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KVH Industries, Inc. (NASDAQ:KVHI)

Q1 2013 Earnings Call

May 3, 2013 10:30 am ET

Executives

Martin Kits Van Heyningen - CEO

Peter Rendall - CFO

Analysts

Jim Mcllree - Dominick & Dominick

Chris Quilty - Raymond James

Rich Valera - Needham & Company

Operator

Good day everyone and welcome to the KVH Industries First Quarter 2013 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 everyone. I am Peter Rendall and with me is Martin Kits Van Heyningen, Chief Executive Officer of KVH Industries. This call will address the first 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 to ir@kvh.com and we will answer them following this call.

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

Factors that might cause these differences include, but are not limited to, those mentioned in today’s call and risk factors described in our Annual Report on Form 10-K filed with the SEC on April 2, 2013. The company’s SEC filings are directly available from us, from the SEC, or from the Investor Information section of our website.

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

Martin Kits van Heyningen

Thank you, Peter, and thank you all for joining us today.

I’m pleased to report that KVH achieved record results during the first quarter, our third record quarter in a row. Revenues of $39.9 million were up 49% from the same period last year. EPS for the quarter was $0.13 up from the loss of $0.09 per share in the first quarter of 2012.

Our continued solid revenue growth during the quarter was primarily the result of strong shipments for our guidance and stabilization business which was up 189% for the quarter and continued growth in our Maritime VSAT business which was up 42% from the same period last year.

Our TACNAV business continues to benefit from our large ongoing contract with the Saudi Arabia National Guard, our fiber optic gyro sales were also quite healthy especially commercial sales of our inertial measurement unit used in dynamic mapping systems and autonomist platform navigation. In fact, commercial FOG sales were larger than military FOG sales for the first time.

Looking at each of our markets in greater detail, starting with our satellite business, our overall mobile broadband revenues including satellite TV were $22.9 million that’s up 10% year-over-year. The mini-VSAT broadband portion of the business was up 16% overall reflecting strong airtime growth which offset a small decline in hardware sales. Hardware sales were about flat from last quarter and the drop in hardware sales year-over-year was caused primarily by a decline in our European mini-VSAT hardware business, which we believe was down due to the continuing poor economic conditions in the EU especially in Southern Europe.

As expected our Inmarsat hardware revenues were down 32% but that was offset by 11% increase in Inmarsat airtime revenues. So ironically the Inmarsat price increases that have helped drive their customers to our mini-VSAT broadband solution have also supported out overall Inmarsat revenues for the quarter.

Moving on our satellite TV business, TracVision revenues were up just 4% for the quarter over the same period in 2012 and maritime satellite TV market continues to show signs of modest improvement. According to our dealers on seasonably cool spring weather in both the U.S. and Europe as negatively impacted the overall leisure marine market. So we are still seeing some weakness but we believe we are in excellent position relative to our satellite TV competitors. We are also optimistic that some of this business wasn’t lost but merely deferred in another current quarter.

And I would like to talk a little bit about some of our new product and service plan. We have a number of major initiatives underway to improve the performance of our mini-VSAT broadband network and to enhance our competitive position.

First, the overall network from the overall network perspective, we have just about completed the full global rollout of the new variable codings, spreading and modulation technology known as VCSM. As I mentioned during our last call, VCSM has effectively doubles the capacity of our network by enhancing our efficiency by optimizing transmissions to each terminal type on our network.

In a very smooth process, we automatically upgraded our entire population of onboard terminals allowing us to support our growing user base without significant investments in new hubs and additional satellite capacity.

Later this year, the second major upgrade to the network is schedule to be brought online they will contribute another significant increase in our transmission efficiency creating another major increase in our capacity. This upgrade will also include what we believe will be a game changing capability called multicasting. This will allow us to send any data file or stream to all our customers on our network at the same time. One satellite transmission can be received by every terminal in the coverage area in much in same way that a television satellite broadcast one stream of data to millions of customers.

The current technology used by KVH and other maritime broadband providers is Unicasting, we are sending individual transmissions to each individual customer. This is the standard Internet protocol. Multicasting which is layered on top of this is exciting because it allows KVH to effectively eliminate the high cost of distributing large digital files to large populations of vessels.

