KVH Industries, Inc.

and welcome to the KVH Industries Inc. Q4YE 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I'll turn the conference over to Brent Bruin, CFO. Please go ahead.

Thank you, Operator. Good morning, everyone. Thanks for joining us today to discuss KVH Industries' fourth quarter and full-year results, which are included in the earnings release we published this morning. With me on this call is Martin Kitzvan-Hanigan, the company's Chief Executive Officer. The earnings release is available at on our website and through our investor relations department. If you would like to listen to a recording of today's call, you can access a webcast replay on our website. If you're listening via the web, feel free to submit questions to ir at kvh.com. This conference call will contain certain forward-looking statements that are subject to many assumptions and uncertainties that may cause our actual results to differ materially from those expressed in these statements. we undertake no obligation to update or revise any forward-looking statements. We will also discuss certain non-GAAP financial measures, and you'll find definitions of these measures in our press release, as well as reconciliations of these non-GAAP measures to comparable GAAP measures. We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading risk factors in our third quarter, Form 10-2, filed on October 29, 2020, and our 2020 Form 10-K, which we expect to file tomorrow. The company's other SEC filings are available directly from the Investor Information section of our website. At this time, I'd like to turn the call over to Martin. Martin?

Thanks, Brent. Good morning, everyone, and thank you for joining us today. Let's get started. Like many businesses around the world, we continue to face challenges from the pandemic in Q4. However, we ended 2020 on a very positive note and we have a number of reasons to be optimistic about the future. We built on our strong third quarter and reported fourth quarter revenue of $44.1 million, an increase of $1.7 million or 4% versus the fourth quarter of last year. We also increased our fourth quarter adjusted EBITDA to $3.5 million, up from $700,000 in the prior year. For the full year, we increased revenue to $158.7 million, up almost a million dollars from last year, and reported total adjusted EBITDA of 3.1 million, and that's a $7 million improvement compared to the fiscal 2019. I'm really proud of our team's continued ability to deliver for our shareholders and customers despite the challenging environment. Our core business remains strong. In Q4 of 2020, we delivered one of the most robust fourth quarter results from continuing operations in the past five years. We recorded very strong TACNAF revenues, record BSAT unit bookings, and record BSAT shipments. From an operations perspective, we continued our cost containment efforts in Q4, achieving OPEX well below the prior year and our budget. While restrictions on travel and trade shows posed challenges for sales visits and pipeline development, it has also reduced our travel and marketing costs. As these restrictions begin to ease, we expect to see expense reductions normalize in the second half of the year. So against the backdrop of economic uncertainty, we're pleased with our overall financial results for the year and with the positive momentum we carried into the first quarter of 2021. Our strategy of diversification and focusing on innovative products and services really paid off in 2020 and has positioned us well for the future. Now let's look at some of the details in our core markets. In our mobile connectivity segment, VSAT revenue increased $1.2 million to $20.3 million, a year-over-year increase of 6%, while our VSAT subscribers increased 4% versus Q4 the previous year. Year-over-year, our airtime margins were up almost four points to 34.2% compared to Q4 of 2019. Our Agile Plans program continues to be a key revenue driver as customers recognize the benefits of an innovative, all-inclusive model. Agile Plans revenues increased 53% compared to Q4 of the previous year. We also record strong sales of our Agile Plans regional service, which employs our smallest VSAT, the 37-centimeter track zone V3 HTS. Agile Plans Regional offers connectivity as a service for smaller commercial vessels, such as fishing and coastal cargo and workboats. We announced this new service in February of 2020, just a few weeks before the pandemic-related shutdown sick effect, which really impacted the launch. However, interest in this product began to pick up in the second half of the year, and in the fourth quarter, Agile Plan's regionals helped drive strong results outside the U.S. in largely untapped markets, including Vietnam, Indonesia, and Africa. As a result, Q4 V3 HTS shipments were up 175% compared to last year. Overall, Agile plans represent 73% of our commercial shipments in the quarter and is now 38% of our total VSAT subscriber base. Several beneficial industry trends should aid our mobile connectivity sales efforts. Oil