Good day, and welcome to the KVH Industries Q1 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Don Reilly, Chief Financial Officer. Please go ahead, sir.

Okay, thank you. Good morning everybody. Thanks for joining us today to discuss KVH Industries' first quarter results and our guidance for the 2017 second quarter and full year, all of which is included in the earnings release we published this morning. With me on this call is Martin Kits van Heyningen, the Company's Chief Executive Officer. The earnings release is available on our Web site and also from our Investor Relations department. If you would like to listen to a recording of today's call, you can access a webcast replay on our Web site. If you are listening via the web, feel free to submit questions to ir@kvh.com. This conference will contain certain forward-looking statements that are subject to many assumptions and uncertainties that may cause our actual results to differ materially from those expressed in these statements. We undertake no obligation to update or revise any forward-looking statements. We will also discuss certain non-GAAP financial measures, and you'll find definitions of these measures in our press release as well as reconciliations of these non-GAAP measures to comparable GAAP measures. We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading Risk Factors in our form 10-Question, filed on March 9th of this year, and the Company's SEC filings available directly from Investor Information section on our Web site. So, at this time, I would like to turn the call over to Martin. Martin?

Thank you, Don. Good morning everyone, and thank you for joining us today. I'm pleased to report that our results for Q1 of 2017 were right in line with our guidance. First quarter revenues were $40.2 million, and our non-GAAP loss of $0.09 per share is consistent with our expectations. mini-VSAT Broadband Airtime was up 7% from last year. mini-VSAT Broadband Airtime margins were at a new high of 38%, and usage-based plans accounted for 59% of airtime revenues. Overall, services accounted for 63% of our total company revenue in the quarter, in keeping with the trend of moving from a product business to a more predictable services and recurring revenue model. And Don is going to cover the numbers in more detail shortly, but before he does that I'd like to recap some of the significant achievements and trends we saw in our two business units in Q1. As you may recall, our two business units are now called mobile connectivity and inertial navigation, terms we started using last quarter as a better reflection of their market focus and product coverage. Turning first to mobile connectivity, the commercial maritime world remains challenged and challenging, with shipping companies adjusting their business models in hopes of improvements in the economic climate. Against the backdrop of ongoing macroeconomic and market trends, our growth in both with revenues and margins in airtime is very encouraging. Commercial maritime customers are increasingly coming to appreciate the synergies between our offerings in satellite communications, e-learning, news and sports, entertainment, that contribute to the safer and more productive crew members. In a challenging economic environment the combination can improve business productivity, and keep business healthier until markets turn up. Now, in the leisure marine market we see continued improvement in the health of the market. Reports from…

Thank you, Martin. So as Martin said, I'd like to discuss now in more detail the financial results for the first quarter. As you know and as Martin said, we changed our segment reporting at the end of 2016, and now have two reportable operating segments based on product lines, mobile connectivity, and inertial navigation. To assist in trend and comparative analysis we filed an 8-K, on March 15th that provided supplemental unaudited consolidated financial information regarding our segments for each of the quarters in 2016. So as Martin mentioned earlier, our first quarter revenue was $40.2 million, which was slightly above the midpoint of our guidance range, was substantially in line with the first quarter of 2016. In constant currency, our revenues exceeded last year by about 2%. Our mobile connectivity revenue decreased about $1 million, but was roughly flat in constant currency. While our inertial navigation revenue increased about $800,000. Product revenue for the first quarter decreased approximately $500,000 or 3% to $14.9 million, from $15.4 million in the first quarter of 2016, due to a decrease in mobile connectivity product sales of about $900,000 or 8%, which was partially offset by an increase in inertial navigation product sales of about $300,000 or 7%. The primary driver in the mobile connectivity product sales was lower sales for our mini-VSAT products. The increase in inertial navigation product revenue was due to higher sales of our FOG products as compared with last year, particularly our IMU products. Service revenue for the first quarter increased $300,000 or 1.2% to $25.3 million, from $25 million in the first quarter of last year, due to increases in mini-VSAT Broadband Airtime service revenue of $1 million or 7%, and nonrecurring engineering revenue from the inertial navigation segment, of $600,000. These increases were partially offset…

Thank you. [Operator Instructions] And we'll take our first question from Ric Prentiss with Raymond James. Please go ahead, your line is open.

Great. Thanks. Good morning, guys.

