Q2 2020 KVH Industries Inc Earnings Call

[music].

Good day and welcome to the KVH Industries Inc. Q2, 2020 earnings Conference call. Today's call is being recorded at this time I would like to turn the conference over to Donald Riley Chief Financial Officer. Please go ahead.

Thank you operator.

Good morning, it was.

Thanks for joining us today discuss KVH Industries' second quarter results, which are quoted in the earnings release, we published small it.

With me on this call as Martin Kipling here again, a couple as Chief Executive Officer, and brands growing quite Chief operating officer.

Your next moves is available on our website at <unk> Investor Relations Department.

If he 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 to IR KVH Dot 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 things.

Take no obligation to update or revise any forward looking statements.

We'll also discuss certain non-GAAP financial measures 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 currently see filings specifically those under the heading risk factors when I first for first quarter form 10-Q filed on May for US not 2019 form 10-K, which was filed on February 28, and our form 10-Q for the second quarter, which we expect to be filed later today.

[music].

The Companys other SEC filings are available directly from the Investor information section of our website.

And at this time I would like to turn the call over to Martin Martin.

Thanks, Dan Good morning, everyone.

Joining us today.

So as was the case for most companies we entered the second quarter with incredible uncertainty relating from the cope with 19 global pandemic.

I'm happy to say, however that while we anticipated in prepared for a range of scenarios both of our business segments held up well in the face of these global health and economic challenges.

For quarterly revenue was 37 million down only 7% compared to Q2 last year or be sat shipments remain strong or airtime revenue continue to grow or fog in TACNAV sales were healthy and our gross margins expand.

We're very pleased with the results for the quarter in the face of the challenges we all experienced.

We also worked very hard to manage our operating expenses, while sustaining our business both of our factories ran a full capacity throughout the second quarter, we implemented and continue to maintain an array of health and safety initiatives, resulting to know missed shipments no health issues and no outbreaks amongst our employees around the globe.

We managed our supply chain aggressively and as a result, we have products on the shelf, we continue to be able to deliver.

We acted early and decisively we reduced operational spending in almost every area. In addition, we temporarily reduce pay across the board with exception of those making under 50000.

The largest reductions were for our executive team. These steps enabled us to avoid layoffs. During Q2 I know layoffs are planned for the future.

As a result of these efforts we improved our EBITDA for continuing operations by $900000 versus a year ago getting us to break even for the quarter.

We got our loss in half sequentially from Q1 of this year.

Together these efforts enabled us to maintain a strong cash position of $44 million.

We're also able to significantly increase our total backlog, which is now over $30 million across all of our markets.

These results validate our strategy of diversification, our combination of defense and commercial as well as product and services enabled us to weather what was hopefully the worst part of this crisis.

By continuing to deliver hardware and installed products, despite port closures and travel restrictions. We believe we gained market share on our competitors.

There's still much uncertainty ahead, we're well positioned for the future.

Now I'd like to share some of the details beginning with their mobile connectivity segment.

We ended the quarter facing significant questions about the state of the maritime industry.

The mass merchants boat yards marinas in both manufacturers were all closing down.

Commercial port visits for shipping declined from an average of 28000 per day barely 16000 per day.

Nevertheless, we continue to ship product our key distributors remained open and sales continued both directly and through our airtime product service providers.

Port visits have steadily increased averaging roughly 22000, a day for the past few weeks.

International Oems the boat yards opened in mid May and U.S. Marine isn't Oems followed suit later that month.

As a result, Q2 really came in three flavors with a major shutdown in April continued softness in May and then a resurgence in June.

Our overall mobile connectivity sales were 29.2 million down just over 2 million from Q2 of last year.

A key contributors to this decline were slow retail sales of our marine satellite TV systems and a decline in content subscriptions following the shutdown of the cruise lines and luxury hotels.

Even so we built in ship more viasat units than we anticipated during the quarter. In fact, it was only a modest decline from a year earlier record high.

Airtime revenue was up 6% versus Q2 of last year as we increase our subscribers also by 6%.

Airtime margins were almost 37% that's up two points versus Q2, 2019, which represents positive progress and our strategy of adding subscribers to our HTS that work.

Well, we did see an increase in suspensions and churn as it started the quarter Reactivations are now outpacing suspensions as vessels returned to active service.

More importantly, we did not see a spike it adds a plans terminations during the quarter and ARPU for HTS Viasat products and services actually increased slightly driven by promotions that encourage airtime plant upgrades to higher data plans.

We achieved two milestones and their airtime group this quarter.

Our quarterly beside airtime revenue surpassed $20 million for the first time and more than 50% of RBC that subscribers are now in or HTS network.

That's a result as a pandemic demand for data increased driven by operational needs as well as crew welfare and as crew changes were halted.

We launched several new offers in April, including a discount on an airplane airtime plant upgrades in crew calling.

More than 430 vessels took advantage here kind plant upgrades contributing directly to our increased HTS network ARPU.

We've extended these offers through the ended the year in response to ongoing demand and hope to convert many of these to permanent airtime increases.

Our agile plants can activity as a service product continued to perform well during Q2 subscription revenues were up 13% sequentially from Q1 and up 72% from Q2 a year earlier.

Despite a slow start in April with all the port and travel restrictions, we achieved record installations for a single month in June.

Agile plans and new products sales contributed to the addition of a number of new customers with fleets in Turkey, Norway in Greece, along with a strong quarter in the Asia Pacific region.

Our performance financial stability in the strength of our services and sales channel enabled us to sustain our business while competitors in the market faltered and some gone into bankruptcy.

Aggressively pursuing opportunities this creates including winning a competitor's fleet with more than 30 vessels in Asia and successfully transitioning another fleet from a competitor to the KVH airtime, while we're using another brand of antenna that was already on board.

In the last year market product sales were slow for much of Q2 as marinas retail stores and boat builders were closed. However, we saw stronger sales in June as leaves as leisure channels began to reopen and consumer is headed back to their votes.

Apparently a day on the waters and appealing way to social distance, especially when you have TV and internet connectivity.

Barring further shutdowns, we expect the leisure market recovery to continue throughout Q3 in Q4.

As I mentioned earlier quarterly Newslink sales declined 50% roughly 1.5 million due to the shutdowns or the cruise lines and and resort hotels.

This segment of our business was hit very hard and represents about half of the year over year total company revenue decline.

Among commercial vessels. However, we continue to see demand for content and strong engagement by the crew. Many of these seafarers had been unable to rotate off their ships for upwards of six month.

Our unique KVH link content solution powered by T mobile calfed keeps them entertained and in touch with home well offering a strong differentiator in the industry. This is especially true now that's competing services such as Inmarsat sleep media were shut down.

We're also making progress with our KVH watch Aiotv connectivity as a service solution.

The vessel quarantines and harbored locked down over the last few months clearly illustrate the value of remote data access remote monitoring and the ability to troubleshoot, but that physical access to the vessel all of which are supported by our watch I O T service.

We have a number of beta installations under way along with a large pipeline of prospects.

Following the introduction of our new remote export intervention capability, a few weeks ago.

This is a long term strategic initiative for KVH, we worked hard to keep developing momentum on track during our cost reduction efforts.

Moving onto our inertial navigation market product revenue for the quarter was up 9% to 7.2 million versus 6.6 million in Q2 of last year. The increase was powered largely by growth in our TACNAV business, while other inertial system sales declined slightly from Q2 last year.

Overall, our defense business outlook is strong two weeks ago, we announced a new international order worth more than $10 million for our TACNAV flawed navigation system.

All hardware deliveries for this order are scheduled to take place.

In Q4 of this year in 2020.

This is one of the three large defense orders that we discussed in prior earnings calls there's other potential international deals are still out there.

And some domestic ones, although the timing has been slowed due to the pandemic and low oil prices, which impacts customers in the middle East.