prices are rising and daily port calls for commercial vessels appear to have stabilized. The commercial shipping market is doing quite well. Container rates and the Baltic Dry Index have both more than doubled in the last year. In the leisure market, the National Marine Manufacturers Association reports that U.S. boat sales were at a 13-year high in 2020. On the other hand, the cruise ship market remains suppressed, and within our immediate business, the Newslink service for cruise ships continues to be heavily impacted. Fortunately, this is a small part of our business, but it did represent a million-dollar decline in 2020 compared to 2019. We launched our legacy Mini-BSAT broadband network in 2007, and after four years, we're shutting it down at the end of this year. The majority of our customers are already on our new HGS network, which we launched a few years ago. We're planning to migrate the remainder of our legacy customers to the HGS network by the end of the year. From a customer perspective, the new network is faster, cheaper, and has much better global coverage. From our perspective, we have better margins on the HGS network and consolidating customers onto one network will reduce our operating expenses as well. We've been converting customers for the last few years, and we intend to complete the effort this year. The significant investment and effort required to facilitate this migration will impact our results in 2021, but upon completion, the migration will represent a net reduction of $4 to $5 million in annual network operating costs starting next year. We expect that many of these customers will be switching over to our popular Agile plan service. Moving on to KBH Watch and our new IoT connectivity as a service offering, we're excited by our progress in recent months. We're focused on rapidly building a broad foundation of watch solution partners, which we anticipate will provide a pipeline of revenue opportunities. These partners are already proposing KBH Watch as a component of their own maritime IoT and maritime service solutions to several large fleets. You've likely seen the announcements beginning in December as we've established relationships with a range of firms, including IoT service providers such as Greenstein, IoT platform integrators like TMS Maritime, OEMs like Kongsberg, and multi-card service providers like Kilo Marine. We've established a formal working process which each of these partners We work with them to define and develop a solution that integrates KBH Watch with their systems. We provide training for their sales teams, establish joint marketing agreements, and deploy trial programs with their customers. The KBH Watch systems are already deployed for trials and training, and we anticipate that the number of deployed systems will steadily grow. So what's driving this acceleration in interest? There's been a move towards digitalization and the connected vessel in maritime. And the pandemic is accelerating this trend. The port restrictions drove home the importance and the need for remote services such as equipment access, surveys, and support. There's also a rapidly expanding ecosystem of IoT service providers who currently have no access to connectivity outside the range of cellular service or limited access due to major constraints of bandwidth imposed by the ship operator. Our watch solution partners have told us that including KVH watch is a competitive differentiator for them, thanks to the global secure connectivity that's separate from the IT systems. The ability to support multiple tenants on the single watch terminal and the simplicity of our integrated connectivity as a service model. In our view, the cybersecurity will be a primary driver going forward. At the start of the year, new commercial maritime guidelines known as IMO 2021 went into effect. A vital aspect of this is the separation of IT and OT networks and data. One of our watch solution partners reports that a major oil company fleet to which they're proposing watch now mandated that vessel performance optimization systems not be connected to the onboard network. We believe the KTH watch is an ideal solution to meet all of these requirements. It delivers 24-7 data flow even when the vessel is in open ocean and affords offers affordable remote expert intervention and high-quality video on demand. Plus, it provides a dedicated air-gapped IoT connectivity without touching the ship's IT network. We think these drivers, the strong interest we're seeing, and the expanding array of potential applications are all validating the assumptions we made when we initially proposed to offer this first VSAT-based dedicated IoT connectivity solution. So we're optimistic that KVH Watch will follow a trajectory very similar in many ways to the Agile plans, which started slowly in the first year and then began to compound rapidly. Our watch solution partners play a critical role in our ability to attract new customers to watch, which is why the partnerships we've announced over the past few