Good morning, Ric.

Good morning, Ric.

Two questions if I could. First on the guidance; you mentioned '17 guidance only a limited number of the TACNAV in the pipeline, but earlier you had some would need to book and shipped to hit the second half guidance. Help us understand where you are in the process with those particular fairly large contracts as far as are they done being manufactured, are sitting on the floor waiting to be shipped? And what's the timeline to really -- the visibility to when it might hit? And these are customized? Just thinking through the whole process of when those might hit?

Right. Yes, so what we are saying is that the total TACNAV guidance is flat with last year. We just bought this $3.5 million order. A big chunk of that we will ship this year, which is good. There are at least two other large orders that we expect to receive, and we've only put a portion of that into the guidance. So, we are trying to indicate that we still feel very confident in those orders. We expect to get them this year. We expect to ship a big chunk of it this year. And if that happens, we will meet or beat the guidance for inertial NAV. So the current status of those programs is that the vehicles are in production. Some of the vehicles have been delivered. We are specked in. We have purchased materials and built some of the product in anticipation of the order. We expect to get the order in the second half of this year. And our turnaround time is basically going to be governed by getting an export license which is normally takes sort of four to six weeks. So, it could happen even late in the year still be in the plan.

Great. You're specked up for really just [indiscernible] for the order to really come in hand?

Yes.

Yes.

And it's in the -– it's a foreign military sale and it is in their budget. So it's not a budgeting problem. So we continue to feel very good about it. And we just don't have confidence in giving specific dates.

Particularly if the order is not firmly enhanced I think so…

Right, yes.

Second question is little more long-term, you mentioned about the autonomous vehicle kind of program working on bringing the cost down in the manufacture easability if that's the phrase.

Yes.

Help us understand what the process is to do that as far as you don't want too early because the market might not be there and cost might be too high, but you don't want to be too late in the market. And what are you doing specifically, what kind of benchmark milestone should we be looking for?

Right. So where we are now, we received -- in Q1, we received our first set of prototypes. We tested those. We made modifications. Just in the last couple of weeks, we got a second set of prototypes. They look a lot better. We're working on a new method for attaching the fiber to the chips which would be further improvement that we didn't originally anticipate. But we have come up with something there as well. So, we're optimistic that during the course of this year, we should see, you know, as somebody [ph] talked every quarter as we progressed down the path. And we are doing it incrementally so that we should be able to have regular milestones there.

And from the contract side of things, what are the people you are working with and hopes to getting a contract with [indiscernible] delivered and what kind of timeframe do they want to see in engineering and manufacturing kind of process?

Well, it varies. I mean some people are moving very fast and they want it now. And if they can't have it now, they don't want it. Other people, who are the more mature big car companies, they have longer time horizons than we do. And so, we are very comfortably ahead of their timeline. So it really varies a lot. So -- and in the interim, we are continuing to provide prototypes of existing design which works great. It's just impractically expensive for volume production. So, it's sort of similar to path of the Light R [ph] guys went through. You get in early and then sometimes you get kicked out if they don't -- if they want something super cheap right now. But in the long run, I think Light R [ph] going to be in all of these vehicles.

Right, and any update on drones; it was discussed on the Verizon Analyst Day yesterday, DISH brought it up on their call this quarter; what's the opportunity in drones? You talked about it a couple of quarter back?

Yes, we're -- a lot of our products are being used in drones everything from surveillance drones to military drones to package delivery drones. So, there's lot of opportunity there. So we -- some of the products announcements we just did where we have the new un-housed version basically makes the product very small and very lightweight which is important for drones. But a lot of IMUs are going in drones, which is our high end inertial NAV system based on our 1750 IMU. And sales for that product we are up almost 50% this quarter. I think it was 46% year-over-year. So we are seeing good growth in that part of our business.

Okay. Great. Thanks, guys.

Thanks, Ric.

And we will take our next question from Rich Valera with Needham & Company. Please go ahead. Your line is open.

Thank you. First just wanted to follow-up on the TACNAV questions from the previous caller; it sounds like you were describing specifically one order, Martin, when you were talking about the timing of that particular order. And if I recall, you had a couple of orders. One which I thought was in kind of $6 million - $7 million range, which you may -- I thought you actually already had pre-built in inventory. And another one that wasn't quite as far long as that. So can you just maybe drilldown a little bit on if in fact that's the case? And if the one you are referring to was the one that's already in inventory?

