG business, while increasing the appeal of our Inertial solutions to an even broader audience of users.So in conclusion, we're focused on improving margins and driving incremental growth opportunities to replace and then to exceed the contribution of Videotel.

Our core VSAT business is accelerating with record shipments and double-digit growth, and AgilePlans will start generating positive cash flow this year. We're leveraging our existing platforms to enter the IoT connectivity market and pursue an incremental business.

Our Inertial Systems are gaining momentum with multiple autonomous vehicle platforms and a major U.S. Army program. And our photonic chip will be ready to begin to roll out commercially by year-end. The decision to sell Videotel was done with the expressed purpose of being able to invest in these high return, long-term initiatives in growing markets.

These investments are now reflected in our updated short term guidance, while the benefits will be seen for years to come and generate long-term shareholder value.Now I'd like to turn the call back over to Don.

Don?.

Third quarter revenue is estimated to be in the range of $39 million to $42 million, and GAAP EPS is expected to be in the range of $0.24 loss to a $0.13 loss per share; non-GAAP EPS is expected to be in the range of negative $0.14 to negative $0.05 per share; and adjusted EBITDA is estimated to be between negative $1 million and positive $1 million.

This includes approximately $1 million to $1.5 million in the third quarter for the key initiatives that Martin referred to. For full year, our revenue guidance is $157 million to $165 million. Our expectations for full year GAAP EPS is a range of negative $1 to negative $0.71 per share.

Our non-GAAP EPS is expected to be from negative $0.53 to negative $0.31 per share. And our adjusted EBITDA is expected to be in the range of negative $4.5 million to positive $500,000.

This guidance includes approximately $2 million to $3 million of incremental spending on our key initiatives.For 2019, we expect our capital expenditures will be in the range of $15 million to $18 million. This guidance assumes there'll be no significant changes in foreign currency exchange rates.So this concludes our prepared remarks.

I'll turn the call over now to the operator for the Q&A portion of this morning's call..

[Operator Instructions]. Our first question comes from Ric Prentiss of Raymond James..

A lot of moving pieces here. So I want to see if we can untack a little bit. But on the annual guidance for the EBITDA line, right? So previously, we're thinking $5 million to $10 million of positive EBITDA for the year.

How much does taking Videotel out of, I assume, 5.5 months impact that by, is it shared kind of in that $4 million to $5 million range? Just trying to get a sense of how much that is factored in?.

Yes, it's maybe in the closer to the $4 million range or so. So it's obviously significant out of the historical periods. And then -- so....

Yes. So if you look at our original guidance, Ric, $10 million to $16 million for the full year. Videotel would have accounted for, I'd say, $8 million to $9 million of that. Without Videotel, our original guidance would have been in the range of $2 million to $7 million..

Okay, okay. So with Videotel $2 million to $7 million, and now we go down to the minus $4.5 million to positive $0.5 million.

We've got the $2 million to $3 million of investing on key initiatives then?.

Right, yes..

And that's going to be on the cost side? Is that going to kind of flow into R&D effort? It sounds like you're hiring some optical engineers, you've got -- you're packaging, but then you've also got software development for the IoT and then spurring promotions. So I am just trying to know how we, kind of, carve up that $2 million to $3 million..

Yes, I'd say probably 75%, 80% of that is on the engineering R&D side, maybe 20% of that is on the sales and marketing..

Okay. And then, we guess that the next big problem is the pullback in revenue guidance from the previous guidance, which is on the high-margin side.

So is that kind of the rest within the difference, but taking it from -- taking Videotel out would have been 2% to 7%, and taking -- or adding the key initiatives kind of pose you to flat to positive 4% and then the high-margin revenue loss from previous thoughts pose at the rest of the way down?.

Yes, that's exactly right. So I think the previous -- if you take out Videotel from the full year, compare it to the existing guidance I think if you take your numbers and subtract out Videotel from Q1 and half of it from Q2, the average I think the consensus was like $164 million or something, if you do that.

And the new midpoint of the guidance range is $161 million and the high is $165 million..

Okay. Yes, like I said, a lot of moving pieces there..

And that's -- so that's a delta from the midpoint of, call it, $2 million to $3 million, and that's how much we took the FOG revenue forecast down.

Basically, our existing -- where we are now on FOG as we're looking -- we're just guiding for flat for the next two quarters, which we think is a little bit conservative, but based on what happened in Q1 and Q2, it's a more safer bet..

Sure. And what do you think led to the change from thinking sales were going to come in versus kind of more flat year-over-year.