Delivering a solution for the U.S. militaries assured physician navigation and timing, where APN T program.

It's one of our major strategic goals for 2020.

We'll be supporting the next round of view US Army PMT trials, just scheduled to take place now in Q4.

Within the inertial systems market International sales slow dramatically early in the quarter, but then started to recover if countries emerge from lock down.

Of the $30 million in backlog for inertial business 25 million is scheduled for delivery in 2020.

Our most exciting inertial news for the quarter was of course, the shipment of our P. 17 75 IMU.

It has a new pick inside this is the first production unit I am you to the equipped with our new photonic chip technology and it represents a huge milestone for the company.

Three years ago, we set out to revolutionize fiber optic gyro technology and manufacturing.

After introducing that photonic chip will pick last year, we set a goal to ship the first inertial system using the technology by the end of Q1, and we did the next step was to move it into commercial production by the end of Q2, which we also did the P. 17 75 represents the first of these new production systems with the pick inside.

The very high performance system for use in both precision and high GE applications, such as the rockets being designed by our first customer.

Now, we're executing our plans and incorporate the photonic chip technology into all or inertial products by the end of 2020.

So in conclusion I'm incredibly proud of the job our team did and delivering these results in the face of the most trying quarter in our company's history, keeping the factories running staff working remotely juggling supply chains, and delivering and installing hardware and poor it's all over the world with amazing.

However, the ongoing impact is a pandemic on the global economy remains uncertain. Therefore, we will continue to proceed cautiously monitoring the overall health of our business closely and maintaining the cost disciplines that we implemented at the end of the first quarter.

As things continue to stabilize will focus on executing our strategic initiatives that will be the foundation for revenue and earnings growth in 2021 and beyond.

And now I'll turn the call back over to done for more detail on the on the financial results Don.

Thank you Martin.

First in order to put our second quarter results in context, I think we need to be call. The global economic environment, we're facing us the second quarter began.

M.S. still facing today.

Given the impact that Kohut 19 has had on nearly every aspect of our business. We believe we've made excellent progress on almost all funds for the quarter.

That said I'd like to walk through some of my second quarter results in more detail.

As Martin mentioned earlier, our second quarter revenue came in at $36.9 million as compared to $39.7 million recorded in the second quarter 2019.

Revenue from our mobile connectivity segment decreased $2.3 million and our national navigation revenue decreased point $5 million from the prior year second quarter.

Product revenue for the second quarter was $13.9 million a decrease of $1.2 million are 8% from $15.2 million the second quarter over the prior year.

By segment product revenues and our National Navigation segment increased just over $600000 are about 9% as our five and OEM revenues decreased slightly about $200000 compared to the prior year, while TACNAV sales increase about $800000.

And our mobile connectivity segment product sales decreased by about $1.9 million, a 22% driven primarily by $1.5 million decrease and track visions House cost. This product is largely targeted to lesion marine industry, which was and continues to be impacted by the pandemic.

Several spending for the second quarter was $23 million.

A decrease of $1.6 million or 6% from $24.5 million in second quarter supply yeah.

By segment service revenues and our inertial navigation segment decreased just have a $1.1 million or about 70%, primarily due to lower contract and in our engineering service revenue.

And I'm all connectivity segment service revenues decreased by about 400000, Osborne, 2%, primarily due to a $1.1 million increase and mini VSAT airtime revenue offset by 900000, a decrease in our media business and a 500000 500000 dollar decrease in contract engineering services.

Our media business was and continues to be significantly impacted by the travel restrictions associated with Covance 19.

I'm going to be sat broadband near time running them increased to over $20 million $20.2 million growing approximately 6% from the prior second quarter driven by the continued success in our I've got plans program and by demand for our HTS network.

He sat shipments in connection with the agile program approximated six to precise about total unit shipments and 72% of a total commercial shipments this quarter.

Hi job plans now represents 32% of all mini VSAT airtime subscribers.

For the second quarter of consolidated gross profit margin was 35.2% as compared with 29.5% in the second quarter last year.

From a segment perspective, our mobile connectivity gross margin was 34.8% up around six percentage points, primarily due to the impact last year about 2.1 million dollar inventory reserve the required relating to our Tracfone VIP products as we decide that along our promote sales these products.

Instead, focusing our efforts on migrating customers to our HTS networking products.

The growth of our HTS network also contributed favorably to our gross margin improvement.

Our inertial navigation gross margin increased about four percentage points to 36.7% primarily due to higher TACNAV sales.

Operating expenses for the quarter was $16.4 million down 10.6% from $18.4 million in second quarter of last year in part due to the multiple steps we took to mitigate the impact of the pandemic.

The second quarter. These changes in revenue margins and operating expenses, resulting in a loss from operations on $3.4 million compared to the loss of $6.7 million last year.

Mobile connectivity segment generated an operating profit from $600000 compared with an operating loss of $2.4 million last year, while our inertial navigation segment had an operating profit of $200000 to the quarter compared with an operating loss of $21000 last year.

And our unallocated loss was about the same at $4.2 million this year compared to $4.1 million last year.

The second quarter, our net loss was the acquired $6 million compared with net loss of $3.8 million last year.

On a non-GAAP basis, which excludes amortization of intangibles stock based compensation Chen transaction related and other nonrecurring legal fees.

Nonrecurring inventory reserves other nonrecurring costs foreign exchange transaction gains and losses, the tax effect, well going and changes in our valuation how those tax allowance evaluation along with our tax adjustments, we had a net loss of $1.6 million compared to the net loss of $1.7 million last year.

Yes, the second quarter was a net loss of 20 cents per share compared to net loss 19 cents per share in the same period last year.

Non-GAAP EPS for the second quarter was a loss of nine cents compared to non-GAAP EPS loss of 10 cents last year.

Our adjusted EBITDA for the quarter was breakeven compared with last I loss of $900000 the quite in the second quarter 2019.

For a complete reconciliation of our non-GAAP measures. Please refer to our earnings release I was published earlier this morning.

Total backlog at the end of second quarter was $21.6 million of which approximately $15.6 million is scheduled to be delivered during 2020.

Backlog for National navigation products and services at the end of June was approximately $20.2 million of which approximately $14.2 million is scheduled to be delivered in 2020.

Which includes about $11.4 million a five products alone.

This but not include the $10 million TACNAV order, which received recently in July.

Net cash generated by operations was 100000 I was positive this year compared to $600000 used in operations the second quarter of 2019.

Capital expenditures with $8.8 million in the quarter.

So to conclude I'd like to say that given the uncertainty we faced at the start of the quarter. We're pleased with our second quarter results.

Of course ball, we believe our business what stood the economic turmoil resulted from the pandemic very well it sounds too early to declare victory the nature magnitude and duration of the cold 19 pandemic continues to evolve and may yet have immaterial adverse effect on our revenues and results of operations and our financial condition.

The extent to which the pandemic will impact our business will depend on many factors beyond our control, including for example, the ability of governments and medical organizations worldwide to control the spread of the virus and develop an effective vaccine and treatment.

So we will mean diligent and capital the Kenai on costs and efficiencies to show, we continue to be as well prepared as possible to deal with whatever comes next with respect to the global health crisis.

So this concludes our prepared remarks, and now I'll turn the call back over to the operator to open the line for the two when a portion of this morning's call operator.

Thank you if you'd like to ask a question. Please signal by pressing star one and your telephone keypad hearing using a speakerphone. Please make sure. Your mute function is turned off to let your signals reach or quit.

Press Star one to ask a question.

We'll take our first question from Rick Prentiss with Raymond James.

Hi, good morning, guys.

Hey, Rick.

Hey.

Sure you certainly navigated the store because it may seem very well in the quarter a view your employees and families continue to say well.

Thank you.

For the first touch on.

