Good day ladies and gentlemen welcome to the KVH Industries Q2 2014 Earnings Call. As a reminder this conference is being recorded. At this time, for opening remarks and introductions I would like to turn the conference over to Peter Rendall, CFO. Please go ahead.

Good morning everyone this is Peter Rendall and with me is Martin Kits van Heyningen, Chief Executive Officer of KVH Industries. Welcome to today’s call. This call will address the second quarter earnings release that we issued earlier today. Copies of the release are available on our Web site and also from our Investor Relations department. This call is being simulcast on the Internet, and will be archived on our Web site for future reference. If you are listening via the web, feel free to submit questions to ir@kvh.com, and we will answer them following this call. This conference call will contain certain forward-looking statements that involve risk and uncertainty. 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 discussion. Factors that might cause these differences include, but are not limited to those mentioned in today’s call and risk factors described in our most recent Form 10-Q, filed with the SEC on March 17, 2014. The Company’s SEC filings are directly available from us, from the SEC, or from the Investor Information section of our Web site. Now at this time, I would turn it over to Martin for today’s discussion of our results. Martin?

Thanks Peter and thank you all for joining us today. This morning we reported second quarter revenue of 40.9 million and pro forma earnings per share of $0.05 that was about the midpoint of our quarterly guidance. Our overall results reflect the good growth in our mobile broadband business. Our maritime VSAT airtime revenues continued on their trend of double-digit growth and we’re pleased to see a better than normal number of new activations during the quarter. ARPU also ticked higher in the quarter and fixed rate plans are now just over $2,000 per month. Our TACNAV revenues were up by 15% however at lower than expected FOG sales caused our guidance and stabilization revenues to decline year-over-year. Looking at each business in greater detail, our overall mobile broadband revenue was $29.7 million for the second quarter, it’s a 9% increase year-over-year. Much of this growth came from strong mini-VSAT Broadband airtime sales which were up 24% year-over-year. Hardware sales of TracPhone products for mini-VSAT Broadband network were below our 250 unit per quarter run rate but our number of activations was quite strong with well over 300 systems activated. This could be due to some inventory coming out of the channel in the quarter and into use and sales in July show normal hardware sales. Maritime satellite TV sales of 4.1 million were flat with the prior year and they were impacted by a late quarter launch of our brand new TracVision product line which resulted in demand for new products that carried over as backlog into Q3. We expect to clear this backlog during the current quarter which will result in a year-over-year increase in Q3 for our TracVision TV products. It was a very active quarter for our mobile broadband teams in terms of rolling out new…

Thank you Martin. Now I’d like to turn our attention a more in-depth financial review of our second quarter results. This morning we reported revenues of $40.9 million, which was 5% lower than the revenue reported in the prior year quarter. As Martin stated earlier, our mobile broadband revenues of $29.7 million represented a 9% year-over-year increase, while our guidance and stabilization revenues were 30% lower at $11.2 million. Revenues from VSAT business were $18.6 million in the quarter, an increase of 8% year-over-year. Of this amount airtime services represented, 14 million an increase of 24% over the second quarter of 2013. During the second quarter our VSAT airtime ARPUs for the variable pay-by-the-megabyte plans were consistent with what we've reported in recent quarters, mainly $600 to $700 a month, where we saw a modest increase in the fixed rate plans from $1,900 per month to total over $2,000 per month. All other SATCOM revenue including TV systems, KVH Media and Inmarsat Systems and associated airtime was $11 million up from 10% from a year ago. Within that amount maritime satellite TV product sales of $4.2 million were almost flat year-over-year while land based systems declined 11% to $1.1 million as we had anticipated. TACNAV product revenues of $5.7 million came in as expected and were 15% higher year-over-year. As Martin has also mentioned, the main contributor to this revenue category was an international military customer who was referenced in the press release we issued in May. Now turning to our FOG business, FOG sales in the second quarter of $4.5 million were 44% lower than the same period last year. As it relates to this year-over-year decrease the significant contributor was a sharp slowdown in spending under the CROWS program as we've previously noted. For the second quarter almost…

(Operator Instructions) We’ll take our first question from James McIlree from Chardan Capital.

