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KVH Industries, Inc. (NASDAQ:KVHI)

Q4 2013 Earnings Conference Call

February 20, 2014 10:30 a.m. ET

Executives

Martin A. Kits van Heyningen – President, CEO and Chairman

Peter Rendall – CFO

Analysts

Chris Quilty - Raymond James & Associates, Inc.

Rich Valera – Needham & Company Inc.

Anya Shelekhin – Sidoti & Company

Operator

Good day everyone and welcome to the KVH Fourth Quarter and Year End 2013 Earnings Conference Call. Today’s call is being recorded.

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

Peter Rendall

Good morning, I’m 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 this 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 most recent Form 10-Q, filed with the SEC on November 9, 2013. The Company’s SEC filings are directly available from us, from the SEC, or from the Investor Information section of our website.

And at this time, I would turn it over to Martin for today’s discussion of results. Martin?

Martin A. Kits van Heyningen

Thank you, Peter, and good morning everyone and thank you for joining us today. Of our disappointing FOG sales in Q4 caused us therefore overall result in the quarter. On a full year basis was another good year for us. As we continue to grow, improve our profitability and strengthen our competitive position with a broad range of new products and services. I’m happy to report that both our mobile broadband and guidance and stabilization businesses performed well in 2013 and we’ve a number of new initiatives underway that will create exciting new growth opportunities in the years ahead.

For the full year 2013, our annual revenues topped a $162 million which is a new record, was up 18% over 2012. And our earnings per share were $0.30, the year-over-year increase of 26%. Our annual revenue growth was driven by mobile broadband sales of $108 million that’s up 22% from 2012. This growth was in turn driven by strong 36% increase in Maritime VSAT airtime sale.

In our marine satellite TV business revenues were up marginally to $16 million for the year, the important leisure markets for our satellite TV business seem to be rebounding somewhat the Americas where we saw a 10% increase year-over-year, but are still lagging in Europe where our marine satellite TV sales were actually down 10%.

Our guidance and stabilization business also grew in 2013 to $54 million, a 12% increase over 2012. We successfully completed hardware deliveries on the largest order in the company’s history for TACNAV tactical navigation system during the year and nearly finished installing over a 1,000 systems in vehicles using our new facility in Saudi Arabia. The sale and associated engineering support generated nearly $20 million in revenues during the year.

Our 2013, fiber optic gyro sales grew to $24.5 million which was up about 5% year-over-year. The new 1750 IMU was being well received and has been designed into many of the product type, military robots, soft driving cars and stabilized optical devices on drones that you might have read about recently in the news.

During the fourth quarter our mobile broadband revenues increased 35% year-over-year to $29 million, this includes $12.5 million of mini-VSAT Broadband airtime revenue which on an annualized basis now represents more than $50 million in revenues. With contracts typically range from one to three years, airtime revenues continue to grow at a fairly predictable rate as we add subscribers to the network. We also had solid unit bookings in the quarter and even carried backlog into 2014 which is unusual.

Our guidance and stabilization revenues were $9.9 million in Q4 down 45% year-over-year. A significant part of this decline was anticipated due to the completion of our record TACNAV contract in Saudi Arabia. Our military navigation sales for the fourth quarter were $2.2 million and this down 76% from Q4 of 2012.

Our fiber optic gyro sale totaled $4.6 million for the quarter down 39% from Q4 in 2012. This was far below our internal expectations. As we reported on previous calls, our fiber optic gyro sales were often used as subsystems and other manufacturer’s final products as we don’t always have good visibility of all the factors that drive demand for their products and ultimately for our FOG sales. This past quarter one of our major OEMs with long term contract unexpectedly delayed shipments on their fourth quarter forecast producing their fairly steady quarterly volume more than 85%. This unforeseen delay combined with already adverse effect of anticipated demand for military systems that use our fiber optic drivers as components resulted in significant drop in revenues.

We have now with the customers responsible for this decline and believe their sales will recover later in 2014, in fact, since the (play sales) that were deferred. We will cover the numbers in more detail but let’s take a look at some of the exciting developments we believe are going to drive significant growth in each of our key business areas, starting off with our satellite business.

