Good day, and welcome to the KVH Industries, Inc. Q4 YE 2020 Earnings Conference Call. Today's conference is being recorded. .

At this time, I'd like to turn the conference over to Brent Bruun, CFO. Please go ahead. .

Thank you, operator. Good morning, everyone. Thanks for joining us today to discuss KVH Industries fourth quarter and full year results, which are 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.

The earnings release is available on our website and through 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. [Operator Instructions].

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 on our SEC filings, specifically those under heading Risk -- under the heading Risk Factors in our third quarter Form 10-Q filed on October 29, 2020, and our 2020 Form 10-K, which we expect to file tomorrow.

The company's other SEC filings are available directly from the Investor Information section of our website. .

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

Martin?.

Thanks, Brent. Good morning, everyone, and thank you for joining us today. Let's get started. .

Like many businesses around the world, we continue to face challenges from the pandemic in Q4. However, we ended 2020 on a very positive note, and we have a number of reasons to be optimistic about the future.

We built on our strong third quarter and reported fourth quarter revenue of $44.1 million, an increase of $1.7 million or 4% versus the fourth quarter of last year. We also increased our fourth quarter adjusted EBITDA to $3.5 million, up from $700,000 in the prior year. .

For the full year, we increased revenue to $158.7 million, up almost $1 million from last year and reported total adjusted EBITDA of $3.1 million, and that's a $7 million improvement compared to the fiscal 2019. I'm really proud of our team's continued ability to deliver for our shareholders and customers despite the challenging environment. .

Our core business remains strong. In Q4 of 2020, we delivered one of the most robust fourth quarter results from continuing operations in the past 5 years. We recorded very strong TACNAV revenues, record VSAT unit bookings and record VSAT shipments.

From an operations perspective, we continued our cost containment efforts in Q4, achieving OpEx well below the prior year and our budget. .

While restrictions on travel and trade shows pose challenges for sales visits and pipeline development, it has also reduced our travel and marketing costs. As these restrictions begin to ease, we expect to see expense reductions normalize in the second half of the year. .

So against the backdrop of economic uncertainty, we're pleased with our overall financial results for the year and with the positive momentum we carried into the first quarter of 2021. Our strategy of diversification and focusing on innovative products and services really paid off in 2020 and has positioned us well for the future. .

Now let's look at some of the details in our core markets. In our mobile connectivity segment, VSAT revenue increased $1.2 million to $20.3 million, a year-over-year increase of 6%, while our VSAT subscribers increased 4% versus Q4 the previous year. Year-over-year, our airtime margins were up almost 4 points to 34.2% compared to Q4 of 2019. .

Our AgilePlans program continues to be a key revenue driver as customers recognize the benefits of an innovative, all-inclusive model. AgilePlans revenues increased 53% compared to Q4 of the previous year. We also recorded strong sales of our AgilePlans Regional service, which employs our smallest VSAT, the 37-centimeter TracPhone V3-HTS. .

AgilePlans Regional offers Connectivity as a Service for smaller commercial vessels, such as fishing and coastal cargo and workboats. We announced this new service in February of 2020, just a few weeks before the pandemic-related shutdown took effect, which really impacted the launch.

However, interest in this product began to pick up in the second half of the year. And in the fourth quarter, AgilePlans Regional's helped drive strong results outside the U.S. in largely untapped markets, including Vietnam, Indonesia and Africa. As a result, Q4 V3-HTS shipments were up 175% compared to last year.

Overall, AgilePlans represent 73% of our commercial shipments in the quarter and is now 38% of our total VSAT subscriber base. .

Several beneficial industry trends should aid our mobile connectivity sales efforts. Oil prices are rising and daily port calls for commercial vessels appear to have stabilized. The commercial shipping market is doing quite well. Container rates in the Baltic dry index have both more than doubled than the last year.

In the leisure market, the National Marine Manufacturers Association reports that U.S. boat sales were at a 13-year high in 2020. .