Can you give us the SATCOM breakdown? You said it was $11 million total. I’m talking about the other SATCOM, axe the mini-VSAT. So you said $11 million total, $4.1 million Maritime and land $1.1 million. What's the other $5.8 million? Including Inmarsat airtime and products or? Chardan Capital: Can you give us the SATCOM breakdown? You said it was $11 million total. I’m talking about the other SATCOM, axe the mini-VSAT. So you said $11 million total, $4.1 million Maritime and land $1.1 million. What's the other $5.8 million? Including Inmarsat airtime and products or?

Yes, so we have, there are other products accessories, services, marine navigation products like our digital compasses

And head wins in there right? Chardan Capital: And head wins in there right?

And KVH Media is in there.

Okay. And how much was KVH media? Chardan Capital: Okay. And how much was KVH media?

For the quarter revenue wise, it was $3.8 million.

$3.8 million. And for Q3 you’re looking at 43 to 47, but that includes I'm assuming a full quarter of Videotel. If you axe out Videotel's and you’re down Q-to-Q and I’m just trying to understand why that is? What’s going down on a quarterly basis to result in that? Chardan Capital: $3.8 million. And for Q3 you’re looking at 43 to 47, but that includes I'm assuming a full quarter of Videotel. If you axe out Videotel's and you’re down Q-to-Q and I’m just trying to understand why that is? What’s going down on a quarterly basis to result in that?

The big thing is TACNAV. So we've shipped the majority of that $5.2 million order. So sequentially from Q2 to Q3 the major delta is decline TACNAV revenues.

And then the reason for the increase in Q4 is you’re expecting consumption of TACNAV? Chardan Capital: And then the reason for the increase in Q4 is you’re expecting consumption of TACNAV?

Correct, we have backlog already in hand for Q4 and we also have other contracts that are pending. So what we’ve done is deferred any TACNAV that’s not a backlog currently in Q3. So that’s not in our guidance at this point. So that’s the only thing that’s declining sequentially.

Okay. And then the unit orders I think that you referred to of 250 for the mini-VSAT, how much lower than 250 was it for the quarter? Chardan Capital: Okay. And then the unit orders I think that you referred to of 250 for the mini-VSAT, how much lower than 250 was it for the quarter?

I don’t want to give the exact number but it was below -- not materially below that number, but it was usual. So that’s why I pointed it out. So, and it was also unusual that we had very high activation. So it was kind of a strange quarter. So we had low hardware revenues but very high activation. So we hadn’t seen that before, which is why I mentioned it. And based on what’s happened in July, it was just an anomaly. So maybe from channel -- because it doesn’t take a lot to move this. We’re talking about 20 or 30 units. That’s a change from our estimate but -- it doesn’t take a lot for that to happen. So we did see a drop in VSAT hardware sales in Q2 that we do not expect to reoccur and so far in July it has not and we're on a solid base to do 100 systems [indiscernible] or so. So it’s looking good, but it definitely caused our hardware revenues to be low in Q2, which was disappointing. But if it’s coming out of the channel, that wouldn’t actually bother me.

Right. Okay, so you’re not talking about half the number of units? Chardan Capital: Right. Okay, so you’re not talking about half the number of units?

No, no, no, no

Still in the ballpark of… Chardan Capital: Still in the ballpark of…

10%. We've been pretty consistent about giving you a range and I didn’t want to mention it.

And then I mean I think we’re all kind of waiting and hoping for acceleration in that number because of KVH Media. Is that still a reasonable expectation; that you get an acceleration in the number of mini-VSAT sales per quarter? Chardan Capital: And then I mean I think we’re all kind of waiting and hoping for acceleration in that number because of KVH Media. Is that still a reasonable expectation; that you get an acceleration in the number of mini-VSAT sales per quarter?