Last year we shipped more than a 1,000 mini-VSAT Broadband terminals, growing our total shipments to over 4,000 systems. According to all three of the leading industry research reports and sales results reported by our competitors this makes us the most widely used maritime-VSAT service by a significant margin. Winning a leadership position in the maritime-VSAT space in terms of the number of customers is a gratifying accomplishment while we really see this achievement as a milestone on the path toward our goal of winning a much larger opportunity.

Our vision is to change the basis of competition in the maritime broadband market from simply trying to provide a lowest cost satellite based data connection to inventing new fundamentally more efficient ways for our customers to send and receive the content they want above their vessels.

Our approach of designing our own hardware and creating our own satellite services gives us a significant advantage over most of our competitors who are limited to a building block approach using common and highly modularized equipment for a number of third-party manufacturers to deliver increasingly commoditized services. Over the past year, we made significant advancements in each major part of our end-to-end solution, moving each element ahead of our competition with significant differentiating advantages and creating the foundation for significant long term growth. Those elements are hardware, network, content delivery and content.

So, from the hardware perspective, in 2013 we introduced a new TracPhone VIP series product line which features antennas that are 85% smaller than similar products and a new single 2U box below decks that includes the antenna controller, events network manager router and the ability to receive our new IP-MobileCast content right out of the box. Advantage of those product line is at a significantly smaller, simpler, making it faster, much costly and easier to install then our competitors and it provides everyone of our customers the ability to access all of our major new services.

On the network side, in addition to adding geographic coverage to the mini-VSAT Broadband Network, we also made two major upgrades, a quadruple transmission capacity over the past 18 months. This increased network efficiency was delivered to our entire customer base to over the year updates enabling us to provide all of our customers with abundant high quality, high speed capacity. With our network now fully deployed, future capacity increases can be brought online exactly where we have concentrations of customers and will only involve incremental investments.

We’re also actively balancing traffic between satellites in many regions where we have overlapping coverage. Assuring the best return on our transponder releases which helped to improve our airtime margins. Looking ahead of the future, we have accessed a plenty of new capacity from our existing satellite providers including high throughput satellite or HTS Ku-Band that can be accessed using all of our antennas in the field and we’re also investigating Ka-Band opportunities with our network partner VSAT.

Having great onboard terminals and a fully fielded global network with the ability that profitably scale to meet future demand puts us ahead of any competitor service, but it doesn’t change the fundamental economics of selling large files over satellite link and this is where we believe our new IP-MobileCast content delivery service is a real game changer. Within the next few months we will be able to affordably deliver entertainment and operational content, sea farers have always wanted of broadcasting large files to large number of ships using a single transmission. This is exponentially more efficient than our competitors’ practice of sending the same file individually to each customer.

While the concept behind multicasting sound simple there is a lot of proprietary technology behind IP MobileCast. Our multicasting technology itself uses sophisticated encapsulation software that assures files are delivered correctly to large groups of users even if part of the transmission is blocked or graveled. IP MobileCast also includes digital rights management capabilities that are essential for networks delivering copyright protected content like Hollywood movies and major sporting events to customers.

In addition, this technology enables us to allow sea farers to access the rights protected content on their smartphones, tablets and TVs using a flick new state of the art user interface. Over the past few weeks we preview the service of commercial shipping events in Europe and the market at the Miami Boat Show. We received great feedback from customers and channel partners trying it for first time.

And the final major area of our extended end-to-end solution involves the access to commercial license content. As most of you know last May we acquired Headland Media, the maritime industry leading supplier of license, movies, news, sports and TV shows. We’ve just completed a rebranding project where about Headland Media is now the owners of KVH Media Group and movies, sports, TV, music and news are the core entertainment content for our new IP MobileCast service. Together with them we’ve been working to a create customized content packages and acquiring new rights targeted specifically at the maritime market and sea farers.

We also just secured the exclusive rights to provide satellite coverage of FIFA World Cup finals to our commercial maritime customers. As soccer fans know the World Cup is one of the world’s most popular sporting events and it’s extremely amongst the sea farer community. We plan to use the World Cup coverage as a major part of our marketing campaign launching the new IP MobileCast service and the only way to watch the finals live anywhere at sea.