Yes, you are exactly correct. So there are two orders, but they are from the same country. So, I tend to lump them together when I talk about them, but the first one is a little bit further along. And you are correct that it is also the one we've actually built and have on the shelf.

Got it. So -- that when you have pretty good confidence on getting some time in second half and then it'd be the six week export license, how about the one behind that, do we think the timing of that is similar?

We do think the timing is similar. So -- and in fact it may become co-mingled into a single contract. We are not quite sure. So -- but we think that the timing of both nav is very similar.

And just one more on that, I mean it frankly seems like we have been in this position now for at least a couple years in a row and just trying to understand what might be different this time. Has anything happened at a high level in the government of this defense organization that you are ordering from that would give us some confidence that this year would be different than the prior year too?

Well, I think that from our perspective we continue to see progress both the fact that the funding is in place that the vehicles are in production, that the contractor has been selected. We've provided updated price quotes. We are discussing installation. So, we have a lot of small indications they give us confidence. But I can fully appreciate your position which is we have been confident for while now so. And that's why we are sort of straddling the fence here with not putting a lot of this in our guidance and basically giving the guidance the same as last year in terms of revenue.

Got it. Okay. Just wanted to move on then to mini-VSATs, so it's nice to see the growth of the service revenue in obviously a tough market, just wanted to understand a little bit on the hardware side. I think you mentioned you had an 8 or 900k decrease in hardware. And it sounds like that would seem to imply perhaps meaningfully lower gross unit adds, but I imagine there could be some impact from units being added on the subscription model. So just wanted to get a sense of any color on unit adds year-over-year and how much of the new business is coming on the subscription model at this point?

Yes we did as I mentioned in my prepared remarks, we did have some immediate interest and we started presenting this subscription service to some key customers, some early customers in Q1 and we did have some early takers who also have the predecessor to that which is a they're a crew calling service where the equipment goes on board and in exchange for an air time contract, we don't count those as revenues. So the overall growth in subscription air time is sort of the net number two, so what we're seeing is as you recall from many quarters we were describing a decline in the offshore oil vessel subscribers which was kind of hurting our growth rates we would be adding subs and not really seeing an increase in revenue because we're getting suspensions or deactivations from vessels being laid out. So I think all those things are factoring in getting the air time growth up a bit.

Any color at all on sort of thoughts on gross adds this year versus last year or in the quarter?

No I mean we don't as you know we don't talk specifically about the number of subs or a subscription just for competitive reasons but where the idea behind the agile plans is to really increase the number of subscribers, so that the whole concept here. So we're not if we just trade hardware sales for a subscription revenue, it's kind of innovative but it doesn't really move the needle for us and that's not why we're doing it. So what we're really trying to do here is increase the subscriber growth in a very material way.

Got it. I mean are you going to give us some sort of data points along the way this year to give us any sense of if you're being successful on that front?

Yes I think so, I think we try not to do too much too early and keep digging up to see the growing but I think as soon as it becomes even remotely material, we'll be discussing it in detail.

Got it, and then just wanted to go on to the FOG for [indiscernible] application. I might understand it correctly that you already have A version of the photonics IC in your prototype, or is that still to come?

No we have prototypes in the lab, so we're getting samples from two different suppliers who are building the actual chip and we're testing them in our lab, they are not running in vehicles.

Got it. So could you talk about what are some of the major steps I mean it seems getting a photonics IC done is a big step, do you need to you think have multiple spins of that shift to get to the open the cost target like what are some of the big milestones we should look for to get down that cost curve to where you need to be for applications.

So at high level, the steps are designing the circuit itself and that has been completed and that appears to be working, the fab steps are critical are reducing the loss through the circuit through the material itself and maintaining the polarization, so those are sort of the two key things that we're working on now. The second spin that we just did the first one had very high loss, second one cut the loss to half, so we're pretty happy we are right on the correct path there. And then those are really the two major things that we are working on right now.

Got it. And then just quickly can you say what the CapEx was for the quarter and how much if any of that was for the subscription plan.

Yes and very little of it was for the subscription plan, I could tell you just one second, CapEx was about $2 million.

Got it. And I'm sorry just one more and I promise out the floor, can you give us the breakdown of TACNAV's and FOG revenue for the quarter?