Was it global economy, industrial, transport? We've seen weakness there, but what kind of led to the weakness and what would cause it to reaccelerate?.

Well, partly, it's because of some programs, we're -- as an OEM supplier, we're kind of at the mercy of the customers' applications, and there were some big drone programs that were designed into that.

The timing of those has moved around a little bit, but just in general, because we're an OEM supplier, we don't have the same level of visibility that we do in our other businesses. We're just -- when their product sell, they call us and buy. So it's a little bit trickier to forecast. I think that's part of it.

But we don't see any fundamental change in the business. So we had a very long track record of double-digit growth there, eight quarters in a row. Now we've had two quarters, Q1 was down and this quarter was flat with last year. So we don't see anything changing fundamentally, competitive pressure or pricing pressure.

So we're just changing the guidance to reflect the reality that we saw in Q2. That's sort of the bottom line..

Okay. And two quick ones for me. The large international orders that you had out of guidance for quite a while. You didn't mention it.

Is it still something out of guidance, obviously, but something that is anticipated? Or is it kind of falling off the rails?.

No, we continue to get updates and the latest update is that there -- they're looking at decision end of the year, but as you know, we decided to stop talking about that because it's very difficult to forecast because it's international.

On the other hand, here in the U.S., we expect about a $5.4 million order here for TACNAV, and we have very good visibility on that and on timing, and probably about $2 million of that will ship in Q4. So TACNAV business is still very viable and that's -- we mentioned on the call about the A-PNT, which also is a domestic program, U.S. Army.

So those programs are easier to forecast, and we have good visibility in time lines and draft purchase orders and things like that. So we're -- we have very high confidence in that..

I think Global Eagle has mentioned a few months back that they were maybe considering monetizing their maritime kind of the yard in high end area.

Is there any interest in expanding into that territory further? And is that an interesting asset?.

I'd say, it seems a little bit distressed over the years. It's been -- that group has been bought and sold many times. I think that the cruise ship space is -- while it's interesting because it's large, it's also -- it's very concentrated buyers. So it seems like it's a tough business because it's -- they've sent out an RFP.

And if you don't win, you get zero. So it's probably not in our wheelhouse. The super yard portion that they have definitely would be, that's certainly a key market for us, so that part would be interesting..

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

This is Roger Boyd on for Rich. Just a quick one from me.

I guess with the gross margin this quarter, with the majority of it was the inventory write-down, can you talk about what you expect in the third quarter? What kind of gross margin is embedded in that? Do you start to get leverage from increasing airtime gross margins? Or just any commentary there?.

Right. Yes. While Don's looking up the facts, I'll -- I just comment on the airtime margins. We do expect that to continue to grow, and we're looking to exit the year around 40% gross margin. So maybe high 30s for the fourth quarter for the blended average. And airtime is because it's compound. We have relatively fixed cost there now.

We've done the bandwidth purchases that we need for the global network, now incremental subscribers are adding a very high margin..

product mix and product volume out of factory. Mix did not favor -- was a bit unfavorable in second quarter, FOG sales were lower than we expected. So our margins are -- margins were lower, less absorb -- less absorption effect. But we expect to get back to historical high 30s, low 40s on product margins in the third and the fourth quarter.

And as Martin said, service margins should be growing throughout the quarter. Exiting -- airtime margin should be exiting the year around 40%..

Even with the relatively flat guidance for FOG sales?.

Yes, yes, because we have....

TACNAV is growing. TACNAV will be an important part of the fourth quarter..

Got it, okay. Makes sense.

And then, I guess just qualitatively, any updates on how the trials are going with May Mobility? And where that progresses with the photonic chip?.

Yes, it's going....

Yes, it's going very well. They launched in Providence. It was a big deal on Rhode Island, so they're running now and they're in maybe half a dozen cities now. So that -- they don't really consider those trials, they are actually rolling out, so they're -- so that's going well, and we're on board every one of those vehicles.

There are several other people movers too. I should have mentioned that same as these autonomous buses are probably a bigger market than we thought originally..

Our next question comes from Jim McIlree of Chardan Capital Markets..

This $2 million to $3 million of incremental investments that you're making, just want to make sure I understand, that is $2 million to $3 million extra for the second half of this year? Or was that some other different year you were talking about?.

Yes. No, that's right. That's for the second half..

And then, it sounds like there might be a portion of this that doesn't continue into 2020, but it also sounds like there's at least a significant portion of that extra expense that does continue into 2020.

Can you characterize, which one of those might be more accurate?.

Yes. So some of this is a pull forward from 2020, and some of it is -- some of these projects won't be finished in the second half. So obviously, we haven't done -- we're not ready to do 2020 guidance yet. But you're thinking about it the right way.

