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KVH Industries, Inc. (NASDAQ:KVHI)

Q4 2012 Earnings Call

February 12, 2013 10:30 AM ET

Executives

Peter Rendall - CFO

Martin Kits van Heyningen - President and CEO

Analysts

Rich Valera - Needham and Company

Jim Mcllree - Dominick & Dominick

Chris Quilty - Raymond James

Operator

Good day everyone and welcome to the KVH Industries Q4 2012 Earnings Announcement Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Peter Rendall, Chief Financial Officer. Please go ahead, sir.

Peter Rendall

Good morning. I am Peter Rendall and with me is Martin Kits Van Heyningen, Chief Executive Officer of KVH Industries. This call will address the fourth quarter earnings release that we issued earlier today. Copies of the release are available on our website and also from our Investor Relations department.

This call is being simulcast on the Internet, and will be archived on our website for future reference. If you are listening via the web, feel free to submit questions at ir@kvh.com and we will answer them following this call.

This conference call will contain certain forward-looking statements that involve risk and uncertainty. For example, statements regarding financial and product development goals are forward-looking. The Company’s future results may differ materially from the projections described in today’s discussion.

Factors that might cause these differences include, but are not limited to, those mentioned in today’s call and risk factors described in our quarterly report on Form 10-Q filed with the SEC on November 8, 2012. The Company’s SEC filings are directly available from us, from the SEC, or from the Investor Information section of our website.

Now, I will turn it over to Martin for today’s discussion of results. Martin?

Martin Kits van Heyningen

Thank you, Peter, and thank you for joining us today. So overall 2012 was a very good year for KVH. We just reported our second record revenue quarter in a row. It was an especially strong year for our mini-VSAT broadband business which continued to grow at a solid rate, driven by the investments we’ve made to expand our global coverage footprint and launch new innovative products.

In our Satellite TV business, we saw encouraging science of a recovery in the leisure market as our new global TracVision HD11 helped us win new high-end yacht customers. In our guidance and stabilization business, we received the largest order in the Company’s history for our TACNAV tactical navigation system and won the contract to be the fiber optic gyro supplier for the U.S. Army’s new CROWS remote weapon station.

We also just introduced the DSP-1750 IMU, which is a breakthrough inertial measurement unit. It has been very well received by potential customers. Increasing our revenues in the fourth quarter by 24% year-over-year to $39.5 million, we surpassed our previous revenue record from the third quarter. We recorded earnings per share of $0.18, that's up from $0.11 a year earlier. For the year, our revenues were just over $137 million, up 22% compared to our 2011 revenues of $112.5 million. Net income for the year was $0.24 per share, compared to $0.06 per share for the full year last year.

Peter will cover all the numbers in more detail, but let's take a look at some of our key business areas, starting off with our satellite business. In the fourth quarter, our satellite revenues were $21.5 million, that's up 23% year-over-year, with our mini-VSAT revenue up 33% from the fourth quarter of 2011.

For the year, our satellite communication revenues overall grew 26% to $88.6 million, with our mini-VSAT revenues growing by 40%. This included growth of 59% in air time as new subscribers continue to generate a larger and more predictable revenue stream.

Our Satellite TV business rebounded with a 31% increase in revenues for the fourth quarter, which contributed to a 16% increase in revenues for the year, thanks in part to the success of our new HD11. This might be the first sign of a general recovery in the leisure markets, but it's still too soon to bank on that.

We recently announced that we had sold our 3,000th TracPhone mini-VSAT product, which further solidified KVH as the maritime market share leader. Last year, the three leading research firms in our industry named KVH as having the leading market share in the Maritime Ku-Band VSAT space.

To further add to our credibility, we now have very good reference customers, including commercial market leaders like V.Ships in the UK, Vroon in Holland and NYK in Japan, as well as premiere government customers like the U.S. Coast Guard and the U.S. Navy combined Maritime force operating in the Arabian Sea.

Our mini-VSAT Broadband service delivered over 200 terabytes of data in 2012, and over 15 million minutes of VoIP calls and had a network up time exceeding 99.5%, which is among the best in the industry. The current Maritime VSAT install base is estimated between 10,000 and 12,000 users.