months are so exciting. While the commercial market bids can take some time, we believe that the IoT connectivity has the potential to be a significant contributor to revenue and earnings in the coming years. Moving on to our inertial navigation business, TACNAF military product sales increased by 3.7 million to 7.2 million in Q4, a more than 100% increase over last year, driven by shipments of the TACNAF fog order we announced last July. Standalone fiber optic gyro sales were down 1.3 million, or 17%, compared to the fourth quarter of 2019, but that doesn't include the fogs that were used as part of our own TACNAF systems. However, we entered 2021 with a very strong backlog for both TACNAF and FOG. At the end of Q4, we also achieved our goal of engineering our photonic integrated chip or PIC technology into the remainder of our core FOG product line. Going forward, our IMUs and our standalone FOGs will all have the PIC inside. As we ramp production, we're adding a second precision assembly system, which will come online in Q2. That will enable us to produce sufficient quantities of assemblies of PIC and fiber arrays to replace our standard product systems. We'll be somewhat constrained by chips and assembly equipment in Q1, which we expect to be released by the beginning of Q2. In the meantime, we continue to see healthy demand for our FOG products. We anticipate strong year-over-year growth in our FOG business this year. We're excited about the momentum and the future market opportunity for our PIC-based products from the position of an established, proven technology provider for autonomous platforms. Our PIC technology enables us to provide a broader range of FOG performance for different applications and enables FOG performance at men's pricing and scalable mass production in the future. We're currently working with customers and prospects who represent a wide range of short- and long-term opportunities, including autonomous trucking and shuttles, mining and industrial, robots as well as drones, defense applications, and, of course, advanced driver assistance systems, or ADAS. As a supplier for these new technologies, the growth of this business will depend in part on how rapidly these technologies are adopted in the market. As the self-driving market continues to evolve, autonomous vehicle providers are realizing the importance of fogs as part of the sensor fusion solution to deliver the precision needed to complement LIDAR when MEMS gyros can't. ADAS applications for our inertial systems represent a large and growing market, but so do platforms like long-haul trucking, mining, and construction, where we anticipate nearer-term sales opportunities. We're also working closely with drone developers. The consumer drone market doesn't require inertial systems with the precision that we offer. However, our FOGs provide the performance, reliability, and form factors suitable for military, security, and commercial drones. And we anticipate that those markets will provide important revenue opportunities as they grow. It each brings almost 15 years of experience as an autonomous navigation technology provider to these growing markets. In 2005, our systems were used in the original DARPA Grand Challenge with self-driving vehicles. Our initial products were first integrated into the U.S. commercial self-driving car prototypes in 2012. KBH fogs and inertial systems have been deployed in various robotic systems over the past decade, including the winner and 10 other competitors in the 2015 DARPA Robotics Challenge. And most recently, we began delivering vital navigation and positioning data for autonomous trucks and other platforms that are being tested on the road now. Our existing fog systems already meet the performance requirement for these applications. Our PIC-based systems are now rolling out to deliver additional reliability and cost savings at scale. So, in summary, in 2020, we navigated the pandemic safely, successfully developed key new technology, and positioned the company well in each of our markets. We had better than expected results in Q4, and Q1 is off to a very good start as we entered the year with around $20 million in backlog. Our airtime business continues to gain market share as we grow revenues and subscribers. We carry the momentum into 2021 with robust net new activations in January and February, and we have exciting new products in the pipeline that will be launched in the next few months. We're very encouraged by the initial response to our Watch IoT initiative and the opportunities the autonomous market continue to grow. Consolidating our airtime customers under a single global network will improve customer experience and reduce our operating costs by year end. We believe that these efforts will fuel our growth in 2021 and beyond. And we're confident that the progress that we're making now will deliver sustainable long-term value to our shareholders and other stakeholders. And now I'd like to turn the call back to Brent to go over some of the numbers. Brent?