Yes, absolutely, we think that these new services that are just coming online, we’ve got the entire IP MobileCast network up and running now. We’re just starting to deliver immediate servers. We activated people in the second quarter, upgraded their software so they could actually watch our media content on their hardware and the live event. So I think we’ve got tremendous feedback. So I think that this absolutely has to change the growth rate that we’re on.

And we’ll take our next question from Rich Valera from Needham & Company. Rich Valera - Needham & Company: Just wanted to revisit the guidance. If you take the midpoint of your prior full year and then the midpoint of sort of third and fourth quarter guides, it’s actually down around $15 million, it looks like if you assume roughly $6 million a quarter for Videotel. So first I just wanted to confirm that you are assuming about $6 million a quarter for Videotel. If not how much? And if that’s the case, $15 million seems like a big delta to attribute to just TACNAV. So I'm wondering if there are other factors that led to the lighter second half than we had been for previously.

So I think part of the confusion is that we hadn’t updated full year guidance at the end of the last call. We’re still within the range. I think perhaps you were assuming the midpoint of the range but given that Q1 was not at the high end of the range, so that probably wasn’t a good assumption. So then Q2 came in light. So that’s, I think that’s probably the biggest discrepancy. So in terms of where we look now versus where we were at the end of the quarter really the only major change in our outlook for Q3 and Q4 right now is the FOG business. So TACNAV is expected to be low in Q3 which was the answer to your previous question, but strong in Q4 and on plan for the year. FOG we’ve taken down significantly. So we’ve taken $5 million or $6 million out of FOG in the second half of the year in terms of our own internal forecast based on what we just saw in Q2. Rich Valera - Needham & Company: Can you give a rough -- for guidance and stabilization as a whole, anyway you can kind of quantify what you’re expecting for the second half either relative to the Q2 base line or year-over-year?

We’re anticipating a roundabout $20 million or so, maybe little higher. We have been very conservative in our focus based on the run rates. Martin -- that was a significant contributor to the overall reduction in annual guidance.

So we also have this contract that's starting. So we’re going to start to see some engineering revenues as we begin work on this other contract that I mentioned. So really just to recap, if you want to look at the difference between our outlook today and our outlook at the end of the last quarter its FOG, that’s the big difference. We’re were expecting to see a rebound in FOG and at this point we’re taking it out of the forecast. Rich Valera - Needham & Company: Got it. And can you just say what you’re roughly expecting for Videotel in the second half as well?

Subject to all the purchase accounting processes happening, we’re estimating $11 million and $12 million. Rich Valera - Needham & Company: Great. So you're not losing, you don’t think much revenue to like deferred -- loss of deferred from purchase accounting at this point you think?

We’ve assumed a similar patent that we had with KVH Media, based on the similarities of the business. Rich Valera - Needham & Company: And then I just wanted to confirm, the $1.4 million of intangible amortization, that’s for the entire second half. So it's sort of a 700 per quarter run rate and is that what we would assume going into ‘15 as well?

That’s per quarter. Baked into the forecast. Rich Valera - Needham & Company: Got you. So do you expect to be presenting your results with that kind of pro forma-ed out as well since I think that’s kind of the way we’d probably like to look at them?

We’ve talked about that a lot internally Rich, and I think that the answer is probably yes next time. We didn’t want to do it this quarter but I think probably net quarter we will take a look at whether we should take out the amortization of intangibles. Rich Valera - Needham & Company: Rough numbers is like $0.09 per quarter which is clearly very material in the context of your business. Seems like it would behoove you to clarify that. And then we could probably back into this, but can you say roughly how much incremental OpEx you expect from adding in Videotel in the third quarter?

Excluding any acquisition related costs, we’re anticipating something in the order of $3 million. Rich Valera - Needham & Company: Per quarter?

Yes. But that includes the…. Rich Valera - Needham & Company: That includes the amortization, that’s a GAAP number?

