Good day, everyone, and welcome to the KVH Industries Q2 conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Pat Spratt, Chief Financial Officer. Please go ahead, sir.

Thank you, and good morning. I am Pat Spratt, Chief Financial Officer of KVH Industries. And with me today is Martin Kits van Heyningen, Chief Executive Officer. This call will address the second quarter earnings release that we issued earlier this morning. Copies of the release are available on our website, kvh.com, and are also available from our Investor Relations department. This call is being simulcast on the internet and will also be archived on our website for future reference. For those of you listening via the web, feel free to submit questions related to the content of today's discussion to ir@kvh.com, and we will be happy to answer them following the call. This conference call will contain certain forward-looking statements that involve risks and uncertainties. For example, statements regarding financial and product development goals are forward-looking. The company's future results may differ materially from the projections described in today's discussions. Factors that might cause these differences include, but are not limited to, those mentioned in today's call and risk factors described in our quarterly report on Form 10-Q filed with the SEC on May 7th, 2008. The company's SEC filings are directly available from us, from the SEC or from the investor information section of our website. Now, I would like to turn the call over to Martin to begin today's discussion. Martin?

Thanks, Pat. Thank you all for joining us today. So despite challenging economic conditions, we achieved solid top line results and earned record profits during the second quarter, as our long-term strategic growth drivers began to hit their stride. We received new orders for our fiber optic gyros that helped growth in demand for remote weapon station. Our airtime business is striving to become a significant contributor to our revenues, and which are the major step towards the global expansion of the mini-VSAT Broadband service. Our diversification with multiple markets and emerging revenue sources enable us to meet or beat our expectations, despite maybe a fewer challenges in some markets. As a result, I'm very pleased with our overall performance. For the quarter, we achieved revenues of revenues of $22.3 million and generated EPS of $0.14 per share on a record profit of $2.0 million. For the first half of the year, total revenue was up 4% to $45.4 million with net profit of $3.6 million. Earnings per share for the first six months were $0.24. That's a $0.14 increase over the first half of 2007. In fact, we are on track to double EPS this year. In the mobile communications market, revenue increased 4% over last year. Land mobile sales were down 37% year-over-year, a reflection of the current challenges faced by the RV industry. Sales of Class A recreational vehicles are down 40% this year as a result of record high fuel prices, declining consumer confidence and challenging consumer credit markets. Consumer behavior is also changing with RV owners traveling regionally rather than nationally and spending more time camping rather than driving, meaning our viewers are still enjoying satellite television on their vehicles. Nevertheless, we see this market continuing to be a challenge going forward. However, our overall…

Thank you, Martin. The financial results for the second quarter were gratifying especially given very, very weak economic conditions that became far more challenging over the last several months. Even though sales were just below the low end of the expected range, our operating margin was just shy of 9%. Now, to some of the specifics. Gross margin was just under 42%. Contributing to this result were the continuing strong sales of TracPhone marine products and the benefit of our ongoing cost improvement programs. In the quarter, we also recorded a one-time catch-up for the recognition of commissions earned for TV receiver activations in prior period. This generated a benefit of less than one point of gross margin. For Q2, operating expenses were down 15% compared to last year. We continue to tightly control discretionary spending. In addition, this result includes the impact of capitalizing the development expenses for the antenna system that we are developing for LiveTV. Because we have a firm order for these systems, it is more appropriate to amortize the cost of development to be aligned with the future revenue recognition. For the second quarter, R&D spending, as reported, was 35% lower than last year. This reflects the impact of the capitalization that I just mentioned and the fact that other customer-funded engineering projects exceeded last year's level. It's important to note that we have added engineering resources to contribute to fulfilling the LiveTV commitment and to sustain our other strategic initiatives. Consequently, although we saw a reduction in the reported engineering expense, we have actually increased the absolute level of effort. Second quarter sales and marketing expenses increased 10% year-over-year, but were up only slightly compared to Q1. In the face of the tough economic conditions and depressed RV expectations, we have taken steps to…

(Operator Instructions) We will take our first question from Jim McIlree with Colin Stewart.