The recovery that you saw the resurgence you saw in June one has continued into July was June kind of step demand or is it good levels in July see similar levels, what's the kind of the trends in June or July.

Yeah, it varies a little bit by market. So on the leisure side I think there's definitely a pent up demand in June and normally by July in a normal year things start to slow down significantly as people start using their boats as opposed to.

They're buying new things for their boats, but.

This year it seems to have been delayed so July continued to be strong compared to normal July for the leisure markets.

For the commercial markets I think you what we saw is that.

There were obviously deals in the pipeline and things that had been in progress and those old continue to pay so there wasn't really a.

The same level of free surgeons as much as just sort of a continuation of things that were in process. So.

I don't know if that answers your question, but it.

It does vary by by segment.

Sure sure.

And as you think about it now you mentioned the backlog the 25 million backlog in 23 is made up of the.

The 15.6, and then plus the 10 million TACNAV orders at pretty good about it.

Exactly right yeah.

Okay any thoughts on how they're shipping tiny will play out get and coated 19 for that backlog as it were rear end loaded in the year or even get loaded.

Yeah. The TACNAV order is scheduled for Q4.

And then of the fog business is more uniform throughout the second half of the year.

Okay, and any bad debt issues I mean, clearly you guys did pretty well, but there are some issues out there so oil and gas and leisure how is bad debt lucky and the reserves.

Bad debt.

And so we're pleased to say, we really haven't seen skipping disruption.

And the cash collection.

Process, but many of our customers I mean, a little a few customers smaller customers are asked of as far as I said in the first quarter call accommodations, which we've made I make and they basically abide by those who buys terms. So now we haven't seen.

Any real change and collection activity I would tell if at our bad debt reserves need to change.

Okay.

And it certainly seems like in this environment, you touched a little bit that the KVH watched products to become even more compelling.

Is it really just tough to make.

Sales and visits and pitches during this environment, but we see that there is value that product she started jumping off the page.

Right, Yeah. So I think that you know the the interest in the product than the you know the pipeline of prospective customers and partners is is larger than we had anticipated. So strong demand, but you know the peso feel getting actually people to do installations and Dan.

Most and then life you know visits.

Is it was definitely impacted during Q2 so.

Hopefully that starts to change now.

The new builds in China people are visiting China again, you know, whereas before a lot of customers simply refused to travel. So I think that's starting to open up again so.

Our goal for Q3 is to get a.

Life, installs and and real customer did or potential customer feedback so.

There's a lot of demand for this right now because of the the pandemic in the whole value proposition of being able to access data remotely and see what's going on in vessels and then to be able to intervention in a do face to face for mode experts, you know who will walk people through.

Appears on board you know even in the middle of the Ocean.

But look at and.

He's obviously the service business hung in there very good which it should resilient needed service.

Or your thoughts are on the guidance obviously on the year in color you gave guidance you've pulled on ones. There's nobody knew the depth and duration you've had a really good.

To to navigate Threeq you July sounds like it's shaping up love it.

So a lot of uncertainty out there what are the thoughts on.

In order of magnitude either on third quarter, if not for the full year.

Yeah, I think that after we get through this quarter I think we'll be in a position to have more visibility and they'll give guidance for Q4 and going forward. So.

Yes, I think you know it's hard to believe it's only been a few months, but it's it does feel like there's still a lot of theater thing. So we don't know yet so but I do feel feel much more confident than we were either three months ago and in the way things are going.

It's significantly better than the we feared so.

Which is great news.

Okay and last one from a probably what kind of it.

30000 foot do or 2000 kilometers you a lot of news in the market about the new Leos, Spacex Starway oneweb coming out of bankruptcy would be like with the British government.

Hyper getting some FCC approval yesterday, what are your thoughts as far as with the new Leos mean into your business model.

Well I think that there's definitely going to be a you know if someone's going to be successful in that Leo market. You know, we're not quite sure yet who will be so we're we're looking at all of them.

Some of them are targeting.

You know like if you look at Spacex you know they don't have inner satellite link so they're very much tied to land base operations. Now eventually the plan is to replace the 600 satellites have already launched.

With satellites that do have that capability, but until that happens. The you know it wont work over the oceans.

Because you need ground stations that are there a nearby so they're all they're all very different they architectures youve been studying them looking at a different options. Some of them look really attractive you know for our business models and other ones are no more attractive for you know for terrestrial use.

Okay, and so jury's still out lot of worked through but she makes more supply into the marketplace.

Yep.

Yeah, the removal of the no one's told us that they have too much bandwidth and slower service, though.

<unk>.

[laughter] definitely so again I wish to fade away employees to say well during these difficult times, where I just see navigate though.

Thanks, Rick we appreciate that though have picked it back.

Our next question from Rich Valera with Needham and company.

[noise]. Thank you let me add my congratulations for navigating through.

Yes, the tough environment very well.

So a question on the five.

I'm sorry, the 25 million backlog, that's supposed to ship in international in the back half can you say how much of that is just fog versus TACNAV.

Sure I think does get those numbers handy so that.

It's.

It's probably.

11 million protective of tough my head.

The rest being five done.

Yeah, I just know second.

[noise] [noise] yeah. So.

Bob is you know in the neighborhood of $11 million.

And.

Pack now.

Let's see yeah. This is there and I'm sorry. This is a I'd say the bottom cognizant <unk> a neighborhood of $11 million.

And TACNAV when you include the.

Well I thought excuse me the they've got the the big military order that we announced well with beer neighborhood of our.

A $12 million.

Got it so that's I guess, that's 23 million is their service in there or something.

Another OEM with the dog man potash, Yeah, that's a total backlog for the whole company.

Got it Okay fair enough that's helpful normally for that business, yeah normally the reset business doesn't have backlog, but it does have some you know because it's normally a book and ship kind of business, but there is right.

It's not zero yep.

Got it okay.

So just wanted to follow ups believes and similar Rick's question sort of the outlook imminent I think if you're looking at Q3.

First Q2, it sounds like at the margin most businesses should have a better environment. I think we understand should have been dynamics around and air show, which is really going to be around timing of shipments, but looking at sort of the commercial side. It seems like you have got.

At least as good if not better conditions for the whole of the September quarter, then likely you had for the whole of the June quarter.

So I'm just trying to figure out is there any reason we wouldn't expect there to be maybe some quarter over quarter improvement in the commercial side of the business.

Any anything we should think about there that might make keep that.

Business from improving quarter over quarter.

Right, Yeah, I think that you know borrowing you know additional crazy things happening in 2020, you know we do expect things to continue to improve here in Q3, and then you've got a good backlog for Q4, so we have better visibility.

You know for Q4 right now so, but you're right I think as you know we're sit here today, we do expect improvement.

How much improvement will you'll see is difficult to predict but you know right now it looks like Q3 should be better than Q2 and.

You know right, but and then traditionally it's not a very strong quarter. So.

So that's actually an improvement.

Right right.

And then Don you you you mentioned the Opex you've been taking some.

Fairly extraordinary measures I think take to keep them.

Keep them under control.

Should we expect it knows measures to abate somewhat in Threeq, you or should we expect flattish opex, how should we think about opex trending over the near term here.

I think opex in the.

Third quarter will be a little higher than second quarter fourth quarter, maybe a little higher than not I mean I think.

Well start to see.

Maybe a little more travel and but but the you know the overall cost controls that we put in place in the second quarter will stay in place I think the growth will be kind of unnatural girl.

You know, but we'll still be you know really you know cautious about where we spend money on.

Right.

Understood.

Good morning, just wanted to ask you about the the P. 17 75, congrats on getting your first commercial shipments there with the Pic technology.

Embedded.

You know for a customer looking to buy.

I knew for new whats the difference there going to see.

In that in that product versus the traditional product using you know your traditional technology from a price or performance perspective.

Well it initially there's there's not a lot of difference on you know in terms of the face value spec. So what we've done is weve.

