KVH Industries' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.31.13 | About: KVH Industries, (KVHI)

KVH Industries, Inc. (NASDAQ:KVHI)

Q2 2013 Earnings Conference Call

July 31, 2013 10:30 AM ET

Executives

Peter Rendall – Chief Financial Officer

Martin A. Kits van Heyningen – President, Chief Executive Officer, and Chairman of the Board

Analysts

Chris Quilty – Raymond James & Associates, Inc.

Jim McIlree – Chardan Capital

Rich Valera – Needham & Company

Operator

Good day, everyone, and welcome to today’s KVH Industries Second Quarter 2013 Earnings Announcement. As a reminder today’s call is being recorded.

At this time I would like to turn the conference over to your host for today, Mr. Peter Rendall, Chief Financial Officer. Please go ahead, sir.

Peter Rendall

Thank you, and good morning, everyone. I’m Peter Rendall, and with me is Martin Kits Van Heyningen, Chief Executive Officer of KVH Industries. This call will address the second 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, which was 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 would turn it over to Martin for today’s discussion of results. Martin?

Martin A. Kits

Thanks, Peter, and thank you all for joining us today. I’m pleased to report that we achieved record top line results during the second quarter, our fourth record quarter in a row. Revenues of $43.2 million, were up 35% from the same period last year.

Non-GAAP EPS for the quarter was $0.15, up $0.03 per share from the second quarter of 2012. Headland Media’s contribution to our revenues in the second quarter totaled $1.9 million, since the acquisition in mid-May and added approximately $0.01 to our EPS.

But even without Headland Media, we still would have achieved record results with both revenues and earnings for the second quarter above our guidance. Our continued strong revenue growth during the quarter was a result of increased shipments for our guidance in Stabilization business up a 100% from the second quarter of 2012, and continued strong growth in our Maritime VSAT Airtime business, which was up 35% 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 solid, especially commercial sales of our Inertial Measurement Unit used in dynamic mapping systems and our autonomist navigation. For the second quarter in a row, our commercial FOG sales were larger than our military FOG sales.

Looking at each segment in greater detail, our overall mobile broadband revenues, including Headland Media were $27.3 million, up 13% year-over-year. The mini-VSAT broadband portion of the business was up 17% overall reflecting strong airtime growth of 35% year-over-year, which was partially offset by a decline in hardware sales primarily in Europe. We believe our European sales continue to be down due to the continuing poor economic conditions in the EU particularly in Southern Europe.

On a positive note, we saw strong sales of our new TracPhone V11 during the quarter. Its higher average selling price led to the V11 passing the V3 in terms of revenue for the first time during the quarter. We’re looking on a number of large opportunity, then the V11 is becoming the system of choice for leading maritime companies. We do expect hardware sales to increase year-over-year again starting this quarter.

Moving on to our Satellite TV business, TracVision revenues were up in the U.S., but down overall due to very slow sales in Europe. Net was a 4% decline in the second quarter over the same period in 2012. Another factor in this we believe was the wet, cold spring both in the U.S. and Europe that adversely impacted the leisure marine market. We’re confident that our competitive position is strong and we have new products in the pipeline it should help maintain our leadership position in the global maritime satellite TV market.

In terms of strategy and longer-term positioning, we had several significant announcements in the second quarter relating to our strategy to expand our mini-VSAT Broadband service. There are many new initiatives underway to modernize the world’s commercial shipping industry, driven by a series of new regulations to reduce greenhouse gas emissions to convert electronic navigation equipment and digital charts to improve training and to enhance the living conditions of seafarers.

Meeting each of these regulations often require large amounts of digital data to be delivered to ships for things such as updating electronic chart databases and providing detailed weather forecasts, computer-based training courses and videos, and news, sports, music, and movies for crew welfare and entertainment.

These large files are now delivered on DVDs due to the high cost of sending these files individually to ships via satellite. But shipping DVDs is a slow and costly effort when you consider the need to coordinate international delivery and get them through customs, and have them available to move to ship that mail would be important for few hours. This is the important customer problem that will solve with our new content delivery solution.

Our second quarter announcements related to how we will revolutionize delivery of large files to ships at sea, included three major components; enhancements to our network to support multicasting, a whole new TracPhone product line, and the acquisition of a leading distributor of licensed media to the global marine maritime market.

Together, they reflect our long-term strategy to introduce innovative new solutions to meet the needs of our customers to affordably deliver content to their ships. And in the process, they fundamentally changed the basis of competition by disrupting the market in a way that positioned to our solutions far ahead of our competitors.

