Good day, and welcome to the KVH Industries, Inc. Third Quarter 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.

Thank you, operator. Good morning, everyone. Thanks for joining us today to discuss KVH Industries’ third quarter results and our guidance for the 2017 fourth quarter and full year, all of which is included in the earnings release we published this morning. With me on the call is Martin Kits van Heyningen, the company’s Chief Executive Officer. The earnings release is available on our website and also from our Investor Relations Department. If you would like to listen to a recording of today’s call, you can access a webcast replay on our website. If you’re listening via the web, feel free to submit questions through ir@kvh.com. This conference call will contain certain forward-looking statements that are subject to many assumptions and uncertainties that may cause our actual results to differ materially from those expressed in these statements. We undertake no obligation to update or revise any forward-looking statements. We will also discuss certain non-GAAP financial measures, and you will 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-Q filed this morning and the company’s SEC filings available directly from the Investor Information section of our website. At this time, I would like to turn the call over to Martin. Martin?

Thanks, Don. Good morning, everyone, and thank you for joining us today. Let’s get started. Our third quarter revenue was $40.5 million, which is slightly below our guidance range, while our EBITDA of $1.6 million and adjusted EPS of $0.02 were both well within our range. In many ways, this was a difficult quarter. For our maritime group, the three different hurricanes impacted our airtime business in the Caribbean and the Gulf. And the Florida storm hurt our leisure, marine and dealer business there during the final weeks of the quarter. But despite the storms, airtime service revenues were up, but not as much as we’ve seen in prior quarters. And of course, the continued delay in our TACNAV international orders was a disappointment this quarter. We still have very high confidence that we will get the order, but since it’s not in backlog as of today, we are removing it from our Q4 guidance. We saw strong shipments of our FOG systems, in particular, our inertial navigation system. FOG revenues were up 25% compared to last year, as we continue to gain traction in higher end drones and other exciting new applications. The big news from Tuesday, of course, is about our new satellite network and our new high-speed TracPhone V7-HTS system. This is, by far, the biggest product of service launch for KVH, since we launched the original mini-VSAT broadband service 10 years ago. We’ve been working on the network and the hardware nonstop for the last two plus years. I’ll be touching more on that in a moment. And I also like to bring you up the speed on what I believe is a significant breakthrough that we’ve made in our effort to bring a photonic chip-based solution to the FOG autonomous automotive market. Starting with our…

Thank you, Martin. As you know, we report our business in two reportable operating segments based on product lines, mobile connectivity and inertial navigation. Our earnings release includes a summary of our operating results by segment, through third quarter and year-to-date periods. As Martin mentioned earlier, our third quarter revenue was $40.4 million, which was just slightly below our guidance range. This compares to $45.8 million recorded in the third quarter of 2016. Revenue from our mobile connectivity segment decreased $3.7 million and our inertial navigation revenue decreased $1.7 million. Foreign currency translation did not have a significant impact on the third quarter. Product revenue for the third quarter was 14.1 million, a decrease of $4.9 million or 25.8% from $19 million in the third quarter of the prior year. By segment, product revenues or inertial navigation segment decreased $2 million or just under 23%. And our mobile connectivity segment decreased by just under $3 million or about 29%. Within our inertial navigation segment, our FOG business continued its solid top line revenue growth, growing approximately 25% for the quarter. TACNAV sales declined this quarter, as the prior year included deliveries on a large TACNAV contract that concluded in the fourth quarter of 2016. In our mobile connectivity segment, the decline in product sales was probably driven by the launch of our AgilePlans subscription model, but also, we believe, by the impact of the hurricanes in the Caribbean and Gulf of Mexico, as many VSAT customers delayed purchases or laid up their vessels in anticipation of and in the aftermath of these severe storms. With respect to the Agile program, as Martin mentioned, 45% of our commercial shipments were in connection with those new offering. As previously communicated, we do not recognize product revenue on a shipment of AgilePlans products,…

Thank you. [Operator Instructions] We’ll take our first question from Rich Valera with Needham & Company.

Martin, with respect to your low-cost FOG development, I think you said that your latest iteration of your photonics IC had 4x better insertion loss and I guess the previous iteration. Can you say where that puts you relative to where you need to be to have a commercially viable product?