So the many of these end stories are very exciting, the combination of our hardware, our field at network, our content delivery service and our wide variety of premium content like movies and sports and FIFA World Cup creates a strong platform for driving new sales of our many VSAT hardware and service and increasing our ARPOs to each new and existing many VSAT customer. We’re very confident of our competitive position and anticipate that this unique combination of features will accelerate our growth rates from both mini-VSAT subscribers and service revenues.

In addition to all the exciting new developments with our satellite business, we made significant advancements in our guidance and stab business as well. In our military land navigation business, we’re wrapping up our largest ever TACNAV contract which will be completed this quarter. With the successful completion of this contract, we’ve established ourselves as a credible prime contractor with important customers in the Middle East and supporting activities in the U.S. Army. We now have stronger relationships within Saudi Arabia as well as a purpose built facility for installing and supporting our TACNAV products.

This quarter we will finish upgrading over a 1,000 Saudi Arabia National Guard vehicles with our TACNAV systems a full six months ahead of schedule. We’re pursuing several other major programs that can keep our TACNAV production lines busy for several years to come. We now have visibility in the potential projects and pipeline that are far better than any time in our history.

Our TACNAV product line will also be strengthened with the introduction of a new high end system that will be introduced later this year called TACNAV 3D. This new system will be significantly more accurate that our existing products especially in hilly terrain, thanks to its embedded 1750 IMU. TACNAV 3D will provide new sales opportunities on platforms with more demanding navigation requirements that could be met by our visiting products.

Our fiber optic gyro technology was also significantly improved in 2013. We knew 1750 IMU was doing well in customer trials and is being designed in the prototypes for many emerging commercial and military applications. We’ve had considerable success thus far selling fiber optic gyros to companies working on self driving cars and other autonomous platforms using commercial and industrial applications. In the KVH 1750 IMU was used by five of the eight finalists in the recent (Derba) robotic challenge.

So, in conclusion, our short term sales results have not been as consistent as we would like to the dependency on large customers in our guidance and stabilization business. While defense contracts are notoriously lumpy, we don’t feel that we see this as getting any worse. We’re optimistic about the future of our new guidance and stab products, we seem to beginning traction in their respective markets and with its recurring revenue stream our service business is becoming more predictable over time. The future of our many VSAT service is very exciting as we believe we have extremely strong competitive position and unique services that will create strong demand for maritime customers.

At this point I’ll turn the call back over to Peter for the numbers, Peter?

Peter Rendall

Thank you, Martin. Now, I would like to turn our attention to our fourth quarter results. This morning we reported revenue of $38.9 million which was 2% lower than the revenue reported in the prior year quarter. As Martin stated earlier, our mobile communication revenues of $29 million represented a 35% year-over-year increase while our guidance and stabilization revenues were 45% lower at $9.9 million.

Revenues from our VSAT business were $18.6 million in the quarter, an increase of 28% year-over-year. Of this amount airtime services represented $12.5 million, an increase of 35% over the fourth quarter of 2012. Our VSAT ARPUs in the quarter were consistent with what we reported throughout 2013 namely $700 per month for the variable by-the-megabyte plan and approximately $1,900 a month for the fixed rate bands.

All other SATCOM revenue including TV Systems, KVH Media which was formerly known as Headland Media, Inmarsat Systems and airtime was $10.4 million. Within that amount satellite TV product sales were flat year-over-year at $3.5 million while LAN based systems declined 6% to $1.1 million as we had previously anticipated.

TACNAV product revenues of $2.2 million came in as expected and was 76% lower year-over-year as product shipments related to the Saudi Arabian National Guard Program ended in the second quarter of 2013. Until that program, we did record $2.6 million in lower margin service revenues related to equipment installations and program management services.

Turning to our FOG business, FIG sales in the fourth quarter of $4.6 million were disappointing at 39% lower than the same period last year. As it relates to the year-over-year decrease a significant contributor was a sharp slowdown in spending under the CROWS program. For 2013 almost 50% of our FOG revenues related to commercial application and we anticipate that trend will continue into 2014 as our 1750 IMU continues to do well in customer trials for a variety of emerging commercial applications.