On the other hand, the cruise ship market remains depressed. And within our Media business, the NEWSlink service for cruise ships continues to be heavily impacted. Fortunately, this is a small part of our business, but it did represent a $1 million decline in 2020 compared to 2019. .

We launched our legacy mini-VSAT Broadband Network in 2007. And after 4 years, we're shutting it down at the end of this year. The majority of our customers are already on our new HTS network, which we launched a few years ago. We're planning to migrate the remainder of our legacy customers to the HTS network by the end of the year.

From a customer perspective, the new network is faster, cheaper and has much better global coverage. From our perspective, we have better margins on the HTS network and consolidating customers onto one network will reduce our operating expenses as well. .

We've been converting customers for the last few years, and we intend to complete the effort this year. The significant investment and effort required to facilitate this migration will impact our results in 2021.

But upon completion, the migration will represent a net reduction of $4 million to $5 million in annual network operating costs starting next year. We expect that many of these customers will be switching over to our popular AgilePlans service. .

Moving on to KVH Watch and our new IoT Connectivity as a Service offering, we're excited by our progress in recent months. We're focused on rapidly building a broad foundation of watch solution partners, which we anticipate will provide a pipeline of revenue opportunities.

These partners are already proposing KVH Watch as a component of their own maritime IoT and maritime service solutions to several large fleets. .

You've likely seen the announcements beginning in December as we have established relationships with a range of firms, including IoT service providers such as GreenSteam, IoT platform integrators like TMS Maritime, OEMs like Kongsberg and multicard service providers like Kilo Marine.

We've established a formal working process with each of these partners. We work with them to define and develop a solution that integrates KVH Watch with their systems. We provide training for their sales teams, establish joint marketing agreements and deploy trial programs with their customers.

KVH Watch systems are already deployed for trials and training, and we anticipate that the number of deployed systems will steadily grow. .

So what's driving this acceleration in interest? There's been a move towards digitalization and the connected vessel in maritime, and the pandemic is accelerating this trend. The port restrictions drove home the importance and the need for remote services such as equipment access, surveys and support.

There was also a rapidly expanding ecosystem of IoT service providers, who currently have no access to connectivity outside the range of cellular service or limited access due to major constraints of bandwidth imposed by the ship operator. .

Our watch solution partners have told us that including KVH Watch is a competitive differentiator for them, thanks to the global secure connectivity that's separate from the IT systems, the ability to support multiple tenants on the single watch terminal and the simplicity of our integrated Connectivity as a Service model. .

To our view, the cybersecurity will be a primary driver going forward. At the start of the year, new commercial maritime guidelines known as IMO 2021 went into effect. A vital aspect of this is the separation of IT and OT networks and data.

One of our watch solution partners reports that a major oil company fleet to which they're proposing watch now mandated the vessel performance optimization systems not be connected to the onboard network. .

We believe the KVH Watch is an ideal solution to meet all of these requirements. It delivers 24/7 data flow even when the vessel is in open ocean and affords -- offers affordable, remote expert intervention and high-quality video on demand. Plus, it provides a dedicated air gap IoT connectivity without touching the ship's IT network.

We think these drivers, the strong interest we're seeing and the expanding array of potential applications are all validating the assumptions we made when we initially proposed to offer this first VSAT-based dedicated IoT connectivity solution.

So we're optimistic that KVH Watch will follow a trajectory very similar in many ways to the AgilePlans, which started slowly in the first year and then began to compound rapidly. .

Our watch solution partners play a critical role in our ability to attract new customers to watch, which is why the partnerships we've announced over the past few months were so exciting.

While the commercial market did -- can take some time, we believe that the IoT connectivity has the potential to be a significant contributor to revenue and earnings in the coming years. .

Moving on to our inertial navigation business. TACNAV military product sales increased by $3.7 million to $7.2 million in Q4, a more than 100% increase over last year, driven by shipments of the TACNAV, FOG order we announced last July.