Announced products that have similar performance.

Even though there's the performance internally and is in fact, better. So what we wanted to do is to get a quarter's worth of Ah production in before we tighten the spec that didnt want this to become you know yield issue for manufacturing, but so far we've seen we've seen the opposite so you know the yields are very very good performances super concerned.

So as we you know the plan is that we're going to put this into some additional products were going to add some improved accelerometers.

And then we'll be announcing further spec improvements.

As as the year progressive.

So it's it's going up remarkably well so we're very very please.

Got it said Sudan as you get it you're able to.

Advertise the product with the with a better specs.

I guess one it gives you some competitive differentiation doesn't doesn't give you pricing power is that sort of not what you're looking for at this point more about market share versus maybe try to get you know any pricing.

Yeah, I think that as as it progresses will get us selectively introduce lower costs models as well, but what we didn't want to do is too you know just take all the cost savings and lower the price and not get improve margin. So for the short term a we're going to see so.

Margin improvement.

And then as we launch additional new products, we'll try and differentiate it further sit at the high end becomes even more high end and with better excels and then there's gonna be room for new products at the mid and low and range, which we think will expand the market.

Lower price points.

Great I just want to starting.

Good.

No that's not that I want to let you finished thinking.

Yeah, No I was just gonna say and that's where we're starting this quarter.

And you know hopefully by the end of the year, we'll we'll have the the migration finished so he'll also as we're doing this we're also mindful that we want to.

Worked down or inventories, because we didnt necessarily know exactly when we'd be in full rate production with the photonic chips into this brand new so we want to if you'd be able to work down inventory no not at the write off any old products. So all that's happening now as we transition so and we think that will be.

Okay.

The quarterly.

The process throughout the next two quarters.

Got it makes sense and just one final one for me I think for Don can you give this split between Socgen TACNAV for the quarter and inertial.

Sure.

So Bob sales for the quarter or.

About six little over $6 million on TACNAV, all with little of online boss.

Got it thank you.

Thank you gentlemen.

Great.

Oh, good or next question from Chris Quilty Quilty analytics.

Hi, Thanks, Darren wanted to just confirm did you say that the let me be sad airtime margins were 37% in the quarter.

Just under <unk>.

Just better that's that's a nice five point from a from Q1 is that it's it does that feel sustainable on a go forward basis. It was there anything you know one time nature in there.

They're already there always.

Always some onetime impacts positive and negative, but I think that trend as we may not get quite that high I'm in the third quarter, but the trend is certainly heading in that direction.

Well I think that yeah. So you know we didn't have the bump from the you know well you know what we internally color coded promotion, where we you know we've got people to buy bigger.

Plans, because a cruise weren't able to change. So there were some risk good that doesn't sustain you know so some of that growth was due to these do promotions.

And as the as we continue to add subscribers you know, we will be incrementally, adding bandwidth throughout the network. So it won't be continuous progression, but it's a really nice do you know trentino, it's not going to be.

To that much every quarter, you know and there may still bounce around a little bit but the general overall trend is very encouraging.

And so you you did mention airtime can you give us an update on where you see the market today I mean, there has been.

Yeah, some bankruptcies with Intelsat, which is a large partner of yours and ER.

You know incremental K., you and K capacity coming on the market how do you feel about both the availability of capacity.

The airline centric models are not using as much in pricing trends and how that may impact margins on a go forward.

Yeah, I think you know we're fairly locked into our you know you know for at least for 2020 in terms of fudo what.

What we need in what will be buying overpaying for so we we have pretty good idea of where margins are so but you're right. The long term trend could be favorable so that you know overtime, we could see lower costs.

But typically what happens is that you know it almost never resulted in improved margin because you know if the bandwidth costs go down people buy more bandwidth, but at lower prices and you know so the margins I think you know our long term strategic goal of around a 40% gross margin is probably.

You know the high end of where we'll be I don't see you know with the market dynamics, you know getting to much higher margins than that.

Just because of you know competitors and the way things work, so, but you know for US 40% gross margins <unk> you know our our ideal I mean to assist you know like our sweet spots, we think that that's going to be great.

I understand.

And when the content business.

Pretty steep fall off there are you seeing with vessel activity picking up you know the content starting to also pick up because that's nice high margin business for yet.

Right, Yeah, so the content business in our visa that market has increased.

Greece in Q2 and continues to increase the content business that declined to though by 50% was our newslink print newspapers for cruise ships.

In hotels, so that's a non airtime related content business and that was down as I said, a millionaire half color. So so half of the total companies revenue decline in Q2 was from that a cruise ship newspaper business.

That's not coming back [laughter]. Please yeah yeah.

That is true enough.

So last quarter, you had talked about the fact that.

Some of your competitors are shedding customers and you were dealing with an issue of third party antennas and it sounds like.

You solve that problem and brought on some customers.

Can you talk about weather.

It was that doing it some sort of a degradation in performance or.

As it technically worked out well it does that provide a easier go forward path or targeting a competitive wins.

Yeah, I think who is in this case it was a little bit opportunistic on our part you know there is transitioning the air time with easier than visiting every single vessel and you know flipping them over to agile plans.

This particular customer already had some agile plans to so would I don't think it's a it's not a strict the change in our business strategy, but from a technical point of view, we're able to get it working and you know from the air time and data rate speeds everything worked fine. What you lose is the you know sort of enhanced tools and visibility.

Monitoring in a lot of the value added services.

Although we think are really key differentiator so.

It's not going to be our business model going forward, but it's it's a great tool to have when you need to flip a fleet quickly.

I understand and final question back to the tech product.

Are you still investing in Miniaturizing me electronics, and how is that coming along and you know any marginal updates silver with long term on autonomous vehicle.

Yeah. So the plan is still to miniaturized electronics right now we're we've developed a new generation of electronics that were that were just completing you know so but this is.

This new version is not yet miniaturized, but it's a brand new clean sheet design, you know with the latest and greatest you know technology for F P.G. A's and Dsps and 80 D.

So its <unk> that's the precursor to then going to a custom electronic chip. So we wanted to do the redesign first get that into production. This is you know I'm going into a new product starting in Q4, and then that will be the basis for the or for the Ministry.

As a nation and the custom chip.

So as far as the automotive.

Not much has happened in Q in Q2 on that front there hasn't been a lot of development. So I think there was a lot of.

So nothing new to report during Q2 as far as you know [noise].

Self driving cars and autonomy. So we expect that you know those companies to reemerge here during the current quarter.

I understand and actually I do have one more question back today PMT.

Is that program progressing on schedule that you anticipated or kind of feels like it. It's go figure its dragging out once again and this yeah. This is Andy.

Yep.

No you're right. The I'm. So there were some tests that you know that they've tried to since we like a three week you know test in the in the desert and then they scale that back because of colder than you know it's.

Now scheduled for Q4 is only going to be three days and with you know so so that.

Definitely has had an impact on on schedule on the other hand somebody other domestic programs are seemingly unaffected so.

Hopefully we'll have some some good news there.

I understand and that's even in light of I think we've had an executive order and we've got the Senate getting involved with the legato situation and nobody's lit a fire on their D.A.M.T. program office.

Yes feel free to allow the call and therefore Oscar [laughter].

All right.

So what is happening you know and you're right they've had all these high level you know.

Indications that this is the top priorities they absolutely have to get it done.

So it's just a question a win.

The normally programs.

Yep.

So in the meantime, you know we've got these other tack that programs. We've got other things in the fire. So you know and the PMT program was was not in our original guidance. When we gave guidance for the year. So we haven't seen anything fall out let's put it that way.

Okay, very good ER and congrats on the quarter guys. This is this is all right and I surprised to extract.

I think it.

No further questions operator.

Great further question.

Okay. Thank you.

As always feel free to contact either Don or myself directly and thanks first thanks for listening.