Thanks. Good morning.

Good morning.

On the services revenue, is the increase in services revenue on a quarter-to-quarter and year-on-year basis primarily related to the mini-VSAT service or was there growth in, let's call it, the legacy services business also?

There was growth, Jim, let me check a couple of numbers. The biggest absolute growth and percentage wise was certainly in the VSAT airtime services, especially since last year we did not have.

Right, right. I was speaking more quarter-to-quarter. I mean, you are seeing --.

We saw a growth in Inmarsat airtime. We saw a substantial, obviously, increase in the VSAT airtime. We also saw as included in that service number is non-warranty repair work, and we saw some increases there as well.

Okay. I think last around you talked about the amount of airtime that customers are taking?

Yes.

At least your initial experience with that, has that changed at all, up or down?

Yes, it has changed a bit. It seemed to be drifting higher now, so, I would tell you that we are seeing customers used more of other services than we expected.

Like 10% more or 20% more, a little bit more?

In a range I think, worst that we are thinking it will be 1,800, and now we are 2,000, it is going a little bit above that now. So, I would say 10% is reasonable.

Okay, great. Pat, you mentioned that TACNAV refurbishment, that is primarily a US customer?

Yes, it is. That is for TACNAC systems that were deployed on vehicles that have been in Iraq and Afghanistan.

Right.

It’s part of a normal reset and refurb program that they go through. So the service category includes not just airtime, it also includes government funded engineering services as Pat mentioned, the non-warranty repair service, anything that is not product is put in that category now.

I see, okay. Okay great. Thank you very much.

Welcome.

Chris Quilty with Raymond James.

Good morning, gentlemen. I just wanted to follow-up, you had mentioned requirement for 10 transponders, and I think you had previously mentioned with the initial announcement was ViaSat that you would be adding three hubs. Does that indicate you are buying more than one transponder per hub or does that also include the transponders that you are currently using for your existing coverage pattern?

It includes the ones we’ve now. So there is one transponder per hub roughly, so that is, it is a one-for-one ratio. So when I say there are 10 required for global coverage, that includes the ones we already have now plus the ones we are buying plus the ones ViaSat is buying themselves. So that would be 10 at the baseline global coverage, and then additional capacity would only be added if you sold out a transponder. So that is a success scenario, you would add capacity but only because you can do much business in that region.

Okay. If I am looking at what happens in the single sized VSAT market, I think they are able to put 7,000 to 8,000 customers per transponder. Are those the type of numbers that you think each region would be able to support before you would have to add excess capacity?

Well, I do not think so. I think those numbers sound very high, by like a factor 10 roughly. So it really depends on the usage patterns because do not forget we are not charging $49 a month, we are charging $2,000 a month. So these customers are getting and buying a fairly high level of capacity and service. So it is a different business model than at the home-use where they try to cram a lot of people on, and whatever level of service they get is what they get.

That is fair enough. Now, a question in terms of the capital expense for building out the hubs, ballpark general cost, and time to completion. How you will end up depreciating that?

I will let Pat answer the depreciation question. It is just a ballpark, just $3 million to $5 million initial capital investment over the next 18 months.

Does that mean you are not going to have the service availability for 18 months, or when would you first be able to launch service? I think you indicated end of the year?

Yes. So I had meant the entire effort would be done in over 18 months. However, we do expect the first region to go live this year, at the end of this year.

Okay.

Our intention as far as depreciation goes is to generally use a five-year straight line period.

Okay. Your thoughts at this point, given what you have seen in demand, taking a low-risk, lower reward approach of a teaming arrangement, or just out and out buying a transponder, which I think will cost you, depending on the region, $1 million, $1.5 million a year?

Yes, that is right. I think that we are at a stage now where we are comfortable enough with the demand for the product that we were somewhat indifferent to the approach, meaning the pay as you go, helps with startup but you make less money in the long run. As long as either model works well for us, we no longer see the risk of the service and product not being successful as a major determining factor. So right now it is purely an economic decision, what is the best deal you can negotiate with the satellite provider. If that answers your question --?