Stand-alone fiber optic gyro sales were down $1.3 million or 17% compared to the fourth quarter of 2019, but that doesn't include the FOGs that were used as part of our own TACNAV systems. However, we enter 2021 with a very strong backlog for both TACNAV and FOG. .

At the end of Q4, we also achieved our goal of engineering our photonic integrated chip or PIC technology into the remainder of our core FOG product line. Going forward, our IMUs and our stand-alone FOGs will all have the PIC inside. As we ramp production, we're adding a second precision assembly system, which will come online in Q2.

That will enable us to produce sufficient quantities of assemblies with PIC and fiber arrays to replace our standard product systems. We'll be somewhat constrained by chips and assembly equipment in Q1, which we accept -- expect to be released by the beginning of Q2. .

In the meantime, we continue to see healthy demand for our FOG products. We anticipate strong year-over-year growth in our FOG business this year. We're excited about the momentum and the future market opportunity for our PIC-based products, from the position of an established proven technology provider for autonomous platforms.

Our PIC technology enables us to provide a broader range of FOG performance for different applications and enables FOG performance at MEMS pricing and scalable mass production in the future. .

We're currently working with customers and prospects, who represent a wide range of short- and long-term opportunities, including autonomous trucking and shuttles, mining and industrial, robots as well as drones, defense applications and, of course, advanced driver assist systems or ADAS.

As a supplier for these new technologies, the growth of this business will depend in part on how rapidly these technologies are adopted in the market. .

As the self-driving market continues to evolve, autonomous vehicle providers are realizing the importance of FOGs as part of the sensor fusion solution to deliver the precision needed to complement LiDAR when MEMS gyros can't.

ADAS applications for our inertial systems represent a large and growing market, but so do platforms like long-haul trucking, mining and construction where the near -- where we anticipate nearer-term sales opportunities. .

We're also working closely with drone developers. The consumer drone market doesn't require inertial systems with the precision that we offer. However, our FOGs provide the performance, reliability and form factors suitable for military, security and commercial drones.

And we anticipate that those markets will provide important revenue opportunities as they grow. .

KVH brings almost 15 years of experience as an autonomous navigation technology provider to these growing markets. In 2005, our systems were used in the original DARPA Grand Challenge with self-driving vehicles. Our inertial products were first integrated into the U.S. commercial self-driving car prototypes in 2012.

KVH FOGs and inertial systems have been deployed in various robotic systems over the past decade, including the winner in the -- and 10 other competitors in the 2015 DARPA Robotics Challenge. And most recently, we began delivering vital navigation and positioning data for autonomous trucks and other platforms that are being tested on the road now.

Our existing FOG systems already meet the performance requirement for these applications. Our PIC-based systems are now rolling out to deliver additional reliability and cost savings at scale. .

So in summary, in 2020, we navigated the pandemic safely, successfully developed key new technology and positioned the company well in each of our markets. We had better-than-expected results in Q4, and Q1 is off to a very good start as we entered the year with around $20 million in backlog. .

Our airtime business continues to gain market share as we grow revenues and subscribers. We carry the momentum into 2021 with robust net new activations in January and February. And we have exciting new products in the pipeline that will be launched in the next few months.

We're very encouraged by the initial response to our Watch IoT initiative and the opportunities in autonomous market continue to grow..

Consolidating our airtime customers under a single global network will improve customer experience and reduce our operating costs by year-end. We believe that these efforts will fuel our growth in 2021 and beyond.

And we're confident that the progress that we're making now will deliver sustainable, long-term value to our shareholders and other stakeholders. .

And now I'd like to turn the call back to Brent to go over some of the numbers.

Brent?.

Thank you, Martin. .

First, to echo some Martin sentiments, we believe our fourth quarter, full year 2020 results related to COVID 2019 pandemic -- I'm sorry, COVID-19 pandemic that continues to impact many areas of our business are quite encouraging.

Despite the challenges we faced, we reported our strongest fourth quarter in quite some time, and we are entering 2021 with a solid tailwind. .