Today's call. Your participation you may now disconnect.

[noise].

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Good day.

Welcome to the KVH industries.

Yeah.

Earnings Conference call today's call is being recorded.

At this time I would like to turn the conference.

Chief Financial Officer. Please go ahead.

Thank you operator.

Good morning, everyone.

Thanks for joining us today discussed KVH Industries' second quarter results drug quoted in the earnings release, we published this morning.

This call is marketplace and again, a couple years, Chief Executive officer, and but well on our Chief operating officer.

You are actually which is available on our website at <unk> Investor Relations Department.

Like less than 12 recording of today's call you can access a webcast replay on our website.

If youre looking via the web <unk>, because my questions too high or do you gauge dot com.

This conference call contain certain forward looking statements subject to many assumptions and uncertainties.

They caught our actual results could differ materially from those expressed in these days.

Undertake no obligation to update or revise any forward looking statements.

We'll also discuss certain non-GAAP financial measures.

And got missions abuse Nightdress press release as bowls reconciliations of these non-GAAP measures to comparable GAAP measures.

We encourage you to review the cautionary statements made I like to see filings specifically those under the heading look soccer's <unk> well first quarter form 10-Q filed on me first not 2019 form 10-K, which was filed on February 28, and a form 10-Q, the second quarter, which we expect to be filed later today.

The companys out of that they see filings are available Lucky Queen Investor information section of our website.

And at this time I'll, let the turn the call what Martin Martin.

Thanks, Dan Good morning, everyone. Thank you for joining us today.

So that's what's the case for most companies we entered the second quarter with incredible uncertainty relating from the Cobot 19 global pandemic.

I'm happy to say, however, that while we anticipated and prepared for a range of scenarios both of our business segments held up well in the face of these global health and economic challenges.

Quarterly revenue was 37 million down only 7% compared to Q2 last year or be sat shipments remained strong or airtime revenue continue to grow or fog attack that sales were healthy gross margins expanded.

We're very pleased with the results for the quarter the face of the challenges we all experienced.

We're also worked very hard to manage our operating expenses, while sustaining our business.

Both of our factories ran a full capacity throughout the second quarter, we implemented and continue to maintain an array of health and safety initiatives, resulting to know missed shipments they'll health issues no outbreaks amongst our employees around the globe.

We managed our supply chain aggressively and as a result your products on the shelf. So we continue to be able to deliver.

We acted early decisively.

Due to operational spending in almost every area. In addition, we temporarily reduce pay across the board.

Yes, you know those making under 50000.

The largest reductions were for our executive team. These steps enabled us to avoid layoffs. During Q2 I know layoffs are planned for the future.

That's a result of these efforts we improved our EBITDA from continuing operations by $900000 versus a year ago getting after break even for the quarter.

We got our loss it half sequentially from Q1 to this year.

Together these efforts enabled us to maintain a strong cash position of $44 million.

We're also able to significantly increase our total backlog, which is now over $30 million across all of our markets.

These results validate our strategy of diversification, our combination of defense and commercial as well as product and services enabled us to weather what was hopefully the worst part of this crisis.

By continuing to deliver hardware and installed products, despite port closures and travel restrictions. We believe we gained market share on our competitors, while there's still much uncertainty ahead, we're well positioned for the future.

Now I'd like to share some of the details beginning with our mobile connectivity segment.

We ended the quarter facing significant questions about the state of the maritime industry.

Mass merchants boat yards marinas in both manufacturers were all closing down.

Commercial port visits for shipping declined from an average of 28000 per day, the barely 16000 per day.

Nevertheless, we continue to ship product our key distributors remained open and sales continued both directly and through our airtime product service providers.

Ford visits have steadily increased averaging roughly 22000, a day for the past few weeks.

International Oems the boat yards opened in mid May and U.S. Marine isn't Oems followed suit later that month.

As a result, Q2 really came to three flavors with a major shut down in April continued softness in May and then a resurgence in June.

Our overall mobile connectivity sales were 29.2 million down just over 2 million from Q2 last year.

Even so we built in ship more viasat units than we anticipated during the quarter. In fact, it was only a modest decline from a year earlier record high.

Airtime revenue was up 6% versus Q2 last year as we increase our subscribers also by 6%.

Airtime margins were almost 37% that's up two points versus Q2, 2019, which represents positive progress in our strategy of adding subscribers to our HTS that work.

Well, we did see an increase in suspensions and churn at the start of the quarter Reactivations are now outpacing suspensions as vessels returned to active service.

More importantly, we did not see a spike it adds a plants terminations during the quarter and ARPU for HTS Viasat products and services actually increased slightly driven by promotions that encourage airtime plant upgrades to higher data plans.

We achieved two milestones maritime group this quarter.

Our quarterly be said airtime revenue surpassed $20 billion for the first time and more than 50% of RBC that subscribers are now and our HTS that work.

That's a result of the pandemic demand for data increased driven by operational needs as well as crew welfare and as crew changes were halted.

We launched several new offers in April, including a discount an airplane airtime plant upgrades and grew calling.

More than 430 vessels took advantage.

Plant upgrades contributing directly to our increased HTS network ARPU.

We've extended these offers through the ended the year in response to ongoing demand and hope to convert many of these to permanent airtight increases.

Our agile plants connectivity as a service product continued to perform well during Q2 subscription revenues were up 13% sequentially from Q1 and up 72% from Q2 a year earlier.

Despite a slow start in April with all the port and travel restrictions, we achieved record installations for a single month in June.

That you'll plans and new product sales contributed to the addition of a number of new customers with fleets in Turkey, Norway in Greece, along with a strong quarter in the Asia Pacific region.

Our performance financial stability in the strength of our services and sales channel enabled us to sustain our business while competitors in the market at faltered.

Some gone into bankruptcy.

Aggressively pursuing opportunities this creates including winning in competitors fleet with more than 30 vessels in Asia and successfully transitioning another fleet from a competitor to the KVH airtime, while we're using another brand of antenna that was already on board.

And the last year market product sales were slow for much of Q2 as marinas retail stores and boat builders were closed. However, we saw stronger sales in June as leaves at leisure channels began to reopen and consumers headed back to their votes.

Apparently a day on the waters and appealing way to social distance, especially when you have TV and internet connectivity.

Barring further shutdowns, we expect the leisure market recovery to continue throughout Q3 in Q4.

As I mentioned earlier quarterly Newslink sales declined 50% roughly 1.5 million due to the shutdowns of the cruise lines and and resort hotels.

This segment of our business with hit very hard and represents about half of the year over year total company revenue decline.

Among commercial vessels. However, we continue to see demand for content and strong engagement by the crew. Many of these seafarers had been unable to rotate off their ships for upwards of six month.

Our unique KVH link content solution powered by the mobile cath keeps them entertained and in touch with home will offer and a strong differentiator in the industry. This is especially true now that's competing services such as Inmarsat sleep media were shut down.

We're also making progress with our KVH watch Aiotv connectivity as a service solution.

The vessel quarantines at Harvard locked down over the last few months clearly illustrate the value of remote data access remote monitoring and the ability to troubleshoot, but that physical access to the vessel all of which are supported by our watch Aiotv service.

We have a number of beta installations under way along with a large pipeline of prospects.

Following the introduction of our new remote export intervention capability, a few weeks ago.

This is a long term strategic initiative for KVH, we worked hard to keep development momentum on track direct cost reduction efforts.

Moving onto our inertial navigation market product revenue for the quarter was up 9% to 7.2 million versus 6.6 million in Q2 of last year.

The increase was powered largely by growth in our TACNAV business, while other inertial system sales declined slightly from Q2 last year.

Overall, our defense business outlook is strong two weeks ago, we announced a new international order worth more than $10 million for our TACNAV Faade navigation system.

All hardware deliveries for this order a scheduled to take place.