We estimate there are over 250,000 vessels carrying 1.4 million sea farers in the shipping, commercial fishing, oil and gas, government and yachting markets that are prospective customers for broadband service. The research firm NSR projects the maritime market for broadband will grow by 90,000 subscribers, net over $1 billion in new annual service revenue in the next 10 years and we believe that we're well positioned to capture a significant portion of this market.

In 2012, our mini-VSAT broadband network became truly global through the addition of three C-band beams that overlay our Ku-Band network. We introduced the TracPhone V11 dual mode antenna, is able to seamlessly switch between the different satellites and different frequencies.

One meter in diameter, the TracPhone V11 is the only VSAT of its size that’s able to deliver full global coverage, offering a significant benefit to our customers over competing solutions that either use very large antennas measuring up to 3.5 meters in diameter or that require two or more unique hardware and service solutions to match our coverage.

In the fourth quarter, we also enhanced the capacity of our network by deploying Variable Coding, Spreading, And Modulation known as VCSM, which when completed in Q1 of this year will more than double the capacity of the entire mini-VSAT network.

This also illustrates one of the key advantages of our end-to-end approach, which is that we are able to upgrade the onboard TracPhone terminals of our entire population of mini-VSAT customers over the air, so as each region gets upgraded all the customers do as well.

Going forward, we'll add capacity to our network as our customer base grows. But incremental investments involved to lease satellite capacity will be modest and focus on areas with concentrations of customers. So, our cost base will grow far slower than our revenues, further increasing our margins.

The next major area of growth for the mini-VSAT network will target enhancements for efficiently managing applications and value added services delivered over our network. A lot of work in this area is already complete.

From a hardware perspective, we've now fully integrated our CommBox network manager into the antenna control units of our TracPhone V7 and V11 systems, enhancing our ability to manage data delivered by our mini-VSAT network onboard the vessel.

This is critical capability for future services we plan to introduce, such as multicasting data and caching it on board the vessel, verifying the delivery and integrity of digital data in mission critical files like electronic charts.

The built-in CommBox also allows us to set up unique, prioritized networks for vessel operations, that are totally protected from networks used for entertainment of the crew. With this enhancement, KVH has extended the value of our end-to-end solution to include management of customer’s onboard networks which is often a catalyst for upgrading the vessel connectivity solution.

On the network side, we expect to roll out a multicasting capability midway through this year, which will enable the same data to reach large numbers of vessels with a single broadcast transmission. For charts, weather or even large video IPTV contents streamed to vessels, multicasting will allow us to deliver rich media content to our customers across our entire global network in a highly efficient and cost-effective way.

A key strategic initiative is to deliver the economic benefits of enhanced data connectivity to our commercial maritime customers in the form of value-added services, creating a new revenue opportunity. We already offer fleet email, internet cafe and VoIP phone services through our CommBox-ACU. Examples of the new services include areas like delivery of mandated electronic chart updates; interactive weather-based route planning services that can help reduce fuel consumption, which is typically a vessel’s largest cost.

We will also explore enhanced applications designed to reduce logistics and administrative cost, facilitate mandated training, enable remote management of IT equipment and enhance security. Now, some of these we’ll provide directly, for others we’ll partner with existing applications or service providers.

KVH is already in discussion with a variety of these application providers who are interested in leveraging our capabilities, both by offering our mini-VSAT Broadband solution to their customers as an easy and economical way to deliver their services and by enabling KVH to sell their applications and services to our customers. We believe we will benefit from these relationships both from increased sales and from higher ARPUs when our customers buy additional services directly from KVH.

Now, moving on to our guidance and stabilization business, the fourth quarter revenues were $18 million, which is up 25% year-over-year driven by strong shipments of both fiber optic gyros, which were up 48% year-over-year and TACNAV which was up 12% versus the prior quarter. For the full year, revenue from our guidance and stabilization business was up 14% to $48.5 million.

2012 was a very good year overall for our TACNAV military vehicle NAV system with large orders received from international customers like Saudi Arabia and Canada. There seems to be a renewed concern amongst foreign military customers who rely on systems that are increasingly dependent on receiving GPS navigation inputs a 100% of the time and for the ability to operate even in GPS denied environments, and that’s exactly the benefit offered by our TACNAV system.