Let's look at our fourth quarter in a bit more detail. As Martin mentioned earlier, our fourth quarter revenue came in at $44.1 million. This compares to $42.5 million recorded in the fourth quarter of 2019.

Revenue from our inertial navigation segment increased $1.7 million, and our mobile connectivity segment remained flat compared to the prior year fourth quarter. Product revenue for the fourth quarter was $20.9 million, an increase of $2.2 million or 12% from $18.7 million in the fourth quarter of 2019.

By segment, product revenue for inertial navigation increased $2.4 million or about 22% primarily due to a $3.7 million increase in TACNAV product sales, partially offset by a $1.3 million decrease in FOG and OEM product sales compared to the fourth quarter of 2019. .

Product revenue in our mobile connectivity segment decreased $0.2 million or 3%, driven by a $0.3 million decrease in TracVision product sales and a $0.2 million decrease in land mobile product sales, partially offset by a $0.2 million increase in VSAT product sales and accessories. .

Service revenue for the fourth quarter was $23.2 million, a decrease of $0.6 million or 2% from $23.8 million in the fourth quarter of the prior year. By segment, service revenue for inertial navigation decreased $0.8 million, primarily due to a reduction in contract engineering service revenue. .

In our mobile connectivity segment, service revenue increased by $0.2 million or 1%, primarily due to a $1.2 million increase in mini-VSAT Broadband airtime revenue compared to the prior year fourth quarter, driven in part by a 4% increase in subscribers, primarily as a result of AgilePlans.

This increase was partially offset by a $0.7 million decline in our Media business, which was significantly impacted by travel restrictions associated with COVID-19, which I will discuss in more detail shortly. .

Mini-VSAT Broadband airtime revenues increased to $20.3 million, growing approximately 6% from the prior year fourth quarter, driven by the continued success of our AgilePlans. VSAT shipments in connection with the AgilePlans program approximated 58% of our total unit shipments and 73% of our commercial shipments this quarter.

AgilePlans now represent 38% of all mini-VSAT Broadband airtime subscribers. .

For the fourth quarter, our consolidated gross profit margin was 38.7% as compared with 37.4% in the fourth quarter of last year. From a segment perspective, our mobile connectivity gross margin was 33.8%, up 1.6 percentage points. Our inertial navigation gross margin was down about 0.7 percentage points to 49.0%.

Operating expenses for the quarter were $17.9 million, down 7% from $19.2 million in the fourth quarter of the prior year, as we continue to hold the line on operating expenses in response to the impact of COVID-19 on many areas of our business and the associated uncertainty that the pandemic represents for us. .

For the fourth quarter, these changes in revenue, margins and operating expenses resulted in a loss from operations, excluding the impairment charge of $0.9 million compared with a loss of $3.3 million recorded in the fourth quarter of 2019..

As you saw in our earnings release, we recorded a total impairment charge this quarter of $10.5 million relating to our Media Group goodwill and certain other Media Group intangible assets. As we have noted previously, our Media Group is one of the businesses that has been most acutely impacted by the pandemic.

The Media Group is heavily dependent on travel. We have been monitoring the business closely throughout the year and had believed that the revenue and earnings decline in this business unit would rebound once the pandemic subsided.

However, in the fourth quarter, as the pandemic continued, resulting in new -- in a new wave of travel restrictions and business closures, it became apparent to us that the damage to the business is likely to be longer-lasting and perhaps even permanent. .

So in connection with our annual impairment test, which we conducted in the fourth quarter, we concluded in consultation with our valuation advisers that the goodwill and intangible assets in the Media Group were less than the carrying value, indicating an impairment and resulting in a noncash charge of $10.5 million.

Including the impairment charge on mobile connectivity segment, generated an operating loss of $10.6 million. Without this -- without the charge, this segment would have reported better results from operations than last year's operating loss of $1.5 million. .

Our inertial navigation segment had an operating profit of $4.1 million for the quarter, compared with an operating profit of $3.0 million last year. Our unallocated costs remained flat at $4.8 million compared to last year. .