So let’s look at these components in detail. Starting off with our network enhancements, our new IP-MobileCast Content Delivery Service is based on the simple idea of broadcasting large files with commonly used datas to mini-VSAT Broadband customers all at once, using a single transmission rather than the current practice of sending an individual file hundreds of thousands of times on a one-to-one basis.

The elements of IP-MobileCast include improvements in our modulation technologies designed to increase our shore to ship data-carrying capacity of our network, special software with Forward Error Correction, optimization, and file verification capabilities that will provide reliable automatic file delivery. And new software for our CommBox ship/shore network manager, which is the onboard hub for the IP-MobileCast service.

We’ll begin rolling out these network enhancements this quarter and should have the service operational by the end of 2013. We also announced the introduction of our TracPhone V-IP series product line, which now features a single-box belowdecks unit that integrates the capabilities over CommBox network manager, our ViaSat’s ArcLight modem and our IP-enabled antenna control unit all in a single 2U Rackmount module called the Integrated CommBox Modem.

In addition to being significantly easier to install, this new product line provides the features of the CommBox and the ability to receive IP-MobileCast service to every new TracPhone customer. So it’ll now deliver the capability right out of the box to provide vessels with unique firewall networks for their operations and their crew. And to offer Voice Over IP, Internet café features, and to receive multicast transmission from our network, which for the first time will enable cost effective transmission of large files to make available all sorts of exciting new content to the world’s 1.4 million seafarers.

The third major announcement during the second quarter was our acquisition of Headland Media. The Maritime industry is a leading provider of commercially licensed news, sports, music, and movies. Headland Media services are popular among seafarers, but often difficult to deliver divided to the need to ship movies on DVDs the ports around the world or the expense of transmitting content over satellite.

Shipping companies need to offer this type of amenity to their crews due to new labor laws that go into effect this month. They were designed to improve seafarers living conditions. We intend to create new IP-MobileCast Delivery Services that will make it easy and affordable for maritime companies to provide Headland Media’s news, sports, music, and movies onboard their vessels.

Our extended content deliver strategy, which includes IP-MobileCast, the new TracPhone V-IP series, and Headland Media content was announced at the Nor-Shipping show last month, along with our plan to work with electronic chart market leader Jeppesen, to broadcast their entire chart database using IP-MobileCast.

The reaction from customers, the press and other potential application partners was universally positive. In coming months, we’ll announce new relationships with other leading application providers and introduce a series of exciting new value-added services to the maritime market.

Moving on to our guidance and stabilization business, our TACNAV product revenues were $5 million for the second quarter, that’s up nearly 230% year-over-year, as we continue to ship the previously announced contract for the Saudi Arabian National Guard. We also have $2.4 million in non-recurring engineering sales, which were mostly associated with the low margin in facility construction and installation support contract that was part of the larger Saudi order.

Since most of our TACNAV business continues to be international, we don’t anticipate any significant impact on this business due to sequestration. Although as expected, the higher margin TACNAV production portion of the contract was largely completed during the first half of the year. There continue to be a number of other large programs that we’re pursuing internationally, we are optimistic about our prospects in this part of our business.

With the completion and formal acceptance of the installation and service facility in Saudi, we’ve demonstrated our ability to be a prime contractor on larger programs like this $36 million project. The facility and the hardware were delivered on-budget and ahead of schedule.

Turning to our Fiber Optic Gyro business, our revenues grew to $8 million in the second quarter, that’s up 43% year-over-year. We saw sales growth in both military and commercial sides of our FOG business with commercial applications again coming for more than half of the revenues. Our military FOG business was supported by new orders for gyros used in Turret Stabilization Applications for a variety of vehicles and continued sales of gyros in remote weapon stations.

We now expect to see a decline in remote weapon station market due to the U.S. sequestration plan, which will impact Q3 and Q4. Although these declines in programs like CROWS should be offset by gains in other FOG areas. Commercial FOG sales continued to be driven by applications like digital mapping and integration with precision GPS systems.

During this past quarter we delivered units for use and integration efforts or early trials in the fields of robotics and self-driving cars. Our 1750 sensor has been popular in this market due to its competitive price point, high accuracy, and small size.

Our FOGs are typically used as part of a navigation solution, where they operate in conjunction with the GPS, providing improved accuracy positions, as well as vehicle dynamic feedback. These applications are very similar to the dynamic serving applications we discussed during last quarter’s conference call. They appear to be growing markets where the accuracy of our technology is needed and represents a good value to the customer.