This year, we plan to incorporate our new thin fiber gyro technology into our military navigation product line, creating a product called the TACNAV 3D system that will provide an order of magnitude more accurate solution and provide reliable navigation information with the 100% availability for military vehicles and be completely un-jammable.

Looking at our military land navigation business as a whole, we have some very promising leads in the pipeline for TACNAV systems, but as we’ve said in the past, these orders tend to be large and the timing is often very difficult to accurately predict that we typically don’t include them in our guidance unless they are already in backlog. However, you should not assume that because they aren’t in the near term guidance that this part of our business will be declining in the future.

In 2012, we won the position as a supplier of fiber optic gyros for the U.S. Army’s new CROWS III Remote Weapon Station program. Currently budgeted at around 3,000 systems plus spares and reset requirements, this will be a very substantial program for KVH. With three gyros per system, we expect a minimum of 9000 additional FOGs to be needed in the coming years from this one program.

We’re receiving good feedback from customers using our DSP-1750 fiber optic gyros, that’s also based on the thin fiber technology and the 1750 is significantly smaller than our previous generation of gyros and also in order of magnitude more accurate. They are being adopted into a wide range of commercial and military applications, such as optic stabilization, navigation systems and flight controls.

Development of our new 1750 IMU, which uses three of those gyros tightly coupled with three accelerometers, is now complete, the performance is outstanding and we’ve shipped initial trail units to customers. We’re excited to see this product under evaluation for new commercial applications, including automotive, robotic platforms, and as an inertial module using conjunction with a variety of GPS manufactures to create hybrid navigation systems. Based on early feedback, we hope to see its volume steadily increase throughout 2013.

So, in summary we’re very pleased with our progress in 2012. Our mini-VSAT Broadband network provides the best global coverage of any maritime VSAT service. We’ve become the market share leader after only five years since launching and appear to be pulling further ahead from our competitors. Our TACNAV business is strong and our new fiber optic gyro products are been tested in applications that should support solid growth for years to come.

So looking back over 2012, KVH further strengthened its financial position and introduced innovative new products and won key contracts and reference accounts in each of our markets. I believe we’re in excellent position to continue our successful growth and deliver long term shareholder value.

Now, I’ll turn the presentation over to Peter, to review the numbers in more detail. Peter?

Peter Rendall

Thank you, Martin. So to recap, for the fourth quarter, total company revenues of $39.5 million were in line with our expectations and towards the higher end of the guidance we previously gave. Our Mobile Communication revenues were $21.5 million, representing a 23% increase year-over-year while our guidance and stabilization business grew 25% year-over-year to $18 million.

Our mini-VAST business recorded approximately $14.5 million in quarterly revenues, of which Airtime Services represented about $9.4 million, which was 53% high year-over-year. Total VSAT product and service revenue increased 33% year-over-year and ARPUs for by the megabyte plan continued to be in the $600 to $700 per month range and ARPUs for our fixed rate plans continue to be around the $1,900 per month level.

With the introduction of the new V11 product in October, the mix of unit sales for the quarter was 36% V3, 59% V7, and 5% V11. All other marine SATCOM revenue, including TV Systems and Inmarsat Systems in Airtime was approximately $7 million.

Within that amount marine satellite TV sales increased 31% year-over-year, while sales of Inmarsat L-band satellite systems declined by more than 21% on an average shrinking base. LAN SATCOM and Aviation System Maintenance Services combined was $1.5 million, down 29% year-over-year. TACNAV product revenue was $9.4 million up 12% year-over-year.

FOG was $7.6 million, up 48% year-over-year and other guidance and stabilization products and services were approximately $1 million, which was similar to the prior year. Some of that product lines have product component and a services component. Service revenues primarily comprised of Airtime, non-recurring engineering, repairs and professional services.

In the fourth quarter, service revenues were 11.5 million, 81% of which was related to VSAT Airtime. The gross margin was 43%, which was in line with our expectations and 300 basis points higher than that recorded in the third quarter.

The gross profit margin for VSAT Airtime was 30% in the fourth quarter, which compares favorably to the 19% in the 2011 fourth quarter. The gross margin for all other services was 46%, which was in line with expectations but higher than 28% prior year quarter, which contained a relatively high content of facility construction services for our Saudi Arabian program. These construction services have a gross margin of less than 10%.