For the fourth quarter, our net loss, including the impairment charge, was $11.6 million compared with a net loss of $2.9 million recorded in the same quarter last year.

On a non-GAAP basis, which excludes impairment charges, amortization of intangibles, stock-based compensation, employee termination, nonrecurring legal fees, foreign exchange transaction gains and losses, the tax effect of the foregoing and change in valuation allowance and other tax adjustments, we had net income of $1.3 million compared with a net loss of $0.5 million last year's -- last year.

.

EPS for the fourth quarter, again, including the impairment charge, was a net loss of $0.65 per share compared with a net loss of $0.17 per share in the same period last year. Non-GAAP EPS profit for the fourth quarter was $0.07 per share compared to a non-GAAP EPS loss of $0.03 per share per diluted share last year. .

Our adjusted EBITDA for the quarter was $3.5 million compared to $0.7 million recorded in the fourth quarter of last year. For a complete reconciliation of our non-GAAP measures, please refer to our earnings release that was published this morning. .

Total backlog at the end of the fourth quarter was $20.4 million, of which approximately $19.8 million is scheduled to be delivered during 2021. Backlog for our inertial navigation products and services at the end of December was approximately $19.4 million, of which approximately $18.8 million is scheduled to be delivered in 2021.

Net cash used in operations was $0.2 million compared to $1.9 million used in operations for the fourth quarter of the prior year. Capital expenditures were $3.9 million for the quarter, and our ending cash balance was approximately $37.7 million. .

In conclusion, I would say again that we're pleased with our fourth quarter full year results in light of the global pandemic that we, like all businesses around the world, faced in 2020. We recognize, of course, that the pandemic is far from over, and we're likely to be dealing with its impact well into 2021. .

We will continue to be vigilant, watching our expenses closely and ready to react properly as circumstances change. That said, we are pleased with the progress we've made in 2020. And we are optimistic about 2021 and beyond as the pandemic subsides, and we continue to execute on our plan to drive long-term value for our shareholders. .

This concludes our prepared remarks. So I'd like -- I will now turn the call over to the operator to open the line for the Q&A portion of this morning's call. .

Thanks, Brent. .

But before we get to the questions, I do want to just point out the press release from this morning. And that mentioned that Roger Kuebel will be joining KVH next week as our new CFO. Roger is an accomplished financial executive, having served as CFO of Seaborn Networks and Treasurer at Aspen Technology, amongst others.

He has great expertise across financial planning, reporting, capital markets and strategic transactions, has industry experience as well in telecom, including subsea fiber optic networks as well as software and services. .

So Roger joins us at an important moment for KVH as our financial performance has real positive momentum, and we focus on building our business through innovation and market leadership while containing cost. And we're all very excited to have him aboard. .

And I also want to thank Brent Bruun for taking over as CFO for the last 6 months, done a great job, put together 2 solid quarters. So you're setting a high bar for Roger to come in. But on behalf of myself and the Board, we just want to thank you for doing that. .

So operator, I think we're ready to take questions now. .

[Operator Instructions] Okay. And it looks like we have a question on the phone line from Rich Valera with Needham & Company. .

Martin, it makes sense that you're going to be migrating your base over to your HTS network this year. And it looks like some nice, long-term savings from that.

Could you give us a sense of what you expect those incremental costs to be this year to migrate your existing base over -- the remainder of your existing base over to the HTS network?.

Well, what -- we've been doing it for 2 years now. So we're basically accelerating what we have been doing. So we'll be offering some incentives in terms of hardware discounts and things like that, installation support.

So it would be -- some of that cost might be capitalized if they move over to AgilePlans, but some of it would show up in the -- in product discounts and installation credits. .

Got it. And then just wanted to try to understand the potential impact of incorporating the PIC into all of your commercial products and I guess, eventually, probably your defense-related products.