In the third quarter we reported for the first time that almost 50% of our revenues were from services. As we expected in the fourth quarter that trend continued and of the $38.9 million of revenues grew reported in Q4, $20 million related to service revenues representing 52% of the total. Of that amount 66% related to airtime, 13% related to services performed under the Saudi Arabian National Guard Program and 18% related to KVH Media. In the fourth quarter last year, service revenues of $11.5 million represented 29% of total revenues, of that amount 90% related to airtime.

The gross profit margin in the fourth quarter of 40% was in line with our expectations although the prior year fourth quarter gross profit margin was higher by 370 basis points, most of that was attributable to the additional $7.1 million TACNAV product that we shipped. We were pleased to report in the fourth quarter that the gross profit margin for VSAT airtime continue to climb, the 37% margin compares favorably to the 30% margin we reported in the 2012 fourth quarter and is up sequentially from 36% in the third quarter.

As we discussed in recent earnings calls, the gross profit margin associated with the installation and program management services of the Saudi Arabian National Guard program at less than 10% and during the fourth quarter we recorded $2.6 million of revenue related to these activities.

As Martin mentioned, the final installment of these services under the contract are expected to be completed in the first quarter of 2014. As it relates to operating expenses, we expected high cost in the fourth quarter compared to the third quarter particularly around spending associated with the IP MobileCast initiative and elevated tradeshow expenses. Even so, operating expenses of $16.1 million was slightly elevated from our previous expectations as we incurred some onetime restructuring cost in Europe and additional cost associated with developing the IP MobileCast service. Compared to the fourth quarter last year, operating expenses were up 23%, the majority of which relate to the addition of the KVH Media’s operating expenses as well as the IP MobileCast.

Our effective tax rate for all of 2013 was 32%. As we have discussed before taxes are always difficult to forecast since there are so many variables and unanticipated discrete items. We recorded a net loss in the fourth quarter of approximately $400,000 or $0.02 this compared to the $2.8 million in net profit or $0.18 EPS we reported in the same period last year. As I already noted the prior year quarter included a significantly higher amount of TACNAV revenue which historically carries a higher gross profit margin than our other product lines.

For the fourth quarter, the EBITDA adjusted for equity compensation expense was $2.7 million. Depreciation and amortization for the quarter was $1.7 million and equity expense was approximately $1 million. For all of 2013, the EBITDA adjusted equity compensation expense and acquisition related costs was $17.7 million and the adjusted EBITDA margin was 12%. Depreciation and amortization for all of 2013 was $6 million and equity expense was approximately $4 million.

And moving onto the balance sheet, at December 31, we had cash of marketable securities at $55.7 million, a decrease of $1.5 million from the end of the prior quarter. Our quarter end accounts receivable balance of $27.5 million was slightly elevated from September 30, while our accounts payable was lower which represents the majority of the changing cash on hand at the end of the year.

Our quarter end inventory balance stood at $18.3 million which was flat with that on hand at September 30. Capital expenditures during the fourth quarter were approximately $2 million bringing out total for 2013 to about $5 million. Backlog for our guidance and stabilization products and services at the end of December was $18 million down by $3.6 million from September.

Turning to our outlook for the first quarter of 2014 and the full year. As Martin said, we expect our VSAT business will continue to grow at a strong year-over-year pace driven by the adoption of broadband services as well as the introduction of our IP MobileCast content delivery solution. we’re encouraged by the pipeline of opportunities for TACNAV but remain cautious as for the timing of any of these programs to close. Although our FOG experienced an expected decline in the fourth quarter we do expect to see a modest increase for 2014.

Operating expenses are expected to be a bit higher in the first quarter as we launch our new IP MobileCast service and we expect our effective tax rate for the first quarter to be approximately 25%. For the full year we expect the effective tax rate to be about 40% subject to the effective unforeseen discreet items.

Considering all of these factors, our guidance for the first quarter is as follows. We expect revenue will be in the range of $36 million to $40 million and we will record a net loss per share between $0.04 and $0.07. Revenues for the full year expected to be in the range of $165 million to $185 million and that EPS will be in the range of $0.30 to $0.40 per share. So, in conclusion, we remain confident in our strategic growth businesses and the operating fundamental remain strong.

And now, we’d like to take your questions, operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll first hear from Chris Quilty of Raymond James.

Chris Quilty - Raymond James & Associates, Inc.