Things like digital chart data bases feature films detailed weather data eLearning programs and television sports and news shows, will be able to economically transmitted on our mini-VSAT broadband network. So we hope to have some more exciting news about this new capability in the months to come.

Another important enhancement to our mini-VSAT broadband onboard terminals was completed in early April, when we introduced an enhanced version of our smallest TracPhone product called the TracPhone V3IP. With this product launch all three of KVH’s onboard terminals now have our CommBox network manager built right into the antenna control unit for the product. In the case of the TracPhone V3, the modem, antenna control or CommBox are all included in a single (inaudible) enabling this product to offer by far the easiest and fastest installation of any maritime VSAT.

The integrated CommBox modem in all our mini-VSAT products is a key part of our multicasting capability. Each of our standard products goes beyond providing multi-megabit connectivity and now can manage the reception, casting and distribution of multicast data onboard. So we now deliver the capability right out of the box from a hardware perspective to provide vessels with unique firewall networks for their operations and crew of our voice-over-IP, Internet cafe features and to receive multicast transmissions from our network, which for the first time will enable cost effective transmission of large files making all sorts of exciting new content available to the world’s 1.4 million seafarers.

In coming months we hope to announce new relationships with leading applications providers and introduce a series of exciting value added services to the maritime market. These services will profitably leverage our unique new content delivery capabilities to help solve important challenges faced by our customers created by new regulations like electronic navigation, pollution control and crew welfare and labor relations.

So now, moving on to our guidance and stabilization business, our TACNAV product revenues were $7.8 million for the first quarter that’s up more than 580% year-over-year as we continue to ship the previously announced contracts for the Saudi Arabian National Guard. We also have $3 million in non-recurring engineering sales which were mostly associated with the facility construction contract that was part of the larger Saudi Arabian order.

Yet, despite these impressive shipments and revenues we actually increased our guidance and stabilization backlog by over $5 million during the quarter. Most of our TACNAV business continues to be international. So we don’t expect any impact to this business because of the sequestration.

Turning to KVH’s fiber optic gyro business, our revenues grew to $6 million in the first quarter that’s up 93% year-over-year. Consistent with our strategy to migrate towards higher end systems, we are seeing strong orders from customers who use our IMUs for commercial applications like a dynamic mapping industry. Think about all the aerial imagery and street level scenes being captured for the new online mapping programs like Google Maps and Microsoft being mapped. They all require very precise reference of the camera position and orientation, which is exactly the information or IMUs tightly linked with GPS systems provide.

We also have excellent reception to our new 1750 IMU where customers report that performance exceeds our expectations. This is great news in a market where customers regularly make trade-offs between price and performance when selecting IMU over another. Through a lot of emerging applications for small highly accurate IMUs in the autonomous platform and self-driving car markets. We have got many units in the field now supporting customer trials.

As we have explained in the past calls, these early design wins are critical. Because they would that’s what leads to successful volume orders in the future. So we are very encouraged with this new products early success even though the numbers are still small.

So, looking forward to the remainder of this year, we are comfortable with our prospects for continued success in each of our strategic areas for the mobile broadband business, our new network capabilities and new product line featuring our integrated CommBox modem, they are going to help us win more fleet customers. We expect to be launching new value added services which will help increase our ARPUs and lead to a generally stickier offering.

For guidance and stabilization military business and military business, we continue to have a strong backlog, our important relationship with Kongsberg continues to go well. We believe we will enjoy growing orders from those three programs as it goes into production although the sequestration does create some uncertainty with that program towards the back half of the year.

And lastly, commercial applications for our fiber optic gyro business continue to look solid. We believe the merging applications especially in fields like autonomous platform navigation and dynamic surveying will make our small highly accurate IMUs extremely popular.

And now I’d like to turn the call back over to Peter for the financial results. Peter?

Peter Rendall

Thank you, Martin.

For the first quarter, total company revenues of $39.9 million were in line with our expectations and towards the higher end of the guidance we previously gave. As Martin stated earlier, our mobile communications revenues were $22.9 million which represented a 10% increase year-over-year while our guidance and stabilization business grew 189% year-over-year to $17 million.