Could you talk about how you're thinking about incorporating the PIC in the commercial products affecting your gross margins and your ability to compete more effectively and maybe drive incremental revenue in that category?.

Yes. We -- you've actually hit the nail on the head. There's both a margin benefit and there's a product performance and size benefit. So what I mentioned in the past is that we've essentially designed PIC into sort of our high-end use just to show how good it is. And now we're rolling it into all the other products.

So during the fourth quarter, we did the engineering work to design it into our standard products. And we're now -- all of those products are going into production.

So the cost savings will happen when we are able to wind down the current method of fabrication, which involves couplers and polarizers and the fiber manufacturing, which has significant cost and overhead.

So as all of that is completely stopped, then we'll have significant margin improvement and manufacture and overhead improvement, which will translate directly into gross margin. .

So right now, we expect that starting really in April, we'll be ramping that up. We've ordered a second precision assembly system, which will then allow us to move everything over to this new -- to new automated manufacturing. And at that point, realistically, I think by the end of June, we'll be looking at switching over completely. .

That's really helpful. I just wanted to follow up on the autonomous opportunity. A couple of years back, I think you've provided at least samples of your FOG products at the time to a number of players in that autonomous market.

And just wanted to understand sort of where things stand there and how you're thinking about that opportunity today, particularly now that you've got the pick in production?.

Yes. So we're in over 20 different platforms. So we continue to do well. And as all of these platforms are in testing and prototyping, it doesn't generate a lot of revenue yet. But as you know, this is an enormous opportunity, and we've been focused on it, which is why I wanted to point that out in the script.

We've been focused on this market for 15 years, so from -- when DARPA first sponsored the original Grand Challenge. So we've been working with these companies for a very long time. So we feel that we have the precision. We have the experience. We've literally been in millions of miles of autonomous driving on roads today through our customers. .

And some of these markets, we think, are going to develop faster than others. And we think autonomous trucking, for example, will develop faster than a fully autonomous consumer vehicle.

And the reasons for that are both economic and that these are more expensive platforms and they deliver an economic value to the people who are operating the trucks as well as the opportunity is to run them in more contained environments.

So level 5 doesn't mean that level 5 is on every single road that you could possibly drive on, but it might be level 5 on the Interstate Highway System. .

So we think things like trucking and autonomous vehicles for public transport and people movers, which are, again, are in more defined geosense areas, this will happen faster. And we're already seeing customers in those areas. .

[Operator Instructions] We'll take our next question from Ric Prentiss with Raymond James. .

A couple of questions. Following up on the migration conversion -- finishing up conversion.

How should we think about -- are you thinking about any of the revenue side, where people not converting over, did I hear you right that exit '21, there would be a $4 million to $5 million OpEx save then on the network side?.

Yes. .

Well, it wouldn't be OpEx, but savings, the cost of sales. .

Cost of sales, you're right. Yes. .

That was $4 million to $5 million at the kind of exit '21 into '22?.

Right. So reduced bandwidth costs, so we're not running 2 networks. So in other words, we're spending more than that now, of course, on the old network, but this would be the incremental part because as we migrate people over, we put the bandwidth on the new network. But the net savings, we estimate is $4 million to $5 million. .

Right. And any concerns on the subscriber side? You think you'll get everybody switched over, so it's really more just a... .

Well, you know how people are, they -- yes -- no, that's definitely a concern. And for us, this is an enormous priority to get this done. But you know how people are, they always wait until the last minute. So we're giving people incentives to do it early and to get switched over. So really, we don't anticipate this being a risk to revenue in 2021.

If anything, some people may defer until 2022 and then realize that they forgot to do it and have to do it in January. .

But what we've also seen, Ric, is that the high-value customers, the people who are more modern customers have all switched already. So the people who are left are sort of the stragglers, the low ARPU customers who aren't really prioritizing this, whereas our big fleets have mostly all converted already. .

Right. And obviously, [ it could ] also be some Agile sales.

How should we think about CapEx in '20 and what this final process might do to that?.