Thank you, Martin. First, to echo some of Martin's sentiments, we believe our fourth quarter full year 2020 results, in light of the COVID-19 pandemic that continues to impact many areas of our business, are quite encouraging. Despite the challenges we faced, we reported our strongest fourth quarter in quite some time, and we are entering 2021 with a solid tailwind. Let's look at our fourth quarter in a bit more detail. As Martin mentioned earlier, our fourth quarter revenue came in at $44.1 million. This compares to $42.5 million recorded in the fourth quarter of 2019. Revenue for our inertial navigation segment increased $1.7 million, and our mobile connectivity segment remained flat compared to the prior year fourth quarter. Product revenue for the fourth quarter was $20.9 million, an increase of $2.2 million, or 12%, from $18.7 million in the fourth quarter of 2019. By segment, product revenue for inertial navigation increased $2.4 million, or about 22%, primarily due to a $3.7 million increase in TACNAV product sales, partially offset by a $1.3 million decrease in fog and OEM product sales compared to the fourth quarter of 2019. Product revenue in our mobile connectivity segment decreased $0.2 million, or 3%, driven by a $0.3 million decrease in TrackVision product sales and a $0.2 million decrease in LandMobile product sales, partially offset by a $0.2 million increase in VSAT product sales and accessories. Service revenue for the fourth quarter was $23.2 million, a decrease of $0.6 million, or 2%, from $23.8 million in the fourth quarter of the prior year by segment Service revenue for inertial navigation decreased $0.8 million, primarily due to a reduction in contract engineering service revenue. In our mobile connectivity segment, service revenue increased by $0.2 million, or 1%, primarily due to a $1.2 million increase in mini-VSAT broadband airtime revenue compared to the prior year fourth quarter, driven in part by a 4% increase in subscribers, primarily as a result of Agile plans. This increase was partially offset by a $0.7 million decline in our media business, which was significantly impacted by travel restrictions associated with COVID-19, which I will discuss in more detail shortly. Many VSAT broadband airtime revenues increased to $20.3 million, growing approximately 6% from the prior year fourth quarter, driven by the continued success of our Agile plans. VSAT shipments in connection with the Agile plans program approximated 58% of our total unit shipments and 73% of our commercial shipments this quarter. Agile plans now represent 38% of all mini VSAT broadband airtime subscribers. For the fourth quarter, our consolidated gross profit margin was 38.7% as compared with 37.4% in the fourth quarter of last year. From a segment perspective, our mobile connectivity Gross margin was 33.8%, up 1.6 percentage points. Our nursing navigation gross margin was down about 0.7 percentage points to 49.0%. Operating expenses for the quarter were $17.9 million, down 7% from $19.2 million in the fourth quarter of the prior year. As we continue to hold the line in operating expenses in response to the impact of COVID-19 on many areas of our business, and the associated uncertainty that the pandemic represents for us. For the fourth quarter, these changes in revenue margins and operating expenses resulted in a loss from operations, excluding the impairment charge of $0.9 million, compared with a loss of $3.3 million recorded in the fourth quarter of 2019. As you saw in our earnings release, we recorded a total impairment charge this quarter of $10.5 million relating to our media group Goodwill and certain other media group intangible assets. As we have noted previously, our media group is one of the businesses that has been most