Sure one second. Was mostly FOG…

TACNAV was about 600 or 700K.

TACNAV is about 700K. So yes TACNAV is about 700K, FOG was about 4.2 and there was OEM type business of couple of hundred thousand.

Got it, thanks very much.

And our next question comes from Jim McIlree with Chardan Capital. Please go ahead. Your line is open.

Yes, thanks, and good morning.

Hi, Jim, good morning.

So I think last quarter you talked about OpEx increasing $10 million for the year. I'm wondering if that's still a valid observation and then secondly in order to get there you can have to have a pretty big increase in OpEx is that going to be in conjunction with the increase in revenue that you're expecting in the second half or there is timing differences.

So first we still continue to expect OpEx will increase year-over-year about $10 million. The first quarter OpEx I believe one second I mean I would say it will ramp up a little bit last half of the year, we were at let's say $16 million, about $19 million, almost $20 million, I guess it was just under $21 million in the first quarter, we expect it will increase slightly or somewhat in the last three quarters of the year. The run rate will pick up a little bit.

Okay. And is that independent of the revenue increases or is that?

Well some of that was positively I should say some of it will increase significantly in connection with TACNAV commission will increase with TACNAV sales.

Okay, great and then in order to hit the high end of the revenue guidance is that mostly getting posted results on the TACNAV or is there something else that would drive the high end of guidance for the year?

We have a pretty varied product line, so between the VSAT and the Air Time and training business there is also a fairly significant part of our revenue is now denominated pound so there's an exchange rate. Between the air time, the hardware the maritime you got FOG and TACNAV, so it's really a mix of all those different things. But you're right of course you know a large TACNAV orders would push us to the high end of the range but there are other parts of the business like agile plans taking off. Air time revenue continuing to grow that would pushes up as well so but it tends to be that you know some things are up and some things are down so it's kind of a blended forecast if you will.

Okay and might my last one is the CapEx for the year you've indicated is going to be partially for the agile plans. Have you put a number around that what, how much in CapEx you're expecting related to the agile plans?

Not directly at say what we've talked about of the total CapEx and I think they're around 20 million.

Yes, fixed into 20 million.

So it's less than. Half of that may be over there that might be.

Good could be probably more than half of that will be it will be.

Understand correct. Sorry about that.

Does the HTS capacity increases that is that capitalized or is that expense.

It's a mixture, there's a lot of development costs which were expensing as we go. Lot of engineering network support product development you know all that being expense as we go and there are some you know capital investments as well in terms of network infrastructure that are being capitalized.

Right so, so potentially ground terminals and you can have higher backlog costs as well that well with that thinking and look along the right line.

Right in traffic saving equipment and a lot of networking so the complex, complex development project.

Right, right. Okay, very good. Thanks a lot. Appreciated.

All right.

And our final question comes from Chris Quilty with Quilty Analytics. Please go ahead. Your line is open.

Hey Don could you give us the full four digit revenues by operating segment which I couldn't find anywhere in the press release or supplementals and it actually be helpful if it was somewhere other than the queue that would have to wait for.

Well first I'll be happy to give you Chris the queue we filed tonight so won't be waiting a long time but I can tell you in the last mobile connectivity total sales are quarter $34,287,000 inertial navigation is $5,924,000.

Got it. Martin, I know you don't give specific numbers on many of the, that but was fair to assume we're still looking at the same sort of 250 per quarter net adds in Q1

Yes, I think you know, our -- the run rate of terminals to deployed has not changed materially for a while and that's really what we're looking to change here with this move towards connectivity as a service. So we're trying to jump start to get us out of that the range that we've been for the last couple years.

And to give I mean in a sense of what you hope the impact to be if you've been adding you know sort of a gross 1000 vessels a year. Are you hoping to get a 50% improvement or a 2X or 3X improvement over time and in just in context of I mean you know how large the market is what the penetration rate is and what competitors are doing, what sort of you know possible and what would be the stretch goal.

I think their trajectory would be in those kind of multiples, a large increase over where we are today but thing that we're you know always have to be careful of in commercial maritime is that, it is a very conservative industry and this is a brand new concept that no one's ever done before so, balancing those two things we had incredibly positive response from everybody know you know and said This is crazy you know why doing this I want that this is exactly what we want. So then the one hand we're getting really positive feedback we make them you know immediate sales actually fell from a trade show which never happened, in this industry so that's all good and I but I think if you look out you know we're viewing this as a important strategic direction for the company and over the next you know year, two years, three years we think this will have a dramatic impact on our trajectory.