That’s a GAAP number. Rich Valera - Needham & Company: So it's really about half of that if you were to back out the amortization?

No we’re assuming amortization of a little $100 million but that [indiscernible] get amortization for KVH Media. Rich Valera - Needham & Company: Okay. I thought you said it was $1.4 million per quarter of amortization from just Videotel.

No, no that's the whole company. Rich Valera - Needham & Company: For the entire company, okay, I’m sorry.

So, about 1 million of that is Videotel.

And we’ll take our next question from Chris Quilty from Raymond James.

First is a cleanup. Peter can you give us the breakdown of antenna sales by antenna types? Raymond James : First is a cleanup. Peter can you give us the breakdown of antenna sales by antenna types?

It's till approximately 60% V7-V11 and 40% V3.

I’m sorry 50% V3? Raymond James: I’m sorry 50% V3?

40% V3.

And 50% V7 and then the balance was V11. Raymond James: And 50% V7 and then the balance was V11.

Yes, he was combining the V7s and V11s just as big antenna versus small antenna. The reason we group it that way Chris that the V3 is a metered plan and V7 and V11 are both on fixed rate plans. So there are different ARPUs.

Okay, got you. So have you seen any -- at least between the fixed rate, any shift between V7 and V11 or any impact in terms of large fleet orders? Raymond James: Okay, got you. So have you seen any -- at least between the fixed rate, any shift between V7 and V11 or any impact in terms of large fleet orders?

No, it’s been relatively consistent. So no surprise that they’re in the mix.

Okay. And Peter you give us a service breakdown and I just didn’t catch the numbers I think in the quarter for KVH Media versus referring services. Can you give that again? Raymond James: Okay. And Peter you give us a service breakdown and I just didn’t catch the numbers I think in the quarter for KVH Media versus referring services. Can you give that again?

Yes, we can. For Q2 it was 19% KVH media, 74% airtime VSAT and Inmarsat.

Okay. And then the balance was what? Raymond James: Okay. And then the balance was what?

We had some final installation services under the Saudi contract and we had some other NRE that we incurred as well, but relatively small amount.

Okay. The TACNAV contract that you’re working, that's one of the $10 million to $15 million size contract that you had talked about previously. Raymond James: Okay. The TACNAV contract that you’re working, that's one of the $10 million to $15 million size contract that you had talked about previously.

Yes.

Yes.

And again you’re reasonably confident that you would see hardware shipments by the fourth quarter? Raymond James: And again you’re reasonably confident that you would see hardware shipments by the fourth quarter?

Well, we’re confident that we’ll see hardware shipments on other programs. We don’t have that in our guidance for Q4 from a hardware point of view, no. Our guidance does not include hardware shipments under that particular contract.

Okay. And can you give us a sense of what you’re seeing in terms of customer update or IP multicast services or package types, whether you’ve got people on 30 day 60 day trials and what the conversion rates are, some sort of event, can you express in pretty strong [indiscernible] that it will be a big update, can you give us any nuances on what you’re seeing? Raymond James: Okay. And can you give us a sense of what you’re seeing in terms of customer update or IP multicast services or package types, whether you’ve got people on 30 day 60 day trials and what the conversion rates are, some sort of event, can you express in pretty strong [indiscernible] that it will be a big update, can you give us any nuances on what you’re seeing?

Yes, what we’re seeing so far is big free customers are interested packages that are in the $500 to $700 a month range, which is kind of where we expected. Some of these fishing offshore guys are surprisingly interested in more of the high end packages, like what we call a platinum package. We’ve done a lot of sort of free activations where we upgrade people in the background and then tell them that they have a new capability, that they didn’t know about and get them to try it. So too early to tell what the conversion on that is. So those are people that aren’t in the sales process. We’re just letting them know they got a new capability. As part of new -- every new proposal obviously where we’re pitching this hard, I think the exciting thing is that we’re now, with Videotel and Headwin media, I think we’re selling to the same customer. I think the challenge we had a little bit in the past was when we’re trying to sell VSAT to NewsLink customers. They were selling to the HR group. We’re selling to the IT group. And we didn’t really get much of a cross selling benefit. The training and the media and the news products are all being sold to the same person or department within the new organization. So that’s why we think this is going to be different this time, because we really didn’t good a job of cross selling a year ago when we got the news link and KVH media group on board. So I think that was a bit of a disappointment and now we’re targeting a different customer and we think that we’re going to get a very different result. So that’s why we’re….