So I wouldn't, in your model, I wouldn't simply multiply the number by two, and say that's going to be 2020..

But we also don't want to bring it back to zero, either?.

No, no. And some of that also will be CapEx. Most of it is R&D spending. So -- but there is some CapEx as we accelerate like their IoT program for Watch. That will be similar to AgilePlans, where we'll be capitalizing the new sales starting next year. So not a -- it won't hit the bottom line..

Got it, okay. Martin, you talked about a TACNAV order in the U.S., you expect -- I think you said $4 million to $5 million with $2 million to ship this year. Just trying to understand or gauge your level of confidence in that.

Is that -- we both know -- we all know that the military business is tough, and things get pushed, so I'm just trying to figure out your -- why you're so confident on this?.

Well, it's been a long-running program that we won three years ago. The program has gone through LRIP. It's a U.S. Prime. We've got draft purchase order in hand, we're looking at Ts and Cs, so I'd give as high a confidence as anything in business, so I'd say 95%..

Okay. And then, finally, on the FOG business. It sounds like there might be an inventory adjustment? Is that -- or am I just trying to read too much into it? [indiscernible] customers..

No, no. Oh, you mean at the customers, no I don't think so. This pattern of order, we've had some customers discontinue product lines. I mean it's really -- it's very difficult to keep track of every single customers' products. So -- but we haven't seen -- we have a pretty -- we don't have a very highly concentrated customer base, which is good.

So again, there's nothing that we're seeing that gives us concern for the FOG business. We think that we're coming off a pretty good year last year, and we're expecting continued growth, instead we're now forecasting flat. But that was a pretty high level for us for kind of the base products.

So I think it's going to be a couple of quarter pause at the most before we resume growth. And also, we'll be putting in our photonic chip-based products. It will give us better margin. It also gives us incrementally better performance. So I think that, that also opens up the potential for next year to return to growth in the FOG business..

Does the photonic chip-based product require the customers to redesign their products in order to use it?.

No, it's absolutely seamless..

Yes. So it's the same power consumption -- well, not power consumption, but it's the same form factor....

That's a good question. That's an excellent question. The power consumption is the same or less. So it's a -- it doesn't require any changes on the customers' part form factor and digital interface is identical by design..

[Operator Instructions]. Our next question comes from Chris Quilty of Quilty Analytics..

I wanted to follow-up on AgilePlans, which ticked down modestly, I guess, as a percent of the overall shipments in the quarter.

Was there anything unusual going on? Maybe some larger traditional VSAT sales or just the normal flow of business?.

Well, we were at 70%. So I'm not sure -- I wouldn't say that is down..

70% of commercial and 56% of total. I think that's....

So it's certainly....

What number do you have from the last quarter, Chris?.

I'm looking at it here, one second. Well, I mean it was like 60%, it's kind of ticked down a little bit on the overall sales in....

Yes, so don't forget the -- AgilePlans is not offered in the leisure market, so the key metric would be the percent of commercial and at 70% -- 69%, 70%, that's -- we think that's very good. So we haven't seen any....

All right. I mean maybe....

So we had a little....

I have 77% in Q1?.

Yes..

We shipped a lot of leisure units in 2Q because of seasonality in that business..

Right. And then for commercial, you're right. We had some customers, Transpetro was not Agile, that was through the lease, right? Or a purchase? Purchase. Yes. So it's a -- so sometimes any given contract might move the needle a little bit, but we have seen no change in Agile, so that's a normal thing..

Where do you think that goes overtime on commercial fleets? I mean does it eventually go to 100%?.

I don't think so. I think that it's kind of like cloud versus on-premise. You're always going to have people who want CapEx versus OpEx. So I don't think -- I don't think it's going to go to 100%. And frankly, we don't really care. I mean if the guy wants to buy the equipment and take our service, that's fantastic.

So this -- we see this as a huge enabler and it's allowed us to double the size of our quarterly shipments over the last -- since we launched it, and so -- but if someone wants to buy it, that's great too..

That's fine.

Any trends you're seeing in ARPUs, now that the V11 is shipping?.

Sequentially, the ARPU from Q1 is up a little bit like 1% or 2%, 2% or 3%, something like that. So we haven't seen any degradation in ARPUs this year, which is good. We have noticed that some of our competitors, who are all public, had dramatic decreases in ARPU. So we're happy to see, ours tick up, not down. And that's true for Agile as well.

Agile ARPUs are ticked up in Q2..

Got you.