In Q4 of this year in 2020.

This is one of the three large defense orders that we discussed in prior earnings calls there's other potential international deals are still out there.

And some domestic ones, although the timing has been flowed due to the pandemic and low oil prices, which impacts customers in the middle East.

Delivering a solution for the U.S. militaries assured physician navigation and timing or a PMT program.

It's one of our major strategic goals for 2020.

We'll be supporting the next round of US Army APN two trials just scheduled to take place now in Q4.

Within the inertial systems market International sales slow dramatically early in the quarter, but then started to recover as countries emerge from lock down.

Of the $30 million in backlog for inertial business 25 million is scheduled for delivery in 2020.

Well most exciting international news for the quarter was of course, the shipment of our P. 17 75 IMU.

It has a new pick inside this is the first production unit I am you to the equipped with our new photonic chip technology represents a huge milestone for the company.

Three years ago, we set out to revolutionize fiber optic gyro technology and manufacturing.

After introducing that photonic chip or pick last year, we set a goal to shift the first and Airseal system using the technology by the end of Q1, and we did the next step with to move it into commercial production by the end of Q2, which we also did the P. 17 75 represents the first of these new production systems with the pick inside.

The very high performance system for use in both precision in high GE applications, such as the rockets being designed by our first customer.

Now, we're executing our plans and incorporate the photonic chip technology into all our inertial products by the end of 2020.

So in conclusion I'm incredibly proud with the job our team did and delivering these results in the face of the most trying quarter at our company's history, keeping the factories running staff working remotely juggling supply chains, and delivering installing hardware and ports all over the world with amazing.

However, the ongoing impact as a pandemic on the global economy remains uncertain. Therefore, we will continue to proceed cautiously monitoring the overall health of our business closely and maintaining the cost disciplines that we implemented at the end of the first quarter.

Things continue to stabilize will focus on executing our strategic initiatives there'll be the foundation for our revenue and earnings growth in 2021 and beyond.

And now I'll turn the call back over to done for more detail on the other financial results Don.

Thank you Martin.

First I wanted to put our second quarter results in context, I think we need to be called the global economic environment, We're facing us the second quarter began.

And this still facing today.

Given the impact that core 19 has had on nearly every aspect of our business. We believe you've made excellent progress on almost all funds for the quarter.

That said I'd like to walk through some of our second quarter results in more detail.

As Martin mentioned earlier, our second quarter revenue came at $36.9 million as compared to $9.7 million recorded in the second quarter 2019.

Hi, My mobile connectivity segment decreased $2.8 million and our national obligations I don't know decreased point $5 million from the prior second quarter.

Product revenue for the second quarter was $13.9 million a decrease of $1.2 million are 8% from $15.2 million the second quarter over the prior year.

By segment product revenues and our National Navigation segment increased just over $600000 are about 9% is our fog and OEM revenues decreased slightly about $200000 compared to the prior year, well TACNAV sales increase about $800000.

And our mobile connectivity segment product sales decreased by about $1.9 million, a 22% driven primarily by $1.5 million decrease and track vision south across this product is largely targeted to allegion marine industry, which was and continues to be impacted by the pandemic.

That was off of a second quarter was $23 million.

A decrease of $1.6 million or 6% from $24.5 million in second quarter quite yet.

By segment service revenues and our national obligations segment.

Yes, just over $1.1 million or about 70%, primarily due to lower contract and in our engineering service revenue.

And I'm all connectivity segment service revenues decreased by about 400000 Osborne, 2%.

Now I do totaled $1.1 million increase and many of you sat yet time revenue offset by 900000, a decrease in our media business and a 500000 $500000 decrease in contract engineering set us up.

Our media business was and continues to be significantly impacted by the travel restrictions associated with called the 19.

I'm going to be sat broadband near time, rather than piece to over $20 million $20.2 million growing approximately 6% prior second quarter.

Given by the continued success of our I've got plans program and by demand or HTS network.

He sat shipments in connection with the agile program approximated, 60% about total unit shipments and 72% about total commercial shipments this quarter.

Hi, John plans now represents 32% of all mini VSAT airtime subscribers.

For the second quarter consolidated gross profit margin was 35.2% as compared with 29.5% in the second quarter last year.

From a second perspective, our mobile connectivity gross margin was 34.8% up around six percentage points, primarily due to the impact last year about $2.1 million inventory reserve recorded related Quad Trackball got p. products as we decide that along our promote sales these products instead, focusing our efforts on my way.

Customers to our HTS networking products.

The growth of our HTS not will also contribute favorably talk gross margin improvement.

Our inertial navigation gross margin increased about four percentage points to 36.7% primarily due to higher TACNAV sales.

Operating expenses for the quarter was $16.4 million down 10.6% from $18.4 million on second quarter of last year in part due to the multiple steps we took to mitigate the impact of the pandemic.

The second quarter are these changes in revenue margins and operating expenses, resulting in a loss from operations of $3.4 million compared to the loss of $6.7 million last year.

Our mobile connectivity segment generated an operating profit of $600000.

And with an operating loss of $2.4 million last year, while our national Navigation segment had an operating profit of $200000 per quarter compared with an operating loss I'm talking about and all of last year.

And our unallocated loss with about the same at $4.2 million this year compared to $4.1 million last year.

The second quarter net loss was $3.6 million compared with net loss of $3.3 million last year.

On a non-GAAP basis, which excludes amortization of intangibles stock based compensation Shan transaction related and other nonrecurring legal fees nonrecurring inventory reserves other nonrecurring costs foreign exchange transaction gains and losses, the tax effect, well going and changes in our valuation how the tax allowance.

Evaluation of all with L. tax adjustments, we had a net loss of $1.6 million compared to the net loss of $1.7 million last year.

Yes, the second quarter was a net loss of 20 cents per share can pick the net loss 19 cents per share in the same period last year.

Non-GAAP EPS for the second quarter was a loss of nine cents compared to non-GAAP EPS loss of 10 cents last year.

Our adjusted EBITDA in the quarter was breakeven compared with last I loss of $900000 quite in the second quarter 2019.

Well complete reconciliation of our non-GAAP measures. Please refer to our earnings release I was published earlier this morning.

Total backlog at the annual second quarter was $21.6 million of which approximately $15.6 million is scheduled to begin lover down 2020.

Backlog for National navigation products and services at the end of June was approximately $20.2 million.

Which approximately $14.2 million is scheduled to begin love it in 2020.

Which includes about $11.4 million five products alone.

This but not include the $10 million TACNAV order, which received recently in July.

Net cash generated by operations was $100000 positive this year compared to $600000 used in operations the second quarter 2019.

Capital expenditures with $8.8 million Macquarie.

Don't include I'd like to say that given the uncertainty we faced at the start of the quarter. We're pleased with our second quarter results.

Of course mall, we believe our business what split the economic turmoil resulted from the pandemic very well, it's really too early to declare victory the nature magnitude and duration of the covert 19 pandemic continues to evolve and may yet have immaterial adverse effect on our revenues are results of operations and our financial condition.

The extent to which the pandemic will impact our business will depend on many factors beyond our control, including for example, the ability of governments on medical organizations worldwide to control the spread of the virus and develop an effective vaccine and treatment.

So let me diligent and cap all the kenai on costs and efficiencies to show, we continue to be as well prepared as possible to deal with whatever comes next with respect to the global health crisis.

So this concludes our prepared remarks and now it's on a call back over to the operator, let's open the life of the two when a portion of this morning's call operator.

Thank you if you'd like to ask a question. Please signal by pressing star one and your telephone keypad.

Speakerphone. Please make sure you hear me assumption is turned off to let your signals return.

Again press Star one to ask a question.

And we'll take our first question from Rick Prentiss with Raymond James.

Hi, good morning, guys.

Eric.

Hey.