Our mini-VSAT business recorded $14.8 million in quarterly revenues, of which Airtime Services represented almost $10 million, which was 42% higher than the first quarter last year. Total VSAT product and service revenues increased 16% year-over-year, while ARPUs for by-the-megabyte plans continue to be in the $600 to $700 per month range and ARPUs for our fixed rate plans continue to be around the $1900 level.

The mix of VAST unit sales for the quarter was 40% V3, 58% V7 and 2% V11. The relative mix of V7s and V3s remained consistent with recent quarters. All other marine SATCOM revenue including TV Systems and Inmarsat Systems in airtime was about $8 million.

Within that amount marine satellite TV sales increased 4% year-over-year to $5 million, while LAN based systems declined as we anticipated by 22% to $1.2 million. TACNAV product revenues of $7.8 million saw a seven-fold increase year-over-year which included over $6 million related to the Saudi Arabian National Guard Program. We also recorded $2.7 million in revenues under this program related to the facility construction and management services.

We were pleased to see robust FOG sales during the quarter of approximately $6 million, which were up 93% year-over-year. And we continued to see a greater proportion of our FOG products being used in commercial applications versus defense applications as Martin has mentioned earlier.

In the first quarter, over 50% of the revenues related to these commercial applications, which compared to less 40% for the whole of last year. In terms of the split between products and services, our current quarter revenues of $39.9 million included $14.7 million which was classified as service revenue of that amount 74% relates to airtime and 18% relates to services performed under the Saudi National Guard Program.

In Q1 last year, we reported service revenues of $9.6 million of which 81% was related to airtime. The gross profit margin of almost 40% was in line with our expectations and over 200 basis points higher than the first quarter last year. The gross profit margin for VSAT airtime was 32% in the first quarter which compares favorably to the 28% in the 2012 first quarter and is up sequentially from 30% in the fourth quarter of 2012.

As we disclosed previously, construction, installation and program management services associated with the Saudi National Guard Program is recorded at a gross margin of less than 10%. As I said before $2.7 million of this quarter’s revenue related to such services.

Our total operating expenses in the first quarter of $13.3 million were in line with our expectations and that recorded in the prior quarter. Compared to the first quarter last year, operating expenses were up 17% of which about 50% of that related to sales commissions for the Saudi National Guard Program. The reported tax expense for the quarter was 25% of pretax income which included almost $400,000 related to R&D tax credits for all of 2012 and a portion of 2013.

Including the effect of the R&D tax credits, we expect our effective tax rate for the full year to be between 35% and 40%. As we’ve discussed before, taxes are always difficult to forecast since there can be so many variables and unanticipated discreet items. And diluted EPS for the quarter was $0.13 on net income of $2 million which compared favorably to the net loss of $1.4 million in the prior year and a net loss per share of $0.09.

Our EBITDA adjusted for equity compensation expense was $4.8 million and the adjusted EBITDA margin was 12%. Depreciation and amortization was $1.2 million and equity expense was about $1 million.

Moving on to the balance sheet, at March 31, we had cash and marketable securities of almost $45 million, an increase of $6.5 million from the end of the prior quarter. $4.7 million of this increase can be attributed to the refinancing of a portion of our VSAT infrastructure during the quarter. This refinancing also explains why debt on our balance sheet at the end of March, a $15.1 million was $4.5 million higher than that recorded at December 31. Our quarter end accounts receivable balance was $29 million and day sales outstanding was 66 which remained broadly in line with the prior quarter.

As of March 31, this year our inventory balance stood at $17 million, which was up slightly from the balance at year-end. This increase resulted from a short fall in demand from our European business.

Capital expenditures were approximately $800,000 for the quarter and we still expect our capital expenditures for the year to be in the range of $6 million to $7 million. Backlog for our guidance and stabilization product and services at the end of March was $38 million up by about $5 million from December 31. This increase was attributed to the strong FOG bookings during the quarter as well as TACNAV product bookings.