Operating expenses were up 6% year-over-year and 6% sequentially, an increase was largely driven by sales commissions that directly relate to the TACNAV contract with the Saudi Arabian National Guard. These commissions are in sales and marketing expense which increased sequentially 7%.

The reported tax expense for the quarter was about 32% of pretax income, which resulted in a tax rate for the year of 48%. As we've discussed before, taxes are always difficult to forecast since there can be so many variables and unanticipated discreet items. Our diluted EPS for the quarter was $0.18 on net income or $2.8 million, which compared favorably to net income of $1.6 million in the prior year and an EPS of $0.11.

For the full year, we reported a diluted EPS of $0.24 compared to $0.06 in 2011. On the balance sheet at yearend cash and marketable securities were $38.4 million, up $5.5 million from the end of the prior quarter, primarily because cash flows from operations were approximately $7 million for the quarter. The EBITDA adjusted for equity compensation expense was $6.1 million and the EBITDA margin was 15.4%. Depreciation and amortization was $1.2 million and the equity expense was about $1 million.

Accounts receivable was $27.6 million at the end of the year and days sales outstanding was 63, which was consistent with what we were running throughout the year. At yearend inventory had decreased sequentially from September 30th by 9% to $16.4 million and capital expenditures were $1.7 million for the quarter, bringing the total for the year to $7 million. Backlog for our guidance and stabilization products and services at the end of December was $33 million, down approximately $13 million compared to the level at the end of September.

Turning to our outlook for Q1 and the full year, we expect our VSAT business will continue to grow at a strong year-over-year pace, driven by both product sales as well as new airtime subscribers being added to our network. We also expect FOG product sales will show solid growth year-over-year as we begin to receive orders under the CROWS III program.

As it relates to our TACNAV business, we have a good level of visibility through the first half of the year, a good portion of which relates to backlog associated with the Saudi Arabian National Guard program.

With uncertainties surrounding defense budgets, we have been conservative in our estimates regarding the timing of new order wins. We also remain cautious as it relates to leisure markets for our mobile communication business.

Considering all of these factors, our guidance for Q1 is as follows; we expect revenue will be in the range of $37 million to $40 million and the EPS to be in the range $0.10 to $0.15 per share. For the full year, we expect that revenue will be in the range of a $150 million to a $160 million and the EPS will be in a range of $0.37 to $0.48. The full year effective tax rate is expected to be in the range of 35% to 40% for the full year. Our confidence in our strategic growth businesses and operating fundamentals remains strong.

Now, we will take your questions, operator?

Question-and-Answer Session

Operator

(Operator Instructions). And we will go first to Rich Valera with Needham and Company.

Rich Valera - Needham and Company

Question on first I guess OpEx; reasonable increase in OpEx implied in your guidance I think and I think it's related to perhaps several of the services you talked about rolling out this year. So just wondering if you could talk about, one, how much of that OpEx increases is related to these new service rollouts and then maybe a little more color on some of these services. It sounds like some of them you would provide maybe just the hardware and your customers would essentially run them themselves and some of them you might actually host. So will you be building some infrastructure to do more hosted services?

Martin Kits van Heyningen

Yes, some of the OpEx is related to some incremental high risk but in this space and the value added services space and you are correct that we really see this as a two-way partnership. So for example if a company is in the maritime weather space, they have difficulty getting large data files to their customers, so they might buy our hardware and give that or sell that to their customers to provide their service and would become almost like a dedicated receiver. In other cases, we would buy the service from them and resell it, either hosting it or at least transporting it to the different hubs around the globe. So there is some incremental cost associated with that but it’s not significant and it’s not really on the order of what we have been spending. So it’s certainly less than what we would cost out of region for example, just to put in perspective.

Rich Valera - Needham and Company

And it sounds like you had some V11 sales in the quarter. So, I’m wondering if that was sort of on track and I was just wondering if you could give us sort of bracket a range for overall sub ads. I think in the last quarter you talked about 250 to 300 was the range. I wonder if you get bracket a range for us for the sub ads for the fourth quarter?

Martin Kits van Heyningen

Yes, we are still in that range. So, I think if you look back at 2012, I think that the average for the year was probably at the low end of that range for the four quarters and I think going forward this year, we expect the average to be probably above that range for the full year and so we are expecting to see continued subscriber growth and new terminal sales.