Thanks gentlemen. I guess Martin, can you confirm it looks like from your statements that the shipments, the TracPhone shipments in the quarter were still within that sort of 250 to 300 unit range?

Martin A. Kits van Heyningen

They were, and increase over the prior quarter and we also carry that not insignificant backlog into Q1 which almost never happened so we had increased demand in Q4 which was very encouraging so we’re seeing an uptick in sales.

Chris Quilty - Raymond James & Associates, Inc.

And can you give us the standard breakdown you typically do between three platforms?

Martin A. Kits van Heyningen

Yes, I think, Peter has got that handy.

Peter Rendall

Sure Chris. So, the mix of TracPhone hardware sales during the fourth quarter was 37% of V3, 54% for the V7 and 9% V11.

Chris Quilty - Raymond James & Associates, Inc.

Okay. And what do you see as the necessary precondition to break out of that sort of channel you have been stuck in at 250 or 300 vessels a quarter, is it the launch of the multicast service, as there been any holdback as clients wait for that or is it just simply winning more big deals?

Martin A. Kits van Heyningen

I think it should happen this year. We see generally sort of the net 10% to 20%, 25% increase in unit shipments this year compared to last year. So, we’re seeing signs of acceleration, I think the IP MobileCast is going to be a real game changer, I think it certainly would be a big driver, the difference between having it and not having it is really going to be strong in my opinion. So, we’re very optimistic.

Chris Quilty - Raymond James & Associates, Inc.

And how about specifically on the sort of pipeline as you look out customers that you have had in trial does it look larger then it was going into ’13 and significantly so or modestly?

Peter Rendall

It’s different, what we’re seeing now is that we’re getting a lot of sort of I know 1G sales, but small sales that just recur, people buying five units and then coming back a month later and buying five more. So, the big RFPs is less than it has been in the past and I think that in general is probably because the early adopters have adopted and kind of now mass market product where people just to buy it as opposed to do a big, well I can probably show in trial everybody’s product, so I think what we are seeing now is, for us it seems like more of a very stale type as opposed to a proposal sale, which I think benefits us because of our broader distribution and our ease of installation.

Chris Quilty - Raymond James & Associates, Inc.

And speaking of distribution, I think you signed up a half thousand reseller partners, that was year and a half ago now, have you seen those partnerships begin to takeover?

Martin A. Kits van Heyningen

Yes, actually they have, I was again that’s one of those things where I was expecting big orders from them and that they never materialized but I was just looking at the percentage of our airtime customers are actually tagged to those types of SPs or resellers as you call them and it’s really significant now, so they actually are doing quite a good job.

Chris Quilty - Raymond James & Associates, Inc.

And is that only replacing the existing base or adding new vessels?

Martin A. Kits van Heyningen

They are adding vessels but I think, our goal there is to help them turn their customer sales still beyond fleet systems or B Systems.

Chris Quilty - Raymond James & Associates, Inc.

Got you. Peter you didn’t comment on the incremental margins for the mini-VSAT services that’s still around 60%?

Peter Rendall

Between 55% and 60% depending on the mix.

Chris Quilty - Raymond James & Associates, Inc.

Okay. And have you secured all of the media rights you need for, I guess, the legacy Headland relationships or is that you still working through the list?

Martin A. Kits van Heyningen

We secured everything we need to launch, there is always more than we want, so a lot of what we were doing is acquiring new content that our media group never had rights to, so things like Pilipino new channels that’s that something that they ever had, we’ve gone out and acquired those rights so that we can do the nightly news from the Vanilla every day. So, we’ve done a great job and then put it at place and it’s going to be an ongoing effort, we’ve added some staff there including some new people out in California, that’ll be focusing on the small time, so you see this as an ongoing effort like we just done the deal with IMG for the FIFA World Cup and so will be acquiring rights continuously, but we have everything we need to launch.

Chris Quilty - Raymond James & Associates, Inc.

And what has been the primary reason for the delay, I think you are probably a quarter behind your original schedule?