Turning to our outlook for the second quarter and for the full year, we expect our VSAT business will continue to grow at a strong year-over-year pace driven by a combination of product sales as well as new airtime subscribers being added to our network.

We do though remain cautious as it relates to the leisure markets for our mobile communications business particularly after experiencing some softness in Europe this quarter. As it relates to our TACNAV business, we have a good level of visibility, product sales through the end of the second quarter, a good portion of which relates to backlog associated with the Saudi National Guard Program.

With uncertainties surrounding defense budgets, we continue to remain conservative in our estimates regarding the timing of new order wins. We also expect FOG product sales will show solid growth year-over-year as we continue to ship against our backlog and book new orders. Our effective tax rate for the second quarter and the rest of the year will increase to approximately 39% up from the 25% we recorded in Q1, which also included the 2012 R&D credit, which we just discussed.

Considering all of these factors, our guidance for Q2 is as follows; we expect revenue will be in the range of $39.5 million to $41.5 million with an EPS in the range of $0.08 to $0.12 per share. Our guidance for the full year remains unchanged and we expect revenues will be in the range of $151 million to $160 million and the EPS will be in the range of $0.37 to $0.48.

In conclusion, our confidence in our strategic growth businesses and operating fundamentals continues and remain strong. And now we would like to take your questions. Operator?

Question-and-Answer Session

Thank you, sir. (Operator Instructions). And we will go first to Jim Mcllree of Dominick & Dominick.

Jim Mcllree - Dominick & Dominick

Good morning. Can you map out the Saudi business for the rest of the year, please, how that flows through the P&L?

Martin Kits van Heyningen

Sure, Jim. So, we still expect team to see about $17 million in revenue in 2013, 65% of that is expected to be product. And we say, we did $8.7 million of that in Q1.

Jim Mcllree - Dominick & Dominick

So, does most of the rest get delivered in Q2 or is that – is it spread out sort of evenly for the rest of the year?

Martin Kits van Heyningen

It is skewed slightly towards Q2. But, there is a portion throughout the rest of the year.

Jim Mcllree - Dominick & Dominick

Okay. And when you talked about the Saudi business, you split it up, it seems like you split it up into two parts the 7, 8, which was the products and the $3 million of the services business. That $3 million is included in the $17 million total for the year?

Martin Kits van Heyningen

That’s correct.

Jim Mcllree - Dominick & Dominick

Okay, great. Speaking on (inaudible) for a bit, so the backlog for FOG versus TACNAV can you describe either quantitatively or qualitatively how the backlog splits out between FOGs and TACNAV?

Martin Kits van Heyningen

It’s approximately 25% is FOG backlog.

Jim Mcllree - Dominick & Dominick

Great. And how long does that backlog extend, is that just next 12 months or is it the next few years?

Martin Kits van Heyningen

It’s generally the next 12 months. So especially the FOG backlog is probably in the next 6 months; 6 to 9 months back. We normally don’t get multiyear backlog in FOG although with TACNAV, we do. So, there is a distinction there.

Jim Mcllree - Dominick & Dominick

All right. And one more, I don’t want to (inaudible) questions. It looks like the mini-VSAT business accelerated a bit. I mean, I think you announced that there was 3000 unit either sold or delivered recently which was a very short period after you had announced 2500 have been sold or delivered. Am I right in thinking that the mini-VSAT –

Martin Kits van Heyningen

Yes. Generally, the business has been increasing steadily although this quarter in terms of unit sold it was pretty flat with – in terms of hardware with last quarter. So I think, we anticipate year-over-year 2013 to be significantly higher than 2012 so.

Jim Mcllree - Dominick & Dominick

That’s great. Okay. Thanks a lot.

Martin Kits van Heyningen

Yes.

Operator

Our next question comes from Chris Quilty of Raymond James.

Chris Quilty - Raymond James

Martin, you are partially answering my question there but given the flat performance in the first quarter sequentially that obviously implies a pretty big pick up through the balance of the year. Can you give us a sense both of the timing of how you expect orders to land and number two, what gives you visibility into those sales is it just based upon ongoing channel increase or do you have any large deals that give you discreet visibility?