Our recent news stories have featured, as discussed the future of self-driving cars, which may become another good market for our FOG and IMUs. Although this market may only represent a few hundred vehicles over the next year or so, getting in on the ground floor of this emerging market will help us identify opportunities both in the automotive market and in related industries such as trucking, mining, and farming, where the technology may also be deployed.

As we’ve explained in past calls, these early design wins are what lead to successful volume orders in the future. So we’re very encouraged with our ongoing early success. So looking forward to the remainder of the year, we’re very excited about the opportunities and comfortable with our prospects for continued success in each of our strategic areas of the business. For the mobile broadband business, the surge in V11s is encouraging, and the reception to our new IP series and the excitement about our upcoming IP-MobileCast Service is helping to create a solid market pull for our products.

Our new colleagues at Headland Media have already started to make a significant contribution to our plans to enhance our product with innovative new services. They will affordably and automatically deliver news, sports, music and movies to ships at sea. For our guidance and stab business, our new commercial FOG products like the 1750 IMU are helping to overcome headwinds due to sequestration.

And our international TACNAV business is helping to keep us diversified reducing our exposure to the U.S. defense budget cuts. We performed well in our TACNAV programs and we’re optimistic about our future potential here.

So that covers where we are, and I’d like to turn it over to Peter now to go over the numbers. Thanks.

Peter Rendall

Thank you, Martin. So this morning, we reported record company revenues of $43.2 million for the second quarter, which included $1.9 million of Headland Media revenue. Excluding this Headland Media revenue contribution, revenues were at the high end of our expectations and the guidance we previously gave.

As Martin stated earlier, our mobile communication revenues which include Headland Media were $27.3 million, representing a 13% increase year-over-year, while our guidance and stabilization business grew 100% year-over-year to $15.9 million.

Our mini-VSAT business recorded $17.2 million in quarterly revenues of which airtime services represented $11.3 million, which was 35% higher than the second quarter last year. Total VSAT product and service revenue increased 17% year-over-year, while the 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 per month level. The mix of VSAT unit sales for the quarter was 38% V3, 51% V7, and 11% V11.

All other marine SATCOM revenue including TV Systems and Inmarsat Systems in airtime was $8.1 million. Within that amount as previously discussed, we saw a slight decrease of 4% in marine satellite TV sales year-over-year to $4.2 million. And as expected the LAN based systems declined by 27% to $1.3 million.

TACNAV product revenues of $5 million saw a more than three-fold increase year-over-year and included $3.6 million related to the final product delivery under the Saudi Arabian National Guard Program. He also reported $2.3 million in revenues under this program related to equipment installations and program management services, and the finalization of the building of the installation facility.

We were pleased to see robust FOG sales of $8 million continue during the quarter, up 43% year-over-year. And we continue, as previously discussed to see a greater proportion of our FOG products being used in commercial applications compared to those used in defense applications.

In terms of the split between products and services, our current quarter revenues of $43.2 million included over $17 million, which was classified as service revenue. Of that amount, 71% relates to airtime, 13% relates to services performed under the Saudi National Guard Program, and 11% related to Headland Media.

In the second quarter last year, we reported service revenues of $11 million, 86% of which related to airtime. The gross profit margin of 42% was in line with our expectations and over 280 basis points higher than the second quarter last year. The gross profit margin for VSAT airtime was 35% in the second quarter, which compares favorably to the 32% in the 2012 second quarter and is up sequentially from 33% in the first quarter of this year.

As we discussed previously, construction, installation, and program management services associated with the Saudi National Guard Program recorded at a gross margin of less than 10%. As I noted earlier, $2.3 million of this quarter’s revenue related to such services.

Total operating expenses in the first quarter of $15.7 million were in line with our expectations, compared to the second quarter last year, operating expenses were up 36%, the majority of which related to new Headland Media operating expenses, the Headland Media acquisition related expenses, and sales commissions for the Saudi National Guard Program. The reported tax expense for the quarter was 35% of pre-tax income.

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 discrete items. Our diluted EPS for the quarter was $0.10 on net income of $1.5 million, which compared favorably to the net profit of $500,000 in the prior year and then EPS of $0.03.

The EBITDA adjusted for equity compensation expense was $5 million and the adjusted EBITDA margin was 12%. Depreciation and amortization was $1.4 million and equity expense was approximately $900,000.