And that customer is on the HR side, or the Op side now. Raymond James: And that customer is on the HR side, or the Op side now.

It’s on the HR side. So the HR department typically handles crew welfare, crew entertainment, crew retention hiring and training. So that’s a key difference. The IT department typically isn’t thrilled about any kind of entertainment running on the network. So it’s a different purchase.

And we do have a follow up question from James McIlree from Chardan.

Peter any acquisition expenses in Q3?

Yes there will be. We’re anticipating that they will be lower than

Peter, are the acquisition expenses included in the EPS guidance?

They are included, yes

And then in response to Rich’s question you said -- I think you said 20 million in guidance and stabilization revenues in the second half. But it sounds like it will be Q4 loaded. That is Q3 will be lower than Q4. Do I understand that correctly?

Yes that’s correct.

And it also sounds like TACNAV is going to be a very small number in Q3?

It’s going to be pretty small. So that's the sequential decline and we have a significant backlog for Q4 shipment in hand signed. So it does not include some of these other contracts that I mentioned because we don’t expect those to ship in Q4.

And then lastly. So on the FOG revenues, are the FOG revenues at a stable level now but just lower than what you thought they would be or are you thinking that FOG revenues are going lower versus Q2?

We don’t think they’re going lower. We do think they’re going higher but at this point we’re trying to be much more conservative than we have been because we’ve been wrong for two quarters in a row.

Okay. So it’s not that FOG has gotten worse. It’s just it hasn’t gotten better at the pace you expected?

Right. So there are a lot of positives here. We keep talking about FOG because we miss the revenue number but the new products are performing incredibly well. We’re getting the design wins to some incredibly cool projects. So we do expect to see an uptick here as these things go into production and the short-term benefit that we’re already seeing is that the margins are getting better because the new products are more sophisticated system sales like 1750 IMU, which carries a higher margin. Product like the CROWS were very low margin product because it was a high volume product originally. So there are some benefits here and we do expect to see things improve. We just don’t want to count on in Q3.

And finally I think at times or usually you give backlog for the guidance and stabilization business. What is the backlog?

Backlog is $14 million

Which is…..

3 million down from March.

Okay. So $14 million, did I hear that?

It is correct.

And we do have a follow up question from Rich Valera. Rich Valera - Needham & Company: Peter I was wondering if you guys can [indiscernible] your expected net interest expense per quarter given the increased borrowings for the Videotel acquisition.

Can you repeat the question Rich? Rich Valera - Needham & Company: Net interest expense you expect in 3Q and beyond given the increased borrowings for the Videotel acquisition?

The net will be probably 250 expense.

And we have a follow up question from Chris Quilty.

One more on the commercial fine [ph] products. At least in my sense, those revenues have been kind of $3 million to $5 million a quarter for the last year and half or so. Is there anything in the pipeline that you see that would maybe double or triple those revenues and I'm not saying in the next 12 months but over the long-term, is there that type of growth potential in the product line and customer base?

Yes. We’re being designed into some programs that have a potential to be very large. In fact we’ve invested millions of dollars in factory expansion. So we think that there is significant potential here which is why we continue to invest. We’ve completely revamped our product production line to go to a one piece flow line. So we think there's opportunities in automotive that will be significant.

And automotive would be larger than stabilized cameras or robots?

Yes.

And we have no further questions at this time.

Great. Well, thanks for listening everyone and as always feel free to contact Peter and myself directly either via phone or email and we will get back to you promptly. Thank you.