I'll let Brent answer that. It'll be... .

Can you ask the question again? I'm sorry. .

He's asking about CapEx. .

You're a little hard to hear there, Ric. .

I think he's asking about CapEx for 2021 for casual related. .

Yes. Well, CapEx for 2021, real generally -- the more CapEx, the better when it comes to AgilePlans as far as we're concerned. We will be -- total CapEx will be somewhere in the neighborhood of $15 million to $20 million.

But what -- and as I said a moment ago, if we get some significant Agile orders, which move more subscribers on our network and more revenue and more airtime revenue, it could be higher. So a very fluid number. The amount of CapEx that we have budgeted for that's not revenue-generating CapEx, such as the Agile, is relatively low. .

Got you. Okay. And obviously, we've got a new president, a new administration there.

Can you talk a little bit about how you see it affecting orders and also international orders?.

It's a question on the defense side, Ric?.

Yes, defense side and also just any [ thoughts on the administration and your view ] of the business. .

Well, too early to tell. I think that it's clear that this administration is probably going to be less focused on defense spending. So what that means to future budgets, we'll have to wait and see.

Also, depending on what happens politically with the Middle East, that could impact some potential TACNAV business if there's embargoes or bans on exports and things like that. So hopefully, that doesn't happen. So... .

Okay. And any thoughts that you could -- obviously, still strong, [ good to be asked for the pandemic, hopefully looking ] on the other side of it... .

Ric, I'm having trouble hearing you. Ric, if you could maybe... .

I'm sorry.

I'm on a -- can you hear me any better now?.

Yes. That's perfect. Yes. .

Okay. Very good. Yes, obviously, balance sheet does the cash position negative net debt.

Any thoughts on M&A or what else might be out there that you might want to tuck in?.

We're not a super acquisitive company, but we've done some 4 or 5 deals over the last 10 years. So we are -- we'll always look. I think that some of the things that we've seen that have come out have been really troubled and very difficult to justify doing.

So if we were to do something, it would have to be something that's very compelling and doesn't put pressure on us with a lot of debt or anything like that. .

So we kind of like where we are. We've got some new products coming. We think we're going to be very, very competitive this year. I think we see a lot of upside in the airtime business. So overall, we feel pretty good about our position. .

[Operator Instructions] It does look like we have another question from Chris Quilty with Quilty Analytics. .

I think Brent may have given this in the script, but he was talking too fast.

What was the gross margin for the mini-VSAT Broadband service specifically?.

34 and change?.

Oh, you -- the gross margin for the mobile connectivity business unit was 33.8%. .

So yes, that's about a 4-point increase over Q4 last year, I believe. .

Right.

And where do you expect that to go this year, assuming you don't get the $4 million to $5 million of savings this year?.

Well, the savings won't -- is not this year. We're talking about the savings in 2022. We're still running 2 networks to the end of the year. And it does put a bit of pressure on the gross margin percentages, in particular for our airtime business. But coming out of the year, when we're down to 1 network, we're anticipating seeing improvement. .

Got you.

So the -- for the full year in 2021, will they remain in sort of the mid-30s? And by next year, they kind of push back up to the 40% goal you long talked about?.

I think that's a good estimate. I think this should be increasing this year. So it would be winding down costs on the old network and ramping up costs on the new network, but incrementally, it will be better. And it's a little bit tricky, Chris, because it's sort of the pace of the migration.

If the migration happens evenly throughout the year, then that's one thing. But if it's all back-end loaded, we're carrying the cost throughout. More subscribers on the old network, perversely, is actually better because you're not needed to add bandwidth on the new one, so it's a little bit tricky to forecast.

But we do -- in our models, we do have the margins generally where they are to slightly increasing. .

Okay. And a follow-up on the CapEx.

Of the $15 million to $20 million, how much of that ballpark might come from AgilePlans? And also, are you seeing a significant CapEx contribution developing for KVH Watch?.