Moving on to the balance sheet. At June 30, we had cash and marketable securities of $54.3 million, an increase of $9.5 million from the end of the prior quarter. $1.6 million of this increase can be attributed to Headland Media. And since we financed $23 million of the $24 million Headland acquisition cost with bank borrowings, our debt at June 30, was $37.7 million, up $22.6 million from that shown at March 31.

Our quarter accounts receivable balance was $27 million and DSO was 55, down 10 from Q1 this year. At quarter end, our inventory balance stood at $17.4 million, which was up by approximately $500,000 from cash on hand at March 31.

Capital expenditures were approximately $1 million for the quarter, and we expect to our capital expenditures for the year to be in the range of $5 million to $6 million. Backlog for our guidance and stabilization products and services at the end of June was $30 million, down by about $8 million from March 31. This decrease is primarily attributed to product backlog shift and services recorded under the (inaudible) contract during the quarter.

Turning to our outlook for the third quarter and 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 will also record a full quarter of Headland Media’s revenues. We do though continue to 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 now shipped all of the product backlog under 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 product sales will show solid year-over-year growth as we continue to ship against their backlog and book new orders. Our effective tax rate for the third quarter and the rest of the year is expected to be approximately 40%.

Considering all of these factors, our guidance for Q3 is as follows. We expect revenue will be in the range of $38 million to $42 million, with an EPS in the range of $0.08 to $0.12 per share. We have increased our guidance for the full-year now and expect that revenues will be in the range of $160 million to $165 million and the GAAP EPS will be in the range of $0.38 to $0.46. Excluding the Headland Media acquisition related costs, non-GAAP EPS is expected to be in the range of $0.43 to $0.51 per share.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Chris Quilty of Raymond James.

Chris Quilty – Raymond James & Associates, Inc.

Good morning, gentlemen. Congratulations on the results.

Martin A. Kits van Heyningen

Hey, thanks, Chris.

Chris Quilty – Raymond James & Associates, Inc.

I wanted to follow-up a little bit on the mini-VSAT business and what you are seeing in terms of rate of antenna shipments trial and activity with some of the larger shipping companies?

Martin A. Kits van Heyningen

Sure. Yeah, so this quarter was generally in line with last quarter, so if sales were from a hardware perspective were flat. As I said in my prepared remarks, it was actually a sequentially sort of year-over-year there was a slight decline. Part of that is that, because the numbers are still fairly small, we’re still in that $250 to $300 per quarter range.

So in the earlier period, we are doing three big rollouts on fleets like NYK and Varun, and this quarter we are doing that across one. So that can be a little bit lumpy. We don’t expect that to continue this quarter. So there is a little bit of up and down there, because you get these binary contract wins. But we are seeing good activity. We’ve got a lot of stuff in the pipeline, some big RFPs out in the street now that we are bidding on. So we see continued strong interest. And I think if you look at our sort of steady state daily bookings kind of business, we are seeing good growth there.

Chris Quilty – Raymond James & Associates, Inc.

And regarding the mix between what you’d classify as leisure versus commercial, clearly the V11 is a commercial product. Can you characterize, first of all, the mix and how it has changed, and second of all, the type of customers that you see adopting the V11?

Martin A. Kits van Heyningen

Yeah. So, you’re right, the V11 is more focused on commercial. Although we have had some nice uptake by some boatbuilders like Westport and Sunseeker, who are putting the 11s on with a matching HD-11 dome. But the V11 is really targeted at the larger shipping companies and natural gas companies. We’ve had some good fleet wins there with LNG companies. So it’s really about the higher value platforms and the ones that are going global. So the big advantage is that you don’t need to have a backup carrier and that the V11 has both C and Ku, so in a fact it’s internally redundant and fully global which is a unique feature. So companies that have vessels they go anywhere really like the V11.

Chris Quilty – Raymond James & Associates, Inc.

And regarding Headland, have you yet previewed for some of your customers what the pricing models will look like for distribution? And what do you expect either for your existing customers, what their adoption rate will look like, say, a year out?

Martin A. Kits van Heyningen

No, we haven’t rolled out anything yet, in terms of the new service. So what we started doing immediately after acquisition is to start cross-selling. So we’ve been training their folks on our products and our folks on their product. So we want to sell what they have today as we prepare for this new for this new service launch, which will be really quite different from their product offerings what they have today. So this will be an all new service. And we have come up with some internal price points that we are testing amongst ourselves before we show to customers. And that really will be rolled out in the fall. So…

Chris Quilty – Raymond James & Associates, Inc.