Martin A. Kits van Heyningen

Yes, it’s like any new product, it’s always a million things but this is probably the most complicated thing we’ve ever done and that includes launching the mini-VSAT service, so the acquisition of content digitizing it, packaging it and the ways that can be transmitted the IP-MobileCast itself encapsulation of technology, pushing content out to 22 hubs, multicasting it, making sure to rise and then the playback method which developed two really slick solution both of which are going to be available on this quarter. So it’s a really, really complex project and we’ve executed it and I think till higher level than we thought we are going to when we started we are thinking we just had some simple playback or watching on your PC type of thing but always come up with a very slick in terms of iPad, set-top boxes, 100 simultaneous users, it’s really unique product I think you will probably be blown away when they see it.

Chris Quilty - Raymond James & Associates, Inc.

Okay. And final question just for Peter can you give us some handles on where you expect the service margins to reach and this is mini-VSAT service margins by the end of the year sort of the incremental expansion and second question would be on the OpEx, you indicated higher than average in Q1 but can you give us a ballpark of what you expect, either on a full year basis or kind of working through the quarterly progression.

Peter Rendall

So, Chris just in terms of the margin as it relates to the [indiscernible] that going to be serviced obviously part of the margin in Q4 and Q3 related to the Saudi contract which factually goes away in Q1 though we will still continue to see, we believe our service margins increased but certainly not at the same pace that they did in 2013, though I suspect by the end of the year will be a few percentage points higher than we were at the end of Q4. And then, as it relates to the operating expenditures, where we incurred more around the IP-MobileCast in Q4 which will continue through Q1 and we’ve also had some higher tradeshow expenses in Q4 and I think with the launch of the new IP-MobileCast Service we would not putting back on with the advertizing and marketing around that service. So certainly it’s elevated from what we saw on a quarterly basis in 2013, but not out of control and certainly we keep a close eye on our expenses.

Chris Quilty - Raymond James & Associates, Inc.

So, were the Q4 OpEx be a high watermark that there you wouldn’t expect to see during ’14?

Peter Rendall

Each of the first three quarters in ’14 you’re probably going to be slightly elevated by a modest few hundred thousand and then by the end of the fourth quarter and probably a million in a quarter higher than where we are in Q4 last year.

Chris Quilty - Raymond James & Associates, Inc.

Okay. Great, thank you gentlemen.

Martin A. Kits van Heyningen

Thanks Chris.

Operator

(Operator Instructions) Next we will hear from Rich Valera of Needham & Company.

Rich Valera – Needham & Company Inc.

Thank you. Peter, I was hoping you give us some color on your revenue expectation beyond Q1 and then if you look at the average of the midpoints of your Q1 and 2014 guidance you are looking at kind of $45 million, $46 million a quarter which is a pretty big jump and I’m not sure if you’re expecting that to be sort of level loaded through those three quarters or if you expecting that sort of ramp into the back half and in any case which is loved get a little more granularity on other prices of the business sort of what drives that kind of a ramp, I know you mentioned that FOG is expected to be up slightly, if you could give us some color and what your expectations are for TACNAV in the year as well as Headland that would also be quite helpful, thank you.

Peter Rendall

Certainly, so just in terms of that TACNAV business as is consistent with previous years we are very conservative and how we work out that based on existing backlog that we have coming to the year or very high probability programs. So today, we are expecting to see a modest decline in that business year-over-year, which is offset by a modest increase in our FOG year-over-year business. But overall because we are losing at $10 billion of nonrecurring of services revenue, we expect to see overall that defense business to come down slightly. However, that doesn’t take you account the opportunity as Martin mentioned that we have good visibility into that we would hope to close that up at some point in the year. But again, timing of delivery under those contracts is not something that we forecast with high degree of accuracy at this stage.

In terms of the mobile broadband business there’s lots of component that effect that in terms of the airtime services there is obviously some seasonality, we expect to see revenues increased sequentially, each quarters we add more subscribers to a network and we expect to actually have a strong growth year-over-year there. On the product side the seasonality over our TV product sales throughout the year which causes some lumpiness in terms of each quarter, but they are predictable based on history.

Martin A. Kits van Heyningen

So, one thing might help you with, if you get that jump after Q1, we are assuming that TACNAV business resumes to a more normalized number which is in the sort of $3 million to $5 million a quarter kind of range, it’s unusually low in Q1 at around a million dollar so that’s kind of a big step function that happens. So some of that is in backlog, some of that is yet to book but that’s kind of what we is sort of normal and that’s what we are expecting.