Well, the -- I'll answer the watch part. But not yet for watch, but we expect that to take on a similar business model that we saw with the AgilePlans plans, so -- where that compounds over time. But the vast majority -- the business right now is not very capital-intensive outside of the AgilePlans.

So some of this new equipment that we're talking about is for -- the photonic chip is -- it's fairly pricey for machine and maybe $0.5 million kind of thing to get that installed and set up. But the vast majority of the CapEx budget is for AgilePlans. .

Great.

And where are you seeing the strongest demand for AgilePlans, either amongst your higher-end customers, lower-end geographically or by application? And has that changed over the course of last year?.

Well, the geographic split hasn't changed. It's sort of evenly distributed between Americas, APAC and Asia. So it's actually a pretty nice distribution geographically.

The one big change that we saw in Q4 is V7, V11 continue to do extremely well, but V3, which was not offered in an AgilePlan service, V3 was purchased only in the past, that really took off in Q4. And that's -- as I mentioned in my script, the unit sales for V3-HTS was up 175% in Q4. And that's a product that had been on the market for 3 years.

So really -- and that was driven by AgilePlans where we're addressing a new market, which is smaller fishing boats, countries like Indonesia and Vietnam and parts of Africa, it was a lot of fishing. So it's a -- it's really a new market for us, so it's incremental. .

And what does that lift in V3 do to the overall ARPUs? Presumably it will mix it down to -- but independent of that, what have you seen happen with the trends for AgilePlans?.

So ARPUs have been very, very constant, so it's surprisingly stable over the years. AgilePlans very stable. V3 is at a lower price point, both for the hardware sale and for the airtime and for Agile. So going forward, we may report ARPU sort of by product, if this becomes -- if this continues to take off.

But it -- I just want to point out, it's incremental. So it's not dragging down ARPU in the traditional sense, it's adding a new category, which is at a lower price point. .

Got you.

And I guess the other question with AgilePlans, how has the churn changed over the course of the year?.

Churn has been very low in Agile. .

Yes, very low. .

I wish all our products were like Agile. So it's our lowest churn of any product we offer. So -- and that's another thing. It's that speaking about the old network or the legacy network has very high churn compared to the HTS network. The vast majority of the churn is on the old network.

So these are old products, old network, a lot of these boats are getting sold or laid up. So we also expect that as a result, starting next year or as we progress throughout the year, we should see a significant reduction in churn, simply because we're getting people off that old network. .

Great. And final question just on the government defense markets. You've got a couple of big programs with a better plan for a rollout.

Are any of those schedules being impacted by the change in administration? Or does everything look generally on time with AT&T and AMPV and others?.

Yes. The U.S. programs are all budgeted and moving forward. So we don't see any impact in U.S. programs, where our big one is with the AMPV program of BAE, that program is on track, at least as far as funding goes and all of that. So I think the risk would be more -- some international.

What's going to happen in the Middle East? Who knows?.

Speaking of which, I think you had a $10 million TACNAV that was supposed to ship in the fourth quarter.

Presumably, only a portion of that shipped, and we should see the balance in Q1?.

You're right. Some of it shipped in January. So some of it -- you're absolutely right. Yes. So -- but it's all been shipped and it's all been paid for and cash has been received. So that program is complete. .

Great. And I think you had talked previously about 2 to 3 potential orders going into 2021 and you hope to win 1 or 2.

And I assume all of that is still on track?.

Yes. And we've got -- as Brent mentioned, we've got around $20 million in backlog, $19 million of that is for inertial nav. So we expect strong growth in our FOG business this year. In TACNAV, we try not to forecast that aggressively. So in TACNAV, we're always very conservative on our forecast until it's in backlog.

So that's not built into our guidance at this point. .

[Operator Instructions] And it would appear that there are no further questions on the phone lines at this time. .

That's great. So this wraps it up. And as always, feel free to reach out to us directly for any follow-ups. Thank you. .

Thank you very much. .

And this concludes today's call. Thank you for your participation. You may now disconnect..