Actually, with more than an order of magnitude better and it’s now a factor of four better than it needs to be for insertion loss. So that was sort of a critical parameter that we’ve been chasing, so we’ve nailed that. So there’s no further improvement required there. In fact, it’s better than it needs to be. So we’re now moving on to other elements of the integration and testing, but it’s with a huge technical breakthrough that -- with a big blocker for us. So that was the thing that we were concerned about the very feasibility. When you do research and development, you can’t say when some things going to happen or even if it’s don’t work because it’s still R&D. So for me it was a threshold that we crossed. We’re now convinced that it’s feasible.

Got it. So I think earlier this year when we talked about the time line for commercial availability, you’d said you’d be disappointed if you didn’t have it commercially available by the end of next year ‘18. Is that still your thoughts?

Yes, I think that this is -- this continues to test well, that time line could be pulled in. I think it depends on what we’ve seen so far. I mean this batch literally came in a few days ago, so it’s a big news, and we haven’t fully tested it yet. So -- but I think that 2018 is definitely our target.

And can you give us a sense of how -- what would be the next step? So let’s say, you kind of get through this current process and then everything checks out. Would the perspective customers should have -- what are the next steps for them? What have they told you in terms of how quickly they would be ready to kind of take these products and then presumably put them into production?

That part is different for every company and a lot of their plans are kept very close and they don’t actually tell us what their production plans are, what their new models are. But we have been told that 2018 is a critical date. So that’s what we’re shooting for.

Got it. And then if I could move on to the TACNAV. So it sounds like another push-out of TACNAV orders. And my understanding if you had roughly 15 million of orders that has been pending for I think about three years now, I think this is the third year of running that, we’ve kind of push them out as we headed late in the year. So just trying to understand why we should still have confidence. Those orders are going to come in, do you have any specific anecdotal evidence you can give us that would suggest that they’re going to come in either later this quarter or early next year?

Right. Well, don’t make it worse than it is. It was two years and one year for one order and two years for the other order, and they’ve now been merged into a larger program. But your point is well taken. So we continue to monitor things at the micro level every contract, clause, negotiation, funding decision, vehicles being contracted, vehicles being delivered. So we’re very close to it. We still have confidence that it’s going to happen, but we completely understand the frustration and not being able to predict these things. So we’ve purchased materials. We’re proceeding with production. So we’re very confident it’s going to happen, and we’re disappointed that it’s going to be 2018.

And one more, sir, if I could. Just on the HTS product, you spoke pretty optimistically about how this potentially changes your competitive situation in the market. Can you give us a little color on that? I mean do you feel like you’ve potentially losing business because you didn’t have an HTS product? Or does this kind of help you to leapfrog ahead of your most direct competition? If you can give us some sense of where you think this put you in the market?

Yes, existing technology is very well established, is very reliable, good coverage, but what we have now gives us really a big leg up over our competitors. So we’ve got better coverage. We’ve got almost as good coverage with Ku-band that we have with our C-band before. So now it’s single antenna or small product to 60-centimeter product has speeds that are almost more than double the V11 which is a 1-year product. We’ve got the dual airtime packages now where you’ve got the high-speed and unlimited plans. And from a competitive perspective, this new architecture, the hardware is less expensive than our old hardware and the airtime is much more competitive so our costs are coming down significantly. So on a cost-per-megabyte basis, as delivered to a customer, our cost is approaching half what it was. So we’re offering higher speeds and our costs are going down. We’ve got better coverage. So it’s really -- for us, it’s been a mammoth effort over the last year 2.5 years to pull this together. So it’s not just a new product, it’s not just additional transponder, it’s a completely new architecture. So long answer, but the second part of your question is correct. This leapfrogs the competition in a big way.

And our next question will come from Jim McIlree with Chardan Capital.

Don, I think you said that 45% of shipments in Q3 were to agile, did I hear that correctly?

You did, yes.

And is that...

Commercial shipment.

Yes, is that a number that it’s -- is that ratio likely to increase or stay at that kind of rate going forward?

I don’t think it’s going to increase, yes. I had to increase in the third quarter versus the second quarter. The run rate into the fourth quarter has been very strong. Pipeline has been building, so now we could [indiscernible] the center is going to increase.

All right. So from a product sale perspective, when I’m looking at product sales for mobile connectivity, if my AgilePlan shipments are increasing, that implies that I’m going to have continued pressure on the product sales growth as long as that number increases. Is that correct?