No, but I know where you are going.

What I am saying is that, we are definitely looking at buying satellite capacity and we are prepared to buy it. However, if the satellite operator says, "hey I would prefer to do a revenue share", we will look at the economic trade-off and if they want, and if that comes out better for us, we will do it that way. However, we are not making these decisions now based on risk because we do not see this as, now that the product has been in the market for a while, we’ve pretty good confidence in the take rate. So we are not doing it to reduce risk.

Okay. Speaking of the take rate and going back to Jim's question earlier, your service revenues were up about $1.3 million year-over-year, and if you divide that by $5,500 per quarter per ship it gets you to around 240 ships on average that you would have had demanding service. Again assuming that all the incremental revenue came from the service, does that put us in the general ballpark where we are for ships and service? I think you said in your earlier statements or in the press release that you expect the service rate to continue growing at a similar pace. Does that mean if you are adding at a 70% growth rate it should stay at that growth rate through the balance of the year or were you talking number of ships?

Well, the average revenue is closer to $2000, you know $2,100 to $2,200, not 5,000 if that is the number you were using per month.

Per quarter I was giving.

I am sorry, per quarter.

Okay.

Sorry, never mind, I thought you were talking about on a monthly basis. I think you are in the right order of magnitude, Chris, as you know we do not like to talk about specific sales of a product. Also included in near time revenue is the Inmarsat numbers which we’ve been doing for years, so that subscriber base obviously is a lot larger still than the VSAT numbers, that is in thousands as opposed to hundreds.

However, you are not getting an actual split on the revenue airtime for the Inmarsat service, just an initiation?

No, we are in Inmarsat ISP. So we sell Inmarsat airtime, so we make percentage wise similar number on the Inmarsat that we would make on the VSAT roughly.

Okay.

So, every Inmarsat system we sell, we’ve a sales group focused on that.

Got it. Shifting back to the core marine business, I think did you indicated that most of the weakness was centered in the low-end, I think is it the M3 product line?

Actually doing pretty well, but what I was trying to say is that, it is not that the marine market is immune to what is going on in the general economy, but like in the general economy it seems to be focused more at the low-end. Fortunately for us, those typically are not our core customers, so we do have some products that start at a low-end but its not the biggest of our business. Active within the land side, interestingly, we thought to see the same thing. For example, the automotive segment was down a little bit, but nothing compared to what is down the RVs. That is because the automotive product sells through the high-end of customer and that is different. So you in the land, you see the same phenomenon going on with the low-end of the market, that is hurt a lot more than the high-end. In the marine market, it is already a high-end market and within that we tend to sell to the higher end of that.

Okay. The dramatic fall-off that you saw in the land market in the quarter, clearly things were not nearly this bad in the first quarter and gas, oil prices are up, but I mean, what do you attribute to the fall-off to? Is it just your customers or OEM customers and channel partners being much more conservative in the channel inventories that they are holding or do you think it was really a bleed through of the actual demand level?

Well, obviously, we mentioned that we are surprised and management should be never be surprised by anything, but we were. Q1, the RV business was flat. The RV market has been down for a long time, so we expected prices, gas prices to erode demand, but we did not expect it to happen this quickly. So part of it is, OEMs were shut down for a period to get their inventories in line. Part of it is when sales are down, if the channel partners overreact by not ordering so that they can work their own inventories down. So there is a possibility that what we saw in Q2 was inventory related because unlike the marine market and the RV market we sell through distributors, we sell to dealers and we sell to distributors, we sell to OEMs which is different from the marine market where we sell direct to dealers primarily, and we sell direct to boat builders. So you do have that inventory situation. However, nevertheless, for guidance purposes we just assume that what we saw in Q2 will continue in Q3.

Okay. However, did you see a different action by your dealers than your OEM in the RV channel or did they both act in concert?

I would say they both acted in concert.