Martin Kits van Heyningen

Let me start with the second question. We don’t really have any large deals that give us discreet visibility. We do have a number of large customers who are still on the process of rolling out our products across their fleet. So we have good visibility – not visibility but good expectations and very high probability of success because of (inaudible) contract but not actually in backlog.

So, for example if we signed a contract with a customer for 100 vessels, we don’t call that backlog because they issue POs against that and as they are in the process of rolling out across our fleet.

And getting back to your first question, I think that Q1 was definitely softer than we would have liked. We thought that but to put that in perspective, we are talking about 20 to 30 units less and we would, we were expecting in Q1 and so it’s a little bit of a disappointment. We are looking at what’s happening across the markets. So we are seeing probably a few companies that actually is marketing products in Cypress for example that didn’t go well this quarter. So the European – Southern European business is definitely a way off and that had an impact.

We are looking at other people in the industry Inmarsat, unit sales were down 4% or 5% and they reported they only sold 85 VSATs in Q1. So we are selling three times as many as VSATs as they are according to their numbers.

Chris Quilty - Raymond James

Okay, great. And could you also give a breakout not that it’s that material – the LAN revenue business how that did in the quarter?

Martin Kits van Heyningen

Discontinued all our discreet LAN products so that had an impact on our revenues. It’s roughly under a $1 million now – about $1 million, yeah, $1.2 million Peter is pointing to a number.

Chris Quilty - Raymond James

Okay. And also I don’t know, Peter, you may have given this but of the Saudi revenue, of the TACNAV revenue excuse me, how much of that was non-Saudi?

Peter Rendall

So, of the $8.7, we did in Q1, $6 million was from the Saudi contract.

Chris Quilty - Raymond James

Okay. You weren’t talking that fast, but I can’t type that fast. Also just on the, the mini-VSAT service margins that kind of stalled out over the last several quarters as the C-Band network has been rolled out. Two things, one can you comment on how C-Band services are progressing and b) how does that impact generally, how does service margin should trend towards the back half of the year, are you still targeting 40% type service margin by Q4?

Martin Kits van Heyningen

We were sequentially up 3% so went from 30% in Q4 to 33% this quarter which I think is good progress and compared to year ago, I believe the number is 27% Peter?

Peter Rendall

27% to 28%.

Martin Kits van Heyningen

So, I think we are on track. So, I would no longer point to the C-Band as impacting the change in margin.

Chris Quilty - Raymond James

And have you landed any significant new customers on the C-Band?

Martin Kits van Heyningen

I wouldn’t say significant we’ve got probably dozen units out on trial. So, we do expect to get significant orders for V 11 product. But at this stage we are not really making the distinction whether it’s C-Band or Ku-Band because it’s a (dual more) product. So, we just look at them, as customers that are on the network. So, we’re not billing separately for the C-Band service.

Chris Quilty - Raymond James

Okay. And on the commercial FOG business up year-over-year but last year was a pretty bad quarter. And if I’m doing my math right it looks like the commercial FOG business was actually down in the first quarter relative to the rate it was running at for say the last three quarters. What are your prospects for that business, I mean, is it possible to get sort of a break out from call $3 million to $5 million of quarter range and what would it take to get there?

Martin Kits van Heyningen

Yeah, I’m not sure that the commercial is declining. I think commercial is increasing, in terms of absolute dollars as well and we expect another 50% kind of year-over-year increase in Q2 which put us around $8 million or higher for the quarter. So, I think we’re on the path for that business is growing quickly. And I think by next quarter, our biggest customers would be commercial in addition to the total being more than 50% commercial.

Chris Quilty - Raymond James

And how broad base you’re concentrated is the commercial business now?

Martin Kits van Heyningen

It’s concentrated around a couple of key products and key customers but compared to where we were, where we had a high very concentration of one program and one military customer, it’s a big improvement.

Chris Quilty - Raymond James

Okay.

Martin Kits van Heyningen

And also we like it because it’s not military.

Chris Quilty - Raymond James

Right. Peter, one other question just on product margins down big obviously because of mix related issues, how should we look at the product margins through the balance of 2013 and should there be any kind of Saudi impact we should watch for?