acutely impacted by the pandemic. The media group is heavily dependent on travel. We have been monitoring the business closely throughout the year and had believed that the revenue and earnings decline in the business unit would rebound once the pandemic subsided. However, in the fourth quarter, As the pandemic continued, resulting in a new wave of travel restrictions and business closures, it became apparent to us that the damage to the business is likely to be longer lasting and perhaps even permanent. So in connection with our annual impairment test, which we conducted in the fourth quarter, we concluded in consultation with our evaluation advisors that the goodwill and intangible assets in the immediate group were less than their county value, indicating an impairment and resulting in a non-cash charge of $10.5 million. including the impairment charge, our mobile connectivity segment generated an operating loss of $10.6 million. Without the charge, this segment would have reported better results from operations than last year's operating loss of $1.5 million. Our inertial navigation segment had an operating profit of $4.1 million for the quarter, compared with an operating profit of $3.0 million last year. Our unallocated costs remained flat, at $4.8 million compared to last year. For the fourth quarter, our net loss, including the impairment charge, was $11.6 million compared with a net loss of $2.9 million recorded in the same quarter last year. On a non-GAAP basis, which excludes impairment charges, amortization of intangibles, stock-based compensation, employee termination, non-recurring legal fees, foreign exchange transaction gains and losses, the tax effect of the foregoing and change in valuation allowance, and other tax adjustments, we had net income of $1.3 million, compared with a net loss of $.5 million last year. EPS for the fourth quarter, again including the impairment charge, was a net loss of 65 cents per share, compared with a net loss of 17 cents per share in the same period last year. Non-GAAP EPS profit for the fourth quarter was $0.07 per share compared to a non-GAAP EPS loss of $0.03 per share per diluted share last year. Our adjusted EBITDA for the quarter was $3.5 million compared to $0.7 million recorded in the fourth quarter of last year. For complete reconciliation of our non-GAAP measures, please refer to our earnings release that was published this morning. Total backlog at the end of the fourth quarter was $20.4 million, of which approximately $19.8 million is scheduled to be delivered during 2021. Backlog for inertial navigation products and services at the end of December was approximately $19.4 million, of which approximately $18.8 million is scheduled to be delivered in 2021. Net cash used in operations was $0.2 million compared to $1.9 million used in operations for the fourth quarter of the prior year. Capital expenditures were $3.9 million for the quarter and our ending cash balance was approximately $37.7 million. In conclusion, I would say again that we're pleased with our fourth quarter full year results in light of the global pandemic that we, like all businesses around the world, faced in 2020. We recognize, of course, that the pandemic is far from over and we're likely to be dealing with its impact well into 2021. We will continue to be vigilant, watch our expenses closely, and ready to react properly as circumstances change. That said, we are pleased with the progress we've made in 2020, and we are optimistic about 2021 and beyond as the pandemic subsides and we continue to execute on our plan to drive long-term value for our shareholders. This concludes our prepared remarks, so I will now turn the call over to the operator to open the line for the Q&A portion of this morning's call.