Rich Valera – Needham & Company Inc.

Just wanted to get as your visibility towards that obviously needing to book some of that business, I mean, you mentioned that I think you have the best TACNAV pipeline in the company’s history, any other color you can put in terms of number of large deals and any expectation for when some of them might close?

Martin A. Kits van Heyningen

Well we expect deals to close in the next few months, so we expect to have some good announcements here, some of which is baked into our guidance and some of which might be longer term, but larger words that we haven’t been booking recently. So, we also have some projects out there that are as larger or significantly larger than the big program we just finished, which is something that recently was unlikely to happen again. So, we just have a whole lot of things in the pipeline right now, some of which were designed in the programs and we think that if the customer wins we’ll win and the customer has recently won, so we are very optimistic that some of the stuff is going to happen. So, I think this disconnect here, we are cautioning that we are going to have sort of shockingly low TACNAV results from the first quarter and that’s really driving up a problem but the same time we are saying we very optimistic about the TACNAV business and the difference really is one of timing.

Rich Valera – Needham & Company Inc.

Okay. And then, with respect to the MobileCast business for the prior discussion it sounds like that has pushed out understand it’s very complex and sophisticated service rolling out there with, I wanted to get a sense of when you think that all be a full production service when you start, generating revenue from paying customers on MobileCast?

Martin A. Kits van Heyningen

Well, we are demoing it now at tradeshows live, we are doing over the years test with customers this month in February, so assuming all the testing goes well we should be starting revenue service within the next 60 days.

Rich Valera – Needham & Company Inc.

Great and then with Headland you had a decent sequential tick up there in Q4 versus Q3, any thoughts on how that business should trend in ’14 and maybe relative to that fourth quarter level, if that’s a decent benchmark?

Martin A. Kits van Heyningen

Yes, I think the business, there I don’t want to call it a legacy business but there are legacy business we see in 5% to 10% growth range business, it’s kind of a stable business and then on top of that we’re, we jumped starting it with using that content and those rights IP-MobileCast and which is we really are carrying forward differently because that’s, it’s kind of a different business, we’re not putting that into the media group revenue.

Rich Valera – Needham & Company Inc.

And then just final one from me, Peter you have the guidance and stabilization backlog at the end of the fourth quarter?

Peter Rendall

It was 20 million.

Rich Valera – Needham & Company Inc.

I’m sorry.

Martin A. Kits van Heyningen

He is looking for number?

Peter Rendall

18 million.

Rich Valera – Needham & Company Inc.

18 million, okay, thank you very much.

Operator

(Operator Instructions) Next we’ll hear from Anya Shelekhin of Sidoti & Company.

Anya Shelekhin – Sidoti & Company

Good morning. First question about the G&A expenses, how much of G&A expenses this quarter were related to KVH Media and do you expect any reductions in those expenses going forward?

Peter Rendall

The KVH Media expenses on a sequential quarterly basis are about $2 million and we are not expecting any significant change in that.

Anya Shelekhin – Sidoti & Company

Okay. And onetime restructuring cost in Euros, because you provided dollar value for those?

Peter Rendall

They were less than $300,000.

Anya Shelekhin – Sidoti & Company

And then, one final one what contributed to the increase in sales and marketing, you mentioned there was no free KVH Media, is that kind of a main thing or is there anything else there?

Martin A. Kits van Heyningen

Year-over-year the vast majority was the additional KVH Media for the first time.

Anya Shelekhin – Sidoti & Company

And is there anything else, because even quarter-over-quarter there was a pretty big jump?

Peter Rendall

Right, sequentially we mentioned that we had as anticipated that incremental tradeshow expenses that start was occurring in the fourth quarter.

Anya Shelekhin – Sidoti & Company

Okay. Thanks. That’s all from me.

Operator

And there are no further questions at this time.

Martin A. Kits van Heyningen

Okay, as always feel free to contact Peter or myself directly if you have any follow-up questions. Thank you.

Operator

That does conclude today’s conference. Thank you all for your participation.

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Source: KVH Industries' CEO Discusses Q4 2013 Results - Earnings Call Transcript

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