The other part of your question on the V11, it’s progressing as we expected which is we have been rolling our trials with some fleets; some cases two different vessels with V11s operating globally in the fourth quarter. So logistically these are little bit larger products compared to the V3 or V7, so it takes bit more time. Some cases requires a dry dock visit in order to install depending on the owner’s requirement but it is going according to plan. The products in the field now working great and we are expecting solid results from that product in 2013.

Rich Valera - Needham and Company

And just wondering if I could on the TACNAV, you alluded to; I guess you called it a lack of visibility in the second half. Now you did just receive I believe $7 million order in January that would ship at least I think starting in the fourth quarter. So presumably that gives you some visibility but I’m wondering if you could comment on your pipeline. You’ve given some color on previous calls about your pipeline of TACNAV opportunities. I think you mentioned Canadian army opportunity. Any color on sort of sizable TACNAV opportunities that might help fill in that back half for you?

Martin Kits van Heyningen

In general, we are very comfortable with our defense business but the reason that we were being so cautious in the guidance is that, what’s going on with the defense budgets and in general we have burned by forecasting the timing of orders. I think we have a very good track record of identifying programs that we will win but we have been less good at identifying the timing. So the programs that you are mentioning now, we still feel very good about. We have very, very high probability of wining these programs, because in many cases they are sold source. So, we’re designed in and they’ve got to get the vehicle contract and vehicles have to go on a production. So, I don’t want to leave the impression that we’re not comfortable with our TACNAV business. We’re just not comfortable with forecasting is it going to be Q3 or Q4 or is it going to be Q1 of next year.

So, the other thing I want to point out is that some of the TACNAV business that we have in 2013 is a service business which is sort of a service and support, that was a pass through business which is very low margin, it’s like 9% margin supporting the construction of installation facility in Saudi Arabia and helping them with installing the TACNAV on the vehicle. So, there is probably $8 million or $9 million in our guidance that’s at very low margin and that helps bring the margin for the year down.

Rich Valera - Needham and Company

Just follow up to that, you mentioned how much service business you have left on the Saudi contract. Can you say what the total is that you’ll be expecting to ship in ’13 on the Saudi contract?

Peter Rendall

In terms of total for 2013, we’re expecting approximately 17 million of revenue of which as Martin said, $8 million is going to be very low margin services pass through

Operator

And we will go next to Jim Mcllree with Dominick & Dominick.

Jim Mcllree - Dominick & Dominick

Can you talk about the operating margin guidance in 2013, particularly how you expect that to play out? Is that a first half margins bigger than the second half or vise or versa?

Peter Rendall

Jim, if you can set our operation margin guidance for 2013 is in the 4% to 8% range, that compares to just under 5% of what we achieved in 2012. So, the margins impacted by, as you understand the relative proportion of revenues streams with that have different gross profit margins. So for instance in 2013, as we’ve mentioned we’re expecting to record $8 million of the services revenues associated with Saudi Arabian National Guard program, which has very low margins. Also at TACNAV profit margins on our product some of our higher margins overall and because we built conservatism into our guidance on the revenue expectations on this fronts and you’re going to see that does have dampening effect on what we’re projecting for overall margins in 2013.

On the mini-VSAT side, as we add new subscribers, we expect our overall gross margins for that part of the business to continue increasing; however, you won’t be seeing those increases to the same order of magnitude that you’ve seen in previous years, because our overall base is now just larger.

And then obviously the other element that impacts operating profit margins relate to the operating expenses, the majority of which are compensation related as we add more sales teams throughout the world and we expect that cost base to increase very modestly.

So, another way to look at is in the first half for the year you’ve got sort of strong TACNAV hardware shipments with good margins, but in the back of the year you’ve got the compounding effect and increasing gross margins on the mini-VSAT Airtime, being offset by the lack of TACNAV. So I think the margins will be reasonably consistent throughout the year but for different reasons.

Jim Mcllree - Dominick & Dominick

I think, I see what you’re saying. So forgive me I just want to make sure I understand this correctly. So are you expecting the service revenue on the TACNAV to be primarily second half related or it’s more that there is less products in the second half that you have in the guidance that’s causing that?