Peter Rendall

Well, so, obviously, in terms of the Saudi contract, it’s a combination of how higher margin product revenues with our lowest margin service revenues. So, throughout the course of the year, we should be seeing it being pretty consistent to increasing slightly.

Chris Quilty - Raymond James

Great. Thank you, gentlemen. Good work.

Martin Kits van Heyningen

All right, thanks Chris.

Operator

And our next question comes from Rich Valera of Needham & Company.

Rich Valera - Needham & Company

Thank you. Question on the CROWS III, you made cautionary comments regarding the potential timing of that program as it relates to sequestration. Can you give us any sense of, have you learned anything new in the past quarter restricted that program specifically that would make you more cautious, or is it sort of just a general caution. And can you give us any sense of how much revenue could be pushed out whatever in the back half related to CROWS III? Thank you.

Martin Kits van Heyningen

Yeah we’ve gotten, we have firm backlog in hand that covers Q2, Q3 so we have, I would say zero risk for – in the next couple of quarters. We’ve got some backlog related to CROWS in Q4, which is I’d say probably half a million to a million dollars less than what we would expect but that’s at this stage that’s not unusual. So, I’d say at this point, we don't have any visibility and we have heard specific comments that sequestration as a concern for the prime contractor but we haven’t heard anything beyond that. So, where do you get the concern for everybody, so I would tell, that’s a generalized comment at this stage.

Rich Valera - Needham & Company

But am I might to take it that what’s really a risk for you relative to your guidance is half million to a million of revenue that’s fairly small amount I would say.

Martin Kits van Heyningen

Yeah, I think that, so was a cautionary comment because it was a comment that we heard directly from the prime contractor…

Rich Valera - Needham & Company

Right.

Martin Kits van Heyningen

And we, but we do have backlog in place including up and through Q4. So, but we have, we’re not fully booked yet for Q4, so that’s where we are.

Rich Valera - Needham & Company

Okay. Not like a (inaudible) there by any stretch?

Martin Kits van Heyningen

Exactly. So, we’re in pretty good shape. And as I pointed out, TACNAV business is on the international, so we don't expect any issues there.

Rich Valera - Needham & Company

Okay. So, I just want to be clear. So, as it relates to your expectations that you laid out a quarter ago for guidance and stabilization to be up, I think about 10% in 2013, is your current backlog hover essentially all of that minus what’s a million dollars of CROWS III or, is there other stuff you need to turn in the remaining few quarters to hit that number?

Martin Kits van Heyningen

Right. Yeah, we definitely have more to book to hit our numbers.

Rich Valera - Needham & Company

Okay.

Martin Kits van Heyningen

So, this was just a comment about the specific sequestration exposure…

Rich Valera - Needham & Company

Got you.

Martin Kits van Heyningen

As it relates to guidance and stabilization. We’ve also heard that we have some exposure possibly 30 to 40 unit range as it relates to Coast Guard because that’s also federal money. So, we keep an eye on that too. But that…

Rich Valera - Needham & Company

Oh, you’re talking about the Coast Guard mini-VSAT structure?

Martin Kits van Heyningen

Yes.

Rich Valera - Needham & Company

I see.

Martin Kits van Heyningen

Yes. So, that’s not guidance but obviously but it is defense. It’s federal government.

Rich Valera - Needham & Company

Got you, okay. That’s helpful color there. And then in the leisure marine market, I wanted to make sure, I understood that I’m there so you suggested that I think that March quarter was lighter than expected because of the cold weather and you’re hopeful that some of that might actually come back to you in later period sort of delayed demand….

Martin Kits van Heyningen

Yes.

Rich Valera - Needham & Company

Is raining you’re seeing a month now into the second quarter that would lead you to believe there will be some pick up or is that still something you’re hoping to come at the next several weeks or months?

Martin Kits van Heyningen

Yeah. I think it’s a little bit too early to tell, if it has been better than March was but that so, but it’s too early to say whether that’s just early April sales, I don't have the, obviously the four quarter results yet but so far so good.