Thank you Sir you certainly navigated the store Lucozade leaching very well in the quarter Oh, you your employees and families continue to say well.

Thank you.

One of the first touch on the.

The recovery that you saw the resurgence you saw in June.

What has continued into July was June kind of step demand or is it good levels in July see similar levels, what's the kind of the trends in June or July.

Yeah. It it varies a little bit by market. So on the leisure side I think there's definitely a pent up demand in June and normally by July in a normal year things start to slow down significantly as people start using their boats as opposed to.

Buying new things for their boats, but.

This year it seems to have been delayed so July continued to be strong compare to show a normal July for the leisure markets.

For the commercial markets I think what we saw is that.

There were obviously deals in the pipeline of things that had been in progress and those all continue to pay so there wasn't really a you know the same level of resurgence as much as just sort of a continuation of things that that were in process. So.

I don't know if that answers your question, but if.

It does vary by by segment.

Sure sure.

And as you think about it.

You mentioned that backlog.

The 25 million backlog into inventory is made up of the.

15.6, and then plus the 10 million TACNAV orders and thinking about it.

That's exactly right yeah.

Okay any thoughts on how the shipping tiny will play out given coded 19 for that backlog as it were rear end loaded in the year or even at loaded.

Yeah. The TACNAV order is scheduled for Q4.

And then of the fog business is more uniform throughout the second half of the year.

Okay, and any bad debt issues I mean clearly.

As it did pretty well, but there are some issues out there or oil and gas.

Measure how is bad debt lucky and the reserves.

Bad debt.

So we're pleased to say, we really haven't seen skipping disruption.

And the cash collection.

Process, but many of our customers I mean, a little a few customers smaller customers are asked about as far as I said in the first quarter call accommodations, which we've made I mean, it and they basically abide by those who buys terms. So no. We haven't seen any real change and collection activity I would tell if at our bad debt reserves need to change.

Okay and it certainly seems like in this environment Martin you touched on it a little bit that the KVH watched product to become even more compelling is it really just tough to make.

Sales and visits and pitches during this environment, but we seem to me that to the value of that product. She started jumping off the page.

Right, Yes, so I think that you know the the interest in the product and the the pipeline to prospective customers and partners is is larger than we had anticipated so strong demand, but the peso feel getting actually people to do installations and demos.

And then life you know visits.

Is it was definitely impacted during Q2 so.

Hopefully that starts to change now.

The new built in China people are visiting China again, you know, whereas before a lot of customers simply refused to travel, though so I think they're starting to open up again so.

Our goal here for Q3 is to get a.

Live installs and and real customer did or potential customer feedback so.

There's a lot of demand for this right now because of the.

Pandemic in the whole value proposition of being able to access data remotely and see what's going on in vessels and then to be able to intervention in a do face to face for mode experts, who will walk people through.

Repairs on board, even in the middle of the Ocean.

Yeah look at and.

Things, obviously, the service business hung in there very good which it sure resilient needed service.

Or your thoughts are on the guidance.

Obviously on the year in color you gave guidance you called it on ones, who is nobody the depth and duration you've had a really good to navigate idiots Threeq you July sounds like it's shaping up well, but.

So a lot of uncertainty out there what are the thoughts on.

Order of magnitude either on third quarter, if not for the full year.

Yeah, I think that after we get through this quarter I think we'll be in a position to have more visibility and they'll give guidance for Q4 and going forward. So.

Thank you.

It's hard to believe it's only been a few months, but it does feel like there's still a lot of things that we don't know yet so but I do feel feel much more confident than we were three months ago and in the way things are going.

It's significantly better than the we feared so.

Which is great news.

Okay and last one from a problem kind of it.

30000, but you are 2000 kilometers you a lot of news in the market about the new Leos, Spacex Starlink oneweb coming out of bankruptcy would be like with the British government.

Hyper getting some FCC approval yesterday, what are your thoughts as far as with the new Leos mean into your business model.

Well I think that there's definitely going to be a you though.

Someone's going to be successful in that Leo market, we're not quite sure yet who will be so we're we're looking at all of them.

Some of them are targeting.

You know like if you look at Spacex They don't have inner satellite link so they're very much tied to land base operations. Now eventually the plan is to replace the 600 satellites have already launched.

With satellites that do have that capability, but until that happens. The you know it wont work over the oceans.

Because you need Pete ground stations that are there a nearby so they're all they're all very different you know the architectures youve been studying them looking at the different options some of them look really attractive for our business model.

In other ones are more attractive for you know for terrestrial use.

Okay, and so jury's still out lot of work to do but I'm sure base more supply into the marketplace.

Yep.

Yeah, the rent little to no one told us that they have too much bandwidth.

Slower service, though.

[laughter] definitely well again I wish you bandwidth was to say well during these difficult times, let's just see navigating low.

Thanks, Rick we appreciate that though.

Thank you.

Our next question from Rich Valera with Needham and company.

Thank you Rob let me add my congratulations fair navigating through.

Yes, the tough environment very well.

So question on the fog.

I'm sorry, the 25 million backlog, that's supposed to ship it inertial in the back half can you say how much of that is fog versus pack Matt.

Sure.

I think don's got those numbers handy so the.

It's.

It's probably.

11 million protective offset my head.

US being done.

Yeah, just you know second huh.

Yes so.

Bob is in the neighborhood of $11 million.

And.

Now.

Ah Yes. This is.

Sorry, this is that I'd say, the bottom cognizant <unk> neighborhood of $11 million.

And TACNAV when you include the.

Gee I thought excuse me the.

The the bank military or that we announced well would be or neighborhood of.

A $12 million.

Got it so thats I guess, that's 23 million is their service and there or something.

There's other OEM.

Potash yeah, that's the total backlog for the whole company.

Got it Okay fair enough that's helpful normally for that business, yes, normally the reset business doesn't have backlog, but it does have some you know because it's normally a book and ship kind of business, but there is right.

Yep.

Got it okay.

So just wanted to follow up please.

Similar Rick's question, but sort of the outlook imminent I think if you're looking at Q3.

First Q2, it sounds like at the margin most businesses should have a better environment I think we understand shouldn't the dynamics around and air show, which is really going to be around timing of shipments, but looking at sort of the commercial side. It seems like you have got.

At least as good if not better condition is for the whole of the September quarter, then likely you had good the whole of the June quarter.

So I'm just trying to figure is there any reason we wouldn't expect there to be maybe some quarter over quarter improvement in the commercial side of the business.

Any anything we should think about there that might make keep that.

Business from improvement quarter over quarter.

Right, Yeah, I think that you know borrowing you know additional crazy things happening in 2020, we do expect things to continue to improve here in Q3, and then you've got a good backlog for Q4, so we have better visibility.

You know for Q4 right now so, but you're right I think as you know we're sit here today, we do expect improvement.

How much improvement will you will see is difficult to predict but the though right now it looks like Q3 should be better than Q2 and.

You know right.

And then dropped at least not.

Very strong quarter so.

So that's actually an improvement.

Right right.

And then Don you you you mentioned the Opex you've been taking some.

Fairly extraordinary measures I think to keep them.

Keep them under control.

Should we expect.

Those measures to abate somewhat in Threeq, you or should we expect flattish opex, how should we think about opex trending over the near term here.

I think Opex summit, and the third quarter will be a little higher than second quarter.

Fourth quarter, maybe a little higher than not I mean I think.

I will start to see.

Maybe a little more travel and but but the you know the overall cost controls that we put in place in the second quarter will stay in place I think the growth will be kind of a natural girl <unk>.

You know, but will then be really you know cautious about what we spend money on.

Right.

Understood.

Martin just wanted to ask you about the P. 17, 75, congrats on getting your first commercial shipments there with the Pic technology.

Bedded.

You know for a customer looking to buy.

I knew for new whats the difference they're going to see.

In that in that product versus the traditional product using your traditional technology from a price short performance perspective.