Okay. I have one other question just to shift back to the TracPhone V7. I think you had mentioned last quarter about some potential large orders, Turkish navy, Russian shipping fleet. Was there any news on either of those two? The broader question is, how well is the effort moving along at targeting large shipping fleets?

Yes, both of those actually came in, and we started shipping some this quarter. So in general, the product strategy is working incredibly well. Perhaps this survey was done recently on shipping companies, and for what they need for crew retention and crew morale, what people want on board vessels, and we had four of the top five things. Like number one was internet access. Number two was email. Number three was voice calling. and/or number two was satellite television. So it is pretty impressive. So we’ve got really a suite of products now that address that market very well. So the key things we’ve to continue to do is put in more coverage, so that people can use it throughout their operating area. So even though a company might be located in Europe, if they go to the Middle-East, if they go to China, they want coverage over there as well. So that is why we are saying that when you add a region, you do not just have to sell in that region to make it profitable, you can sell units in Germany because you added coverage in China.

Got it. Final question on the defense business. You still have what looks like some pretty good expectations going into 2009 of $4 million to $6 million run rate. Yet, the only big industry-wide CROWS, RWS-type contract we’ve seen, it was the US Army's CROWS contract. Are there other contracts out there that internationally perhaps, have been awarded that I have not picked up on, or these things that you still believe are pending?

Well, I am not aware of any order as big as CROWS, that is for US Army. So I think that is up there.

Okay, pretty good. Thank you.

Rich Valera with Needham & Company. Rich Valera - Needham & Company: Thanks, good morning. I can just circle back to the year-over-year increase in service revenue of about $1.3 million. Could you give any granularity regarding how much of that was from V7? It sounds like clearly maybe not all of it was, but is it roughly half of that or any granularity on that would be helpful.

Well, let me try to add a couple of things that might give you a sense without us doing more than we would like. Of the total number of $3.1 million in terms of service revenue, the airtime portion is roughly half of it in total. That is Inmarsat and VSAT combined. The growth drivers year-over-year or the biggest growth driver was clearly the VSAT, airtime portion of that. So, I probably cannot go more deeply than that, but we had some growth in some repair services work, but the big drivers were the airtime and specifically the VSAT airtime. Rich Valera - Needham & Company: Great. Then you did not mention any update on your qualification process with Kongsberg. I thought you would expect it to be qualified and shipping within this third quarter. Can you just give us an update there how is that going and when you expect to be shipping your first box to Kongsberg under the $6 million order?

Well, we’ve shipped the units for qualification and it is my understanding that the way this process is working is that they have a customer who works with them on changes and some of the changes get approved ahead of formal qualification, which sounds strange. So, there is a possibility that we will actually be delivering long before the qualification process is completed. So we are clear to ship. We are shipping to Kongsberg. Their qualification process for their customers is really separate from our delivery requirements. I know that sounds strange, but that is the way it is working right now. Rich Valera - Needham & Company: Right. So, do you have any revenue to Kongsberg for FOGs baked into the third quarter at this point?

Yes, yes. Rich Valera - Needham & Company: So, that is not contingent on the final qualification. Then that big ramp you expect in the fourth quarter, is that contingent on the final qualification?

No. We’ve been clear to build and we are building as we speak. Rich Valera - Needham & Company: Okay.

In other words, what formal qualification they do is not something that we are awaiting final word on in the sense that they have not said, do not build until we go through our own internal process, because they have been internally testing the products for six months or more. Nine months. Rich Valera - Needham & Company: Right, okay. The $46 million per quarter revenue level you referred to in your prepared remarks, was that just FOGs or overall defense revenue?

That would be just for this DSP-3100, which is the product being used by Kongsberg for remote weapon stations. Rich Valera - Needham & Company: Right. So, obviously if that were the case, you would expect overall defense revenue to be higher than that level per quarter.

Right. So, I mean in other words, think of that, 2 million order, as one additional month production. Rich Valera - Needham & Company: Right. To Chris's question, that is a pretty high run rate. Do you have any visibility to the end program this is going in to that that level of demand could be sustained throughout '09?