Peter Rendall

Both of that and then that being, on the positive side the mini-VSAT Airtime margins are going up every quarter as we go through the year. We will be approaching 40% as we exit the year. That’s on the positive side. So no change in the mini-VSAT business and outlook, all that’s the same.

Jim Mcllree - Dominick & Dominick

And so although let’s call it 155 in revenue guidance that you’re looking at for 2013. Can you suggest what you think the guidance and stabilization revenue will be of that 155 to 160?

Peter Rendall

In general, we’ve given sort of broad percentage mix. So if you pick that midpoint of the guidance I think it’s still roughly 35%, could be guidance of say 65%, satellite, if I’ve done the math right.

Martin Kits van Heyningen

So, total guidance and stabilization is hoped to be 35%.

Jim Mcllree - Dominick & Dominick

And have you started shipping any FOGs IV to CROWS III or is that still to occur this year?

Martin Kits van Heyningen

That's still to occur this year but we've got good visibility and we feel very comfortable with our FOG backlog. Kongsberg backlog is in house for the current quarter. So I think we're in very good shape there.

Jim Mcllree - Dominick & Dominick

So that would suggest that even if there is some changes with the budget, either the sequestration or some Hail Mary that is caught by Congress and the President that you would still ship something for CROWS III this year?

Martin Kits van Heyningen

Yes, I think we are pretty good for the first half of the year and so I think that might be a concern for the second half of the year. So again that's why we're being a little bit conservative in the back half, but you probably know as well as I do what's going to happen there.

Jim Mcllree - Dominick & Dominick

Well I don't think anybody knows frankly, but thanks for that confidence. And then just the last one on operating expenses, if I understand it correctly, you're just looking for; I would call it modest at least relative to sales growth increases in OpEx. Is that fair?

Martin Kits van Heyningen

That's correct, so as a percentage I think all the categories are going down as the percentage of sales. But there is an absolute increase on the order of $5 million or so.

Operator

And our next question comes from Chris Quilty with Raymond James.

Chris Quilty - Raymond James

I'm going to throw out some housekeeping for Peter and then throw on a question; if you can pull up the depreciation quarterly cash flow and maybe a projection for 2013 CapEx? And then my first question I guess is just a macro one in terms of your long term guidance driving towards $250 million to $300 million of revenue out in '15 and operating margins at 15%; the '13 guidance seems a little bit low in terms of the trajectory getting there. So my question is, does that still seem like a reasonable target given everything you know now and that assumes a pretty steep ramp up in '14 - '15, which again does that still seem reasonable?

Martin Kits van Heyningen

Yes, it absolutely seems reasonable. I think we're on track in our core businesses. We've got the five businesses rebounding, we've got new products there, we have got new services on the VSAT side. So we feel very good about the trajectory. And again back half timing on defense; we don't see that as a macro trend, we see that as a short term visibility trend. So yes, we definitely feel good about the overall guidance for the long term.

Chris Quilty - Raymond James

And with regard to the mini-VSAT business, you're implying something north of a thousand new vessels added in 2013, is that correct?

Martin Kits van Heyningen

Yes, what I was saying is that last year it was averaging around 250, if you take the four quarters together and I think this year we should be averaging closer to 300 for the year per quarter, which will put you around 1200 something like that. It’s at a high level to be our goal.

Chris Quilty - Raymond James

And when you look at that, when you try to forecast the number of vessels added, what percent of those might come from large fleet wide orders that give you a higher level of visibility and how would that visibility for '13 compare to what you had going into '12?

Martin Kits van Heyningen

I don't think there's been any change in the mix. I think as a whole, one of the things we actually like about our mini-VSAT business is we have extremely low concentration. Outside of the U.S. Coast Guard I don't think we have a customer that's more than 3% of our revenue in that space. So we have a pretty distributed wide customer base which is really nice. So if you get a big NYK or something that can boost your quarter with hardware shipments, which they might repeat the next quarter. So you might get some smaller variations like that. But, overall it's a pretty distributed customer base.

Chris Quilty - Raymond James

And obviously Inmarsat has been raising prices, which would seem to help your relative standing, but have you seen any other changes amongst other VSAT service providers either in terms of raising or cutting prices that would impact your outlook?