Okay and just to be clear because you know information was available in the last conference call when I looked at the pricing on these plans it's the exact same price as you had before. It's just people get the antenna for free they get the content for free and the same exact plans in terms of used, these are all usage based plans.

Right so, you get the antenna, you get the below decks, you have the cabling, you get the insulation is included, maintenance is included, the vessel tracking is included, news link print, news link television the training the video tell training, basic training package as well as the chart update service, chart link and forecast link so it is a pretty comprehensive package of stuff that you get and it starts as low as 499 a month though. So, that's what we mean by all inclusive.

Got it. And I haven't seen any public statements by competitors but I would assume that they think you're crazy.

I don't know, they always think we're crazy so that's the probably the reason we have more subscribers than they do but you know this is something customers want is something that's unique benefit that we can offer. It's a turnkey solution and it's happening in other industries you know here KVH used buy software and servers and all that stuff. We don't do any of that anymore, salesforce.com, we have Amazon cloud everything is you know this is the way the industry is going and you know they may think we're crazy now but they'll be copying it you know within a year or so

Got it and separately that content training business I assume will be partially cannibalized by some of these plans maybe who knows you get actual step ups because people get the basic and they decide to add on the premium but independent that because the plans really haven't kicked in you know other than the FX impact that business really hasn't grown much in the last year or two, what do you think the rash reasons are? Why you haven't got more attraction with sort of the independent content business sales?

Well, the - as far as cannibalization goes I mean some of that, it's through like of the traditional movie link service is being cannibalized by the MobileCast and that's been going on for three years now. The Videotel training has grown since we acquire them from sort of 10,000 to 12,000 vessels, so that's grown you have to remember that the British pound, but from a $0.70 to a $0.20 during that time period as well. But if you look at number of vessels, we have increased about 2000 vessels during that period. So I think the growth from that business will come from new products and we are working on some new products, we will be announcing here during this quarter for the training business as well.

Got you. And on the automotive side, just a question on the photonic chip design, are you designing that based upon specific packs that customers have given you that they desire or is it based upon what state-of-the-art, what you think is achievable from a technology or an accuracy perspective?

Both, but primarily to meet customer requirements, so we know state-of-the-art is and we know in a current performance. So right now, we don't - the goal is not to reduce performance from current levels but simply to make it smaller, cheaper and faster to build.

Got you and then from your script it sounds like your, you feel like you are on track with the development, can you remind us when do you think you have either prototype test units that will get filled it or when the goals are kind of be in full production?

Well, we haven't set a specific day. The way R&D works is you keep working it and then suddenly it works, which is different from engineering development where I can plan out to schedule and make a discrete path and so I think that if we are not in production in 2018, I would be very disappointed. If we get something that we can put into drive out this year, I will be very happy.

Got you. And Don 38%, margins on the many VSAT are those - should we project that as a stable margin on go forward basis whether onetime items where it might come back a bit?

Best I can see, no Chris no that should be a good run rate going forward.

Got you. All right, thank you gentlemen…

Relatively launch HTS, so it might be some small incremental dealt as but it should be small, so I agree with Donald that's our target going forward.

Martin one more question. You had said that HTS will allow you to lower cost but just to be clear you are going to still be operating your existing many VSAT light band or white being network and you are going to have to layer on additional HTS capacity. So isn't it true that the costs are actually going to go up to add that service?

Well, every time add had capacity, you total cost goes up but the net cost goes down. So what we are saying is that our cost for subscriber or per megabit per second or for a megabyte whatever metric you want to use, those costs will be going down and fairly significantly we are looking at something like a 50% reduction versus our current cost, so…

And will the - all of those future HTS plans, will they include a existing wide beam overlay as an option or as standard as a way to continue pushing IP multi-cast and a backup service?

Well, we will be announcing the details for the service shortly though we will address that point then. I don't want to get out in front of our new product announcements but what you are asking is a very good question and we've got a very nice solution for that.

Okay.

It's a great plan.

Very good, I'd get it if I had a boat.

All right. Thanks, Chris.

And at this time, we have no further questions.

Okay. And we will be available after the call if anybody has any follow-up questions. Thank you.