I think our customers asked us not to talk about specific programs, but I think Chris made the observation that he is only aware of one program that is of that size? Rich Valera - Needham & Company: Right. Okay. That is helpful. You mentioned in your prepared or actually in your release about a new leasing program for the V7. Pat, can you give us any sense of the potential working capital implications of the V7 lease?

Well, first of all, we do have a lease program. We’ve had some folks who have leased units, but it is been a fairly small percentage of the total so far. We do not expect it to ever be a very large percentage. We put this in place primarily just to offer an alternative stream of financing. However, essentially, the way it works is the lease is typically a three-year lease. Although we recognize the revenue at the front end of the lease, we are obviously financing the cost of the product over the term of that three year. So essentially what is being financed in the working capital that we are putting up is to cover the cost of the product itself. The airtime is recognized and paid for as we move through the lease. Then certainly, we’ve to collect on a monthly basis from those customers, but it is the cost of the product that is being financed. Rich Valera - Needham & Company: Okay. Just a final one, Pat, do you have both the quarter ending defense backlog and then your current backlog including that $2 million order?

Yes, I do not have the exact number but ballpark, it is the numbers I gave Rich. We were at $13 million at the very end, around June 30. A few days later, we were at $15 million, and I would estimate, it is still right around that $15 million number. Rich Valera - Needham & Company: Great, that is helpful. Thanks very much.

Tom Watts with Cowen and Company.

You have a lot of questions. Could you just comment a little bit more on the LiveTV, you said that there were no revenue assumptions throughout in guidance and there are some remaining development milestones. Could you talk about the milestones a little bit? How should I think about that moving into the revenue stream?

Okay, I will answer the first part of that. This is a fairly big product development program; we’ve got a large team of people working on it. It is a formal development process where you have a preliminary design review, and then a critical design review. Right now, we finished the preliminary design review with the customer about a month or so ago, and we are probably about a month away from the critical design review. We expect to start FAA STC-type testing here in the next few months. The product development program is on schedule, and the reason we do not have it in our revenue forecast even though contractually their deliveries this year is that, we haven't gone through that certification process before and we just think it is better to be a little conservative on that with our customer. So there is some upside there.

As far as the revenue goes, we will clearly begin to recognize revenue as we ship product to LiveTV. It is hard to say it contractually, we are expected to begin shipping before the end of this year but it is very late in the year, it is in the back half during the month of December and mostly in the back half of the month of December. So as Martin said, because of the milestones that we still have to move through and we’ve high confidence that we will be very successful there, but also because of the fact that the timing is such that it is right on the boundary of the end of the year, we just did not want to get too aggressive in terms of assuming that everything is going to go perfectly well. So it is not in our current forecast. If we do ship, it could add in excess of $1 million of revenue to the year for the units that we would ship to LiveTV. As we said, that is not in the projection and if it does happen then certainly we would add that to the projection.

Okay. Maybe I missed it. Could you give us CapEx for the quarter?

Yes sure, CapEx was $520,000.

Okay. You mentioned that were you, are you expecting similar levels in Q3 before the ramp in Q4?

Q3 will probably be fairly similar, it might be slightly higher. Q4, I expect it will probably take a step up because we would be beginning to install the first hub for the rollout of the VSAT service. So as we rollout the additional geographies over the course of the next 18 months, we will see a bit of an increase in our CapEx for that hub equipment.

Okay. Then finally, you have a healthy cash balance on the balance sheet. You are not burning any cash here. Could you just remind us if your philosophy on cash if there are any other things you will consider doing with that?

Well, as you know, we are buying back some stock, so we are using some cash for that and even with that we’ve been able to generate more cash than we’ve been using. If you were asking about acquisitions or M&A activity or anything like that, there is not anything that we are aggressively pursing. We always do keep our eyes and ears open. However, right now, I think our primary focus is on making sure that we build out the VSAT capability on a global basis so that we’ve full success there. The cash levels are more than we need on an operating basis if you look out long-term, but in environments like we see today with poor economic conditions and so forth, it is actually nice to have the extra cash. However, we are looking to invest it in the company as we go forward and we foresee opportunities with fiber optics gyroscopes and VSAT global rollout as well as some other things that we think are going to consume some portion of that over the next year or so.