Can you give us the actual airtime sales in the quarter?.

$19.1 million..

Got you. And likewise, for TACNAV, if I -- one of number's right, it looks like you only sold a couple of hundred thousand dollars in the quarter..

Exactly, right. Exactly, right..

Yes. Yes, that's why [indiscernible] down talking about the product mix and factory overhead, that's a factor..

Understand. And on the margins on the Agile plan or on the mini-VSAT airtime. I mean you actually did better than I had forecast in Q2, up around 35%, but it sounded like you backed off a little bit on the exit. As you had said, exiting at 40%, and I think you said now 38% to 40% exiting. Anything changed in terms of....

No. What I was trying to say is that we think that the average for the full quarter would be around 38%, but we would be exiting the year at 40% so..

Okay. Got you. Shifting gears over to the IoT. Maybe you can help explain that a little bit better. I mean you've got somebody who's selling, whatever, a marine engine that they want to maintain. It's going on somebody else's ship, that the ship operator has his own antenna.

Do I understand that you're going to provide an additional antenna for the purpose of monitoring equipment on the vessel? And would have to negotiate that with the vessel owner?.

No. Well, yes and no. So no to the last part of the question. So there's no negotiation with the vessel owner. So it's kind of like imagine that you buy an alarm system for your house, and you negotiate with the alarm company, you tell him where you -- what you want and you want transmission to the police department or whatever.

The guy shows up at your house and installs your alarm. He might ask you where do you want the transmitter, but it's not a negotiation where you say, oh, what kind of transmitter? What frequency? Do I -- are you using AT&T? Are you using point-to-point wireless? You brought an alarm system? So this is the same kind of thing.

So these equipment manufacturers, these are multimillion dollar piece of equipment. They sell service contracts, and they sell uptime, they sell efficiency gains. They have all these service plans that they sell to the vessel owner.

And as part of that, now they'll be able to improve their uptime and reduce their own costs, and improve service for their customer by having real-time monitoring of large amounts of data continuously and have the ability to do intervention, or you have -- if you're live to a video conferencing face time, software updates and all that type of stuff..

Got you.

And I'm assuming this is primarily a kind of new product type of market entry? Or is there a retrofit aspect to this?.

Well, there's a retrofit aspect. So for example, Kongsberg Maritime, they've got something like 8,000 to 10,000 ships with their engine monitoring system on board. So currently, that doesn't have this new feature that they are announcing, which is this connectivity and this new IoT platform.

So they -- what's interesting about this market is that the customers are -- have much larger installed bases than any fleet. So like the biggest fleet in the world might have 400 ships or something or 800 ships, whereas these customers have 10,000, 12,000 ships..

Got you.

And can you walk us through kind of what the economic model looks like for you in terms of, does this flow through as CapEx? And is it upfront investment and long-term revenue in terms of service? And would that service flow through your existing mini-VSAT airtime? Or how would you account for it?.

Yes. So I think that from a business model perspective, it's very similar to the Agile plans, where we put the equipment onboard, and then we sell the service to equipment manufacturers. So it has the advantage that it -- you can sell it more than once. So it's sort of Agile plans with many different customers.

So it would be recorded as an airtime revenue. So we're also -- so we're selling airtime in a way, but we're really, from a business model perspective, we're selling the value of reduced service costs, IoT and intervention. So it's -- you're not really selling it by the megabyte.

You're selling it by -- this is what it cost to have continuous monitoring of an engine..

Got you.

And is it wired or wireless connectivity between the equipment on the vessel and the antenna?.

So the equipment is hardwired and it goes through various firewalls, the cybersecurity thing. And then there's a second port, which is available for intervention and that can be a wireless.

So that you can take a phone, smartphone or tablet to the equipment and do screenshots or a video of the equipment for problem-solving or just remote expert type things..

I understand. And final question, just on the TACNAV.

Is it fair to assume that the A-PNT stuff really doesn't ship in any kind of volume until next year?.

That's correct. Yes. Yes. So next year, the next -- so this first we delivered 17 units, the next Phase 2 is 80 units, and that's going to be -- but there were three suppliers for Phase 1. They're going to down-select 1 for Phase 2. So hopefully, we'll be part of the winning team there, and that's 80 units, and then it's 8,000..

And that's just an Army program at this point?.

Yes..

And is there an operation -- an opportunity on the SOCOM or other services?.

Yes. And some of our partners also have applications in aviation and other places where GPS-denied environments are important, so we're looking to partner with them on those programs as well..

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

Great. Well, thanks for listening, and Don and I are available, should you have any follow-up questions. Thank you..