Well it initially there's there's not a lot of difference on you know in terms of the face value spec. So what we've done is weve.

Announced products that have similar performance.

Even though the the performance internally and is in fact, better. So what we wanted to do is to get a quarter's worth of Ah production in before we tighten the specs I Didnt want this to become you know yield issue for manufacturing, but so far we've seen we've seen the opposite though the yields are very very good performances super concerned.

That.

So as we get the plan is that we're going to put this into some additional products were going to add some improved accelerometers.

And then we'll be announcing further spec improvements.

As as the year progresses.

So it's it's going a remarkably well so we're very very please.

Got it sits at any as you get it you're able to.

Advertise the product with the with the better specs.

I guess one it gives you some competitive differentiation doesn't doesn't give you pricing power is that sort of not what you're looking for at this point more about market share versus maybe trying to get you know any pricing.

Yeah, I think that as as it progresses will get us selectively introduce lower costs models as well.

<unk> you didn't want to do is too you know just take all the cost savings and lower the price and not get improve margin. So for the short term, we're going to see some margin improvement.

And then as we launch additional new products, we'll try and differentiate it further.

At the high end becomes even more high end and with better excels and then there's gonna be room for new products at the mid and low end range, which we think will expand the market.

At lower price points.

Great. That's just one starting.

Good.

Now that I want to let you finished thinking.

Yes, no I was just gonna say and that's where we're starting this quarter.

And hopefully by the end of the year, we'll have the migration finished so you also as we're doing this we're also mindful that we want to.

A work down our inventories because we didnt necessarily know exactly when we'd be in full rate production with the photonic chips as it was brand new so we want to be able to work down inventory no not at that write off any old product. So all that's happening now as we transition so and we think that will be.

Okay.

The quarterly.

Process throughout the next two quarters.

Got it makes sense and just one final one for me I think for Don can you give this split between Socgen TACNAV for the quarter and inertial.

Sure.

So Bob sales for the quarter for.

About six little over $6 million I'm, TACNAV, all with little over a million boss.

Got it thank you.

Okay.

Great.

Oh, good or next question from Chris Quilty analytics.

Hi, Thanks, Don wanted to just confirm did you say that the literally be sad air time margins were 37% in the quarter.

I just wonder.

Just under that that's a nice five point from a from Q1 is that.

Does that feel sustainable on a go forward basis. It was there anything you know a one time nature in there.

There are I mean, they're always.

Though is some one time impacts positive and negative, but I think that trend as we may not get quite that high in the third quarter, but the trend is certainly heading in that direction.

Well I think that yeah. So.

We did have the bump from the <unk>, what we internally color coded promotion, where we you know we've got people to buy bigger.

Plans, because accrues weren't able to Jay so were some risks good that doesn't sustain you know so some of that growth was due to these new promotions.

And as that as we continue to add subscribers you know, we will be incrementally, adding bandwidth throughout the network. So it won't be continuous progression, but it's a really nice judo trentino, it's not going to be.

That much every quarter.

And then may still bounce around a little bit, but the general overall trend is very encouraging.

So you you did mention air time can you give us an update on where you see the market today and then there's been.

Some bankruptcies with Intelsat, which is a large partner of yours and.

You know incremental K., you and key capacity coming on the market. How do you feel about both the availability of capacity.

The airline centric models are not using as much.

Pricing trends and how that may impact margins on a go forward.

Yeah, I think you know we're fairly locked into our you know you know for at least for 2020 in terms of fudo, what what we need and what will be buying and what we're paying for so we we have pretty good idea of where our margins are so but you're right. The long term trend could be favorable.

So that overtime, we could see lower costs.

But typically what happens is that you know with almost never resulted improved margin because you know if the bandwidth costs go down people buy more bandwidth, but at lower prices and so the margins I think you know our long term strategic goal of around 40% gross margin is probably.

You know the high end of where we'll be I don't see you know with the market dynamics, you know getting to much higher margins than that.

Just because of competitors and the way things.

Work, so, but you know for us 40% gross margins.

Our our ideal I'm going to assist you know like our sweet spots, we think that that's going to be great.

I understand.

And when the content business.

Pretty steep fall off there are you seeing with vessel activity picking up.

The content starting to also pick up 'cause that's nice high margin business for you.

Right, Yeah, so the content business in our visa that market has increased.

Increase in Q2 and continues to increase the content business that declined to though by 50% was our newslink print newspapers for cruise ships.

In hotels, so that's a non airtime related content business and that was down as I said, a millionaire half color. So so half of the total companies revenue decline in Q2 was from that a cruise ship newspaper business.

That's not coming back.

Yeah Yeah.

Understood your enough.

Last quarter, you had talked about the fact that some of your competitors are shedding customers and you are dealing with an issue of third party antennas and it sounds like.

You solve that problem and brought on some customers.

Can you talk about weather.

It was that going into some sort of a degradation in performance or.

As it technically worked out well and does that provide a easier go forward path or targeting a competitive wins.

Yeah, I think who is in this case it was a little bit opportunistic on our part you know there.

Transitioning the air time with easier than visiting every single vessel and you know flipping them over to agile plans.

This particular customer already had some agile plans to so I don't think that that is not a strict <unk> change in our business strategy, but from an technical point of view, we're able to get it working and you know from the airtime in data rate speeds everything worked fine. What you lose is the you know sort of enhanced tools and visibility.

Monitoring and a lot of the value added services.

No that we think are really key differentiators. So.

Not going to be our business model going forward, but it's it's a great tool to have when you need to flip a a fleet quickly.

I understand and final question back to the pick product or are you still investing in Miniaturizing me electronics, and how is that coming along and you know any marginal updates silver with long term on autonomous vehicle.

Yeah. So the plan is still to miniaturized the electronics right now we're we've developed a new generation of electronics that were that were just completing you know so but this is this new version is not yet miniaturized, but it's a brand new clean sheet design.

You know with the latest and greatest.

Technology for F P.D.A. Davidson Dsps unaided d.

So it's that's the precursor to than going to a custom electronic chip. So we wanted to do the redesign first get that into production. This is you know I'm going into a new product starting in Q4, and then that will be the basis for the or for the ministers.

Nation and the custom chip.

So as far as the automotive not much has happened in Q in Q2 on that front there hasn't been a lot of a development. So I think there was a lot of.

So nothing new to report during Q2 as far as.

[noise] self driving cars and autonomy. So we expect that you know those companies to re emerge here during the current quarter.

I understand and actually I do have one more question back today PMT.

It is that program progressing on schedule that you anticipated or kind of feels like it. It's go figure its dragging out once again and this yeah. This is Andy.

Yep.

No you're right the B. I'm. So there were some test you know that they've tried to since we like a three week test in the in the desert and then they scale that back because of KOVA, then and now it's.

Now scheduled for Q4 is only going to be three days and with you know so so that.

Definitely has had an impact on schedule on the other had some of the other domestic programs are seemingly unaffected so.

Hopefully we'll have some some good news there.

I understand and that's even in light of I think we've had an executive order and we've got the Senate getting involved with the legato situation and nobody's lit a fire on or the PMT program office.

Yes feel free to allow the call and therefore Oscar [laughter].

All right so.

So what is happening you know and you're right they've had all these high level you know.

Indications that this is a top priority they absolutely have to get it done.

So that's just a question a win.

Yeah, The Army program.

Yep.

In the meantime, you know we've got these other tack that program through got other things in the fire. So you know and the PMT program was was not in our original guidance, we'll give guidance for the year. So we haven't seen anything fallout, let's put it that way.

Okay, very good ER and congrats on the quarter guys. This is this is alright, thanks price to exercise.

Thank you.

No further questions operator.

Great further questions.

Okay. Thank you.

As always feel free to contact either daughter myself directly and thanks for thanks for listening.

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