Okay, great. Thanks very much

(Operator Instructions) We will take a follow-up question from Chris Quilty with Raymond James.

Hi, two for you Pat. First of all the 22% marine growth that you reported in the press release, does that include the service?

It includes the service core, the marine business, yes it does.

Okay, so that is a mixed number there. If I were to just make some general assumptions about, again, as we talked earlier how much of the service revenue is coming from the V7, it would still look like you are probably hitting around low double-digit growth on the product side in marine?

Well, again, in the marine, we’ve seen some softness in the TV portion in the U.S. anyway. In Europe, it is still looking good. The non-VSAT TracPhone business has continued to do well also. So, that is probably the extent of the detail I would like to give, but the biggest chunk of our growth year-over-year is absolutely the VSAT products and services.

Okay. Can you give us either now or offline the Q3-Q4 revenue breakdown for last year just for modeling purposes, since it looks like you are going to break that out on a go-forward basis.

You mean what they were as a percentage of the business or dollars?

Or are you talking about service?

You broke out revenue for both Q1 and with the six-month Q2 into products and services and the product cost of service. It is quite something you hadn't done previously.

Right.

So, just so we can model the back half of the year, can we get that for Q3 and Q4 of last year to look at --?

Okay. That is something I would have to work up, but I can do that.

Okay.

I can get that to you if you like.

The final question on the LiveTV opportunity. How confident are you in that FAA certification process and how much effort have you looked into? As I understand, it is not a simple process. Second part of that is, if I am not mistaken, have you not already sold that system for some business jet applications?

No, this is a brand new design. This is a ground-up new design. The bizjet version is really a customer-modified A7.

Okay.

So, buying standard A7s and then modifying it themselves. The requirement for the FAA and the STC certification is actually LiveTV's requirement, not our requirement. So, we are actually building and delivering to a very detailed specification. So, it is really their process to go through, and we will support them. However, we actually do not do the specification ourselves.

Okay. So, if this is a new design, does it draw from any of the previous hardware architectures that you have done before, either for the A7 or any of the TracVision product line?

Yes, this is one of those classics. It is exactly like one of our standard products except the array and the circuit board and the motors and the radome. Everything is different. So, it draws on the product architecture of the M3, the array and the board side array, but it is an array like an A7, but it is not an offset array like the A7. Then, everything about the mechanism is brand new, designed to work in minus 55, gear-driven precision bearing. So it is quite a different product. So, it is really designed from the ground-up for commercial aviation.

A radome type device or more of a flush mount?

It is a low profile radome. It actually will fit into the existing radome that is out there. That is one of the key requirements so that they can get quick approval. So they are not changing anything on the exterior of the aircraft or the way it is mounted to the aircraft. So, it is just changing something that is inside the radome.

So, are you talking about a replacement market of replacing in-service units?

Yes. You can absolutely do that. They are looking at that as well. However, the main motivation for them is that they do not want to have to go through the extensive testing you have to do if you build something on the outside of the airplane. In other words, this is already done. That is already there, and it is completely certified. We are just changing what is inside that radome.

Got you. They have certified that radome profile for how many different types of narrow-body, wide-body aircraft?

It is got the Boeing 737, the Airbus 320 and the Embraer 170, 180 series. So there is three narrow-body jets that it is already type approved for.

Got you.

Those are the two that make up 90% of the market.

Okay, awesome. Thank you very much.

Yes.

(Operator Instructions) Seeing there are no further questions, I will turn it back over to you, Mr. Spratt.

Well, we just want to thank you all very much for listening in and participating and we look forward to talking to you again. Please do not hesitate to give us a call if you have further questions. Thank you.

That does conclude our conference for today. Thank you for your participation and have a wonderful day.