Can you talk about maybe philosophically, if a customer is currently paying a couple hundred dollars for movies a month to a vessel, would the concept it be to charge less because you are costs are less or to charge more because of the convenience of the service?

Martin A. Kits van Heyningen

Yeah. At a high level I think that we would charge roughly the same, meaning that they buy the content. So if you’re buying a movie for $20 and we beam it to you or you buy the mail on DVD, the value to you is roughly the same, so the cost to you will be roughly the same. Where we hope to increase revenues is that, we’ll be offering a lot of other things that aren’t available today. So that there will be additional packages that you can buy to size just movies, more timely to live news and sports and things like that.

Chris Quilty – Raymond James & Associates, Inc.

Gotcha. Shifting gears to the FOG business, the 1750 had a real slow roll in terms of its adoption. Are you happy with where you are at now with that product line?

Martin A. Kits van Heyningen

The sensor side has been a little bit slow. But the IMU has been going faster than we expected. So the integrated product, which is a higher value product as well, has had a very exciting start. So we’re optimistic about that product.

Chris Quilty – Raymond James & Associates, Inc.

Great. I’ll bow out and back into the queue, if I have more questions. Thank you.

Martin A. Kits van Heyningen

Thank you.

Operator

(Operator Instructions) From Chardan Capital we’ll go next to Jim McIlree.

Jim McIlree – Chardan Capital

Good morning.

Operator

Mr. McIlree, your line is open.

Jim McIlree – Chardan Capital

Yeah. I’m on. Can you hear me?

Martin A. Kits van Heyningen

Yeah.

Operator

Yes, sir. Please go ahead.

Jim McIlree – Chardan Capital

Right. Yeah, thanks, good morning.

Martin A. Kits van Heyningen

Good morning.

Jim McIlree – Chardan Capital

For the increase in the revenue guidance, is that mostly attributable to the addition of Headland Media?

Martin A. Kits van Heyningen

Well, it’s – certainly that’s part of it. Their revenues are on the order of $3 million a quarter. So for the balance of the year, that’s going to be roughly $3 million in each of the next two quarters in round numbers. So we anticipate that that will also be accretive, and we’re hoping that that they’re expecting rather that that would cover also the one-time acquisition costs that we incurred in the second quarter. So should be a little bit better than a wash for the full-year on the EPS basis as well as contributing to the top line. So a wash, by that, I mean, it’s covering the one-time acquisition cost, it is accretive in each of the next few quarters.

Jim McIlree – Chardan Capital

Okay. And then this transaction expense of $865,000, where does that show up in the income statement?

Peter Rendall

Jim, this is Peter….

Operator

Ladies and gentlemen, please stay on the line as we attempt to reconnect with our speakers. Gentlemen, you may continue. Gentlemen you are back in conference.

Martin A. Kits van Heyningen

Okay, great. Thank you.

Peter Rendall

Sorry about that, Jim.

Jim McIlree – Chardan Capital

We got disconnected there.

Peter Rendall

Could you repeat the question Jim?

Jim McIlree – Chardan Capital

Yeah. What was the question? The $865,000 in transaction expense, where does that show up in the income statement?

Peter Rendall

That all in general and administrative.

Jim McIlree – Chardan Capital

Okay. So Peter, going forward, what’s kind of a normalized OpEx in Q3? So we are going to take out the $865,000, but we need to put in a full quarter of Headland OpEx. So what’s the normalized OpEx going forward?

Peter Rendall

It’s broadly around the $15 million a month like obviously there will be some ups and downs.

Jim McIlree – Chardan Capital

Okay, great. And is there any – in order to rollout the Headland products, is there is a significant increase in R&D or any other items?

Peter Rendall

No. I wouldn’t say a significant, there are definitely costs associated with that, there are no bandwidth costs, because we are using our existing network. But there are some ground-based infrastructure costs, some CapEx, and some incremental spending that we baked into the numbers. So – but it’s not significant compared to rolling out the C-band network for example.

Jim McIlree – Chardan Capital

Okay, great. Thanks a lot.

Martin A. Kits van Heyningen

Yeah.

Operator

(Operator instructions) Up next from Needham & Company, we’ll hear from Rich Valera.

Rich Valera – Needham & Company

Thank you. Good morning.

Martin A. Kits van Heyningen

Hi, Rich.

Rich Valera – Needham & Company

Hi. Martin, could you just talk about the diversity of the V11 sales? I know you had one large customer that was sort of looming out there with kind of a backlog. Have you secured other meaningful wins? Was it fairly diverse?