Rich Valera - Needham & Company

Okay. And you kind of indirectly addressed this. But just want to get your sense of the competitive dynamics in the mini-VSAT market particularly I guess that relates to Inmarsat who clearly is competing aggressively in that market. Any thoughts on they should suggest their price increases have not led to increased churn into factions and sort of worked out quote kind of great for them. But how are you seeing the competitive dynamics in the marketplace particularly as it relates to them?

Martin Kits van Heyningen

Well, I think it hurts them. I think it hurts their brand and their reputation and I think it will make it more difficult for them when they come with their new system requires people to buy new hardware. I think that they are correct and that the price increases didn’t really hurt them in the short-term because people have their equipment on board; it only works with their service. So, that they’re kind of stuck in the short-term. So I think it’s a good short-term strategy but I think it’s going to hurt them in the long run. But I…

Rich Valera - Needham & Company

Okay.

Martin Kits van Heyningen

I can’t say that that’s an immediate benefit to us but it certainly doesn’t make their customers happy because they feel like they’re being abused and there is nothing they can do about it.

Rich Valera - Needham & Company

Right. I understood. Okay, thanks for taking my questions.

Martin Kits van Heyningen

Yes.

Operator

And we’ll take a follow up from Jim Mcllree with Dominick & Dominick.

Jim Mcllree - Dominick & Dominick

Great, thanks again. Martin, I think you mentioned that discreet LAN products have been I think you said discontinued, does that mean that we’ll see a drop in that LAN business from $1.2 million to close nothing going forward?

Martin Kits van Heyningen

No, I should – I wasn’t very clear on that. What I should have said is that we’ve just continued our unique RV products. We’re still selling. We now have a common platform that’s our low end marine products which is also our only RV product which is our M1 platform, there is a R1 variant. But we discontinued all the products that were only designed for the RV market. And that we are continuing with. And we’re also continuing with the A7 which is primarily in the bus market today, motor coach market.

Jim Mcllree - Dominick & Dominick

Got you. Okay.

Martin Kits van Heyningen

And that’s not a change from our guidance so I should have been more clear on that sorry about that.

Jim Mcllree - Dominick & Dominick

Okay. All right. And there have been a lot of new services and products recently in the mini-VSAT business, it sounds like you have a whole bunch more coming this year, can you tell us what you think the impact is going to be on ARPU as these things get rolled out?

Martin Kits van Heyningen

Well, the reason we’re doing is because we want to drive ARPUs higher but I think that the way we want to do is a little bit different from I think the way our competitors are approaching as we want to sell products that have value so that the delivery cost will be transparent to the customer, non-existent to the customer. So by using the small (inaudible) approach, we’ll be able to deliver things for example like a movie where the customer pays for the movie, he doesn’t pay for the delivery of the movie. So, the net impact will be increasing ARPUs but it will done through the delivery of things that people want to buy like a digital chart. So the impact will be increasing ARPUs, and each of these services might be $100 a month or $400 a month in the aggregate, it should make a significant impact on our ARPUs we are hoping.

Jim Mcllree - Dominick & Dominick

I see, okay. Great. And last one Peter, I’m sorry I keep popping on the Saudi service, the Saudi business and the service business. But again, if you would just focus on the service business the low margin that 10% margin from the Saudi. How does that map out over the years. I’m just – I just want to make sure that I get how that progresses over the year. Correct?

Peter Rendall

So, we anticipate doing approximately $5 million for the remaining three quarters.

Jim Mcllree - Dominick & Dominick

Of that low margin service business?

Peter Rendall

Correct.

Jim Mcllree - Dominick & Dominick

Okay. And there is skew towards Q2, but you do have some in Q3 and Q4?

Peter Rendall

Correct. And they are based on meeting certain milestones so certain cost inflow from one quarter to the next.

Jim Mcllree - Dominick & Dominick

Right. I’m with you on that. Okay, great. Thanks a lot.

Peter Rendall

You are welcome.

Operator

And with that we have no further questions in queue.

Martin Kits van Heyningen

Okay. Well, thanks everyone for listening and if as always if anyone has a specific question, feel free to call us or email us. Thank you.

Operator

And that does conclude today’s conference. We appreciate everyone’s participation today.

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