Martin Kits van Heyningen

Yes, what we've seen is that there's been, it's kind of a strange dichotomy what Inmarsat is doing on their pricing. They're raising prices continuously on a majority of their customers which is the smaller customers, but then they're being very aggressive with their large name brand accounts. The thing to remember with them is that they can’t win any business; they can only lose business at this point. They have virtually a 100% market share, meaning that there is some Inmarsat equipment on virtually all of the vessels. So, for them, going into these large deals, it’s just a question of which ones are they are going to lose. So, that’s been their response and as far as the other…

Chris Quilty - Raymond James

I was just going to say that’s still the case that the majority of your wins are displacing Inmarsat or are you picking up real estate on vessels that were previously uninstalled?

Martin Kits van Heyningen

When I say displacing Inmarsat what I mean is that we’re getting now the broadband revenues. They will always have some backup on board which could be Inmarsat but it’s a really a lost account for them in terms of service revenue.

Chris Quilty - Raymond James

And I guess for Peter also, I’m just trying to run the numbers here and I’m not doing it successfully on the fly but company-wide service margins, looking at 2013, given the moving pieces with the Saudi TACNAV and what not, can you give us a sense of the range of where they might fall out for 2013?

Peter Rendall

The two components that affect us is the vast majority of our services revenue is going to be the VSAT Airtime Services which we will continue to see increasing in margin but we will be seeing a significant amount of the services associated with the Saudi Arabian program in the order of $8 million which will have very low margin. So, overall, we expect to see the margins still grow because the mini-VSAT business has a greater impact than the Saudi non-recurring revenue but you are not going to see it track up at the same relative percentages that we’ve been going in the past. So for instance in 2012, we went from 19% to 30%. You will see it increase but not to that same extent.

Chris Quilty - Raymond James

Set aside the C-Band network costs, are you still experiencing the same kind of 60% incremental margins on the Ku-Band network for new vessel lines?

Peter Rendall

For incremental subscribers, correct.

Chris Quilty - Raymond James

Incremental service margins in the past you had mentioned order of magnitude 60% incremental service margin contribution for new vessels on the mini-VSAT

Peter Rendall

That’s correct, is an ever growing base which is at that 30% margin.

Martin Kits van Heyningen

Just to be clear, there’s been no change in our, the gross margin of incremental subs. They were still at that 60% incremental margin. I think what Peter was saying is we went from 19% to 30% in one year because the install base is larger now by 1,000 units. That same number of ads, 60% won’t produce a same percentage increase over the entire install base. But you’re absolutely correct, the incremental margin on additional subs has not changed and it’s still in the 60% plus range.

Chris Quilty - Raymond James

And final question here, you may have given this but the revenue breakdown between FOG products, CROWS and non-CROWS and then some of those housekeeping metrics if you have them?

Martin Kits van Heyningen

In terms about total defense which is tracking around 35% of that total revenues.

Peter Rendall

Are you talking about Q4 or…?

Chris Quilty - Raymond James

Q4, sorry.

Peter Rendall

So for Q4 the total defense guidance and stabilization business is tracking about 35% of our overall business, of which approximately 17% was FOG.

Chris Quilty - Raymond James

And can you provide a breakdown of the CROWS versus non-CROWS revenue for the FOG business?

Peter Rendall

It was probably around 35% with CROWS, 40%, maybe off the top of my head.

Chris Quilty - Raymond James

And if you have those housekeeping items the D&A for the quarter, cash flow and projected CapEx.

Peter Rendall

For the quarter did you say?

Chris Quilty - Raymond James

Yes please.

Peter Rendall

For Q4 it was approximately $1.2 million of depreciation and that acq (ph) expense was $1 million.

Chris Quilty - Raymond James

And cash flows?

Peter Rendall

And the cash flows increased in Q4 by $5.5 million.

Chris Quilty - Raymond James

And any major changes in your CapEx outlays for ’13?

Peter Rendall

Similar levels of what we’re anticipating.

Operator

(Operator instructions). And it appears that there are no further questions at this time. I would now like to turn the call back over to Peter Rendall for any additional or closing comments.

Peter Rendall

Just like to thank everyone for joining us today on this call and we look forward to 2013. We remain very confident in our business and hopefully we will continue to track great progress throughout the year and again thank you everyone for joining us today.

Operator

And again, that does conclude the call. We would like to thank everyone for their participation today.

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