Martin A. Kits van Heyningen

Yes, it is for pre diverse. So we’ve gotten some a good win or two that’s being rolled out and we have some projects that we’re bidding right now, which are primarily all V11, which is a little bit from what we were thinking before we were thinking that across the fleet, it might be a mix. But we’re seeing now as some of the big fleets, it’s just really focusing on V11 for everything. So that might skew the numbers a little bit going forward in a good way.

Rich Valera – Needham & Company

Of course, and with respect to the unit sales in the quarter, is it safe to say you were within the 250 to 300 range albeit it’s likely at the low-end in this quarter?

Martin A. Kits van Heyningen

Yes, yeah. We’re still in that range and we haven’t broken out consistently over the 300 mark. So we’re still in that range.

Rich Valera – Needham & Company

Great, and then with the TACNAV, in the past, you’ve given a little bit of color, was that too much specificity on the pipeline there kind of given us some sense of the magnitude of potentially deals out there. Is there any color you can give us on what that pipeline looks like over the next year or so?

Martin A. Kits van Heyningen

Yeah, I think we’re pretty much for full-year TACNAV book what we expect to get. So there’s no rise in exposure for 2013. We have some projects that we expect to be awarded in Q4, which will impact 2014. So we’re optimistic about that with these are projects with existing customers and system integrators that we have worked with for many years. So we feel pretty good about our chances there. So generally our visibility is I would say moderate for 2014 on TACNAV, but so far I think we are in pretty good shape.

Rich Valera – Needham & Company

Great. And then with FOG, relative to – I’m not sure how to – I guess sort of maybe relative to the $8 million run rate you saw in 2Q, how we should think about that business going forward. How much of the recent weakness in CROWS and remote weapon station is factored into 2Q? Or should we expect some level of kind of step down in 3Q as you factor in some of that CROWS-related weakness?

Martin A. Kits van Heyningen

I think, broadly speaking the $8 million, we did see a decline from what we were thinking for the Kongsberg and CROWS for U.S. which was on the order of under $1 million for the second half, but we believe we can make that up another program. So right now we are thinking, $8 million on average is a pretty good number.

Rich Valera – Needham & Company

Okay. And looking out, I know it’s early, but looking into next year, I mean, I would assume commercial you would think continues to grow. Not sure what the outlook would be for defense-related stuff there. But any color at all you’d be willing to give on that trajectory as we move into next year?

Martin A. Kits van Heyningen

No, that would be tough. I think, some of the design wins that we are getting with the 1750 IMU that has an average selling price of around $18,000. So it’s a nice high margin, big dollar sale for us, compared to selling the sensors the CROWS, which are a lot less expensive and tighter margins. So, we think that’s going to be a good solid business for us. Customers like NovAtel are doing very well with their product, which integrates our IMU. So Google and Microsoft are big customers in their mapping systems. So, I’d say at this point, we expect that businesses to continue to grow next year.

Rich Valera – Needham & Company

Great, that’s helpful. And one final one from me, with respect to the Headland acquisition, have you tried – have you gotten a sense of what percentage of your existing mini-VSAT customers subscribe to the Headland service now, i.e. sort of what percent is sort of opportunity versus ones that maybe you could do the multicast with, but you don’t necessarily get the incremental revenue from the content itself?

Martin A. Kits van Heyningen

Yeah, the overlap is surprisingly small. So it’s actually – we did the cross reference and it’s actually very small. So the good news is that almost all of it is greenfield from both customers perspective.

Rich Valera – Needham & Company

That’s great. And then in terms of the actual timing of the multicast, I mean, you mentioned this year, but it sounds like, is it late this year, kind of late 4Q, or any other timing on that?

Martin A. Kits van Heyningen

Yeah, it’s going to be late this year. We are going to start rolling out the network improvements within the next, call it 30 to 60 days and those will be – have to be tested and then there is hardware and software that’s going on the vessels and content. There is new content that we are acquiring, so it might be a little bit of a stage rollout as well where we start to rollout some of their services as opposed to doing a big bang.

Rich Valera – Needham & Company

Great, look forward to hearing about that.

Martin A. Kits van Heyningen

Okay. Thanks, Rich.

Operator

(Operator Instructions)

And gentlemen, it appears we have no further questions at this time.

Martin A. Kits van Heyningen

Okay, great. We’ll sign off, and as always, feel free to contact Peter or myself directly if you have any follow-up questions.

Operator

Thank you. And that does conclude today’s conference. Again, we thank you all for joining us.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!