Yes, there will be some pressure on cellular shipments to commercial customers who the Agile product is -- or program is targeted for. We still expect a fair amount, a significant amount of VSAT sales to leisure and other areas of the market. But I think you’re right, there’ll be pressure on them, on product sales. We won’t see the -- and don’t anticipate the same level of growth in VSAT product sales that we may have seen in prior years.

Right, I just want to make sure I understand the dynamics there. We get a better long-term service revenue, but at the expense of short-term product sales is kind of how I’m...

Yes, you’re exactly right, and this is the transition moving to this Connectivity as a Service model is it’s always risky. You’re giving up the guaranteed hardware sale for growth and service revenues. And for the first couple of quarters, it’s definitely a leap of faith. So we’re actually pretty pleased with the way it’s going. I think we’re probably a quarter or maybe 2 quarters behind where we thought we’d be, but we can definitely see that it was the right move and it’s going to be a successful program for us.

And when you say, Martin, that you’re maybe a quarter or 2 behind where you wanted to be at that, is that due to something internal or the market is just taking longer to respond to this?

Well, the market actually responded quickly, which is what we had hoped. So people are quickly saying, "Hey, this is great. I’ll do it." And -- but they do want. And then they try it for a couple of months and then say, "Great, now we’re going to roll out the fleet." So the fleet rollout isn’t going any faster than when they buy them. So the initial decision is quicker, which is great, but they still want to try it before they roll it out to their entire fleet, and that’s probably something that we didn’t really anticipate. We thought that since they had no commitment, they would just go for it. But in hindsight, I think it make sense because if you’re an IT Manager, you don’t want to rollout something that isn’t going to work even if you can send it back. It’s just too disruptive. So the good news is that no one returned any units. So the people have tried them and now rolling out to their fleet. So, it’s working.

Got it. Okay. And then on the FOGs, so you say you have a -- it sounds like you have a technology breakthrough or you’ve crossed the threshold. What about production? Is that still a -- or cost, cost to manufacture, is that still an issue that you need to overcome? Is that like the next step in what’s happening here?

Well, the cost part was always fine with these new chips. In other words, this replaces the individual fibers that are built in the couplers and then the individual fibers that are built in the polarizers and then into second couplers, and all that gets placed together. It replaces all of that, and that is a huge cost saving on day one. So the issue before was it just didn’t work. It wasn’t that it wasn’t inexpensive. So once we get the photonic part completely finished, we’ll have this photonic chip that we’ll just attach to the fiber coil, then the rest of the stuff in terms of scaling our production is very straightforward. So beyond that, it’s also reducing the size and cost of the electronics. But that’s not R&D, that’s just normal cost reduction and scaling. So...

Okay. So just to reiterate that, there’s no particular new technologies that need to be created in order for the production to take place and the cost reductions from that? That’s just, what I want to call it, easy, but that’s the normal...

Yes, for their -- right, there’ll be packaging and other things, but we have -- part of this design and part of our concept does specifically addresses that issue. So it’s no, we don’t see that -- once the device works, we don’t see transitioning to production to be difficult.

Right, right. Okay. And...

Because the whole point of it is to make it -- we already have something that’s relatively difficult to manufacture, so the whole point is to design something that’s already easy to manufacture.

Right. And I’m assuming that this is something that the customers are keenly aware of and monitoring as well? I know that’s kind of sad question, but I just wanted to make sure.

Yes. I think that there was a healthy amount of skepticism that we’d be able to pull this off, so I think we’re feeling pretty good right now.

Okay, great. And to Richard’s point about TACNAV, I don’t want to beat you guys up about it. I mean, we all know that the orders there are lumpy and oftentimes pushed to the right. I would just suggest that keep it out of guidance until it’s a hard order. That’s just my one man’s opinion.

Yes. Well, it’s officially out of our guidance.

Yes, I was talking about 2018 because I’m sure there’s going to be at least some follow-up, putting it back in, yes.

Point taken. Point taken.

And it appears there are no further questions at this time. I’ll turn the conference back over to management for any additional or closing remarks.

Great. Well, if you have anything some follow-up conversations with some people who couldn’t make this call and if anyone has any direct questions, feel free to call us or email at irkvh.com. Thank you.

And that concludes today’s call. Thank you all for your participation. You may now disconnect.