Thanks, Brent. But before we get to the questions, I do want to just point out the press release from this morning, and I mentioned that Roger Keeble will be joining KBH next week as our new CFO. Roger is an accomplished financial executive, having served as CFO of Seaborne Networks and treasurer at Aspen Technology, amongst others. He has a great expertise across financial planning, reporting, capital markets, and strategic transactions. He has industry experience as well in telecom, including subsea fiber optic networks, as well as software and services. So Roger joins us at an important moment for KBH as our financial performance is real positive momentum, and we focus on building our business through innovation and market leadership while containing costs. We're all very excited to have him on the board. And I also want to thank Brent Bruin for taking over a CFO for the last six months. He's done a great job, put together two headquarters. So he's setting a high bar for Roger to come in. But on behalf of myself and the board, I just want to thank you for doing that. So operator, I think we're ready to take questions now.

Absolutely. So if you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one. To ask a question, I'll pause for just a moment to allow anyone to operate. Okay, and it looks like we have a question on the phone line from Rich Valera with Needham & Company. Please go ahead.

Yeah, thank you. Good morning. Martin, it makes sense that you're going to be migrating your base over to your HTS network this year. It looks like some nice long-term savings from that. Could you give us a sense of what you expect those incremental costs to be this year to migrate your existing base over to the HTS network? Well, what we've, you know, we've been doing it for two years now, so we're basically accelerating what we have been doing. Uh, so we'll, we'll be offering some incentives in the, in terms of, you know, hardware discounts and things like that, installation support. So it would be some, some of that cost, you know, might be capitalized if they move over to agile plans, but some of it would show up in the, in, you know, uh, product discounts and, and, uh, installation credits. Got it. Um, And then just want to try to understand the potential impact of incorporating the PIC into all of your commercial products and I guess eventually probably your defense-related products. Can you talk about how you're thinking about incorporating the PIC into the commercial products affecting your gross margins and your ability to compete more effectively and maybe drive incremental revenue in that category? Yeah, you've actually hit the nail on the head. There's both a margin benefit and there's a product performance and size benefit. So what I mentioned in the past is that we've essentially designed the PIC into sort of our high-end IMUs just to show how good it is. And now we're rolling it into all the other products. So during the fourth quarter, we did the engineering work to design it into our standard products. and now all of those products are going into production. So the cost savings will happen when we are able to wind down the current method of fabrication, which involves couplers and polarizers and defiber manufacturing, which has significant cost and overhead. So as all of that is completely stopped, then we'll have significant margin improvement and manufacturing overhead improvement, which will translate directly into gross margin. So right now we expect that starting, you know, really in April, we'll be ramping that up. We've ordered a second precision assembly system, you know, which will then allow us to move everything over to this new automated manufacturing. And at that point, you know, realistically, I think by the end of June, we'll be looking at switching over completely. No, that's really helpful. Thanks for that. Um, I just want to follow up on the autonomous opportunity, you know, a couple of years back, I think you provided at least samples of your five products at the time to a number of players in that autonomous market. And, um, just want to understand sort of where things stand there and how you're thinking about that opportunity today, particularly now that you've got, you've got the pick, um, in production. Yeah. So we're in over 20 different platforms, so we continue to do well, and as all these platforms are in testing and prototyping, it doesn't generate a lot of revenue yet. But as you know, this is an enormous opportunity, and we've been focused on it, which is why I wanted to point that out in the script. We've been focused on this market for 15 years, so from when DARPA first you know, sponsored the original Grand Challenge. So we've been working with these companies for a very long time. So we feel that we have the precision, you know, we have the experience. We've literally, you know, been in millions of miles of autonomous driving, you know, on roads today, you know, through our customers. And, you know, some of these markets we think are going to develop faster than others. And we think, you know, autonomous trucking, for example, will develop faster than a fully autonomous consumer vehicle. And the reasons for that are both economic in that these are more expensive platforms and they deliver an economic value to the people who are operating the trucks, as well as the opportunity to run them in more contained environments. So level five doesn't mean that level five is on every single road that you could possibly drive on, but it might be level five on the interstate highway system. So we think things like trucking and autonomous vehicles for public transport and people movers, which again are in more defined geosense areas, I think will happen faster. And we're already seeing customers in those areas. Thanks for that, and I'll yield the floor.

Okay, and again, that is star one to ask a question. If you find your question has been answered, you may remove yourself from the queue by pressing star two. We'll take our next question from Rick Printers with Framing James. Please go ahead. Thanks.

Good morning, guys. Hey, Rick. Hey, Rick. A couple questions following up on the migration conversion, finishing up the conversion. How should we think about, are you worried about any of the revenue side, where people are not converting over? Did I hear you right that an exit one would be a $4 to $5 million OpEx savings on the network side? Yep. Well, it wouldn't be OpEx, but it's savings because of sales.

Because of sales, you're right.

And that was a fortified new plan at the kind of exit point. 21 into 22.

Right, so reduced bandwidth cost, so we're not running two networks. So, in other words, we're spending more than that now, of course, on the old network, but this would be the incremental part because as we migrate people over, you know, we put the bandwidth on the new network, but the net savings, you know, we estimate is, you know, $4 to $5 million.

Right. And any concerns on the subscriber side? Do you think you can get everybody... switched over. So it's really more just that.

Well, you know how people are. Yeah, no, that's definitely a concern. And, you know, for us, this is, you know, an enormous priority to get this done. But you know how people are. They always wait to the last minute. So, you know, we're giving people incentives to do it early and to get switched over. So really, you know, we don't anticipate this being a risk to revenue in 2021. you know, if anything, you know, some people may defer until 2022 and then realize, you know, that they forgot to do it and have to do it, you know, in January. But what we've also seen, Rick, is that, you know, the high value customers, the people who are, you know, more modern customers have all switched already. So the people who are left are sort of the stragglers, you know, the low RP customers, you know, who aren't really prioritizing, you know, this, you know, whereas our big fleets, you know, have, mostly all converted already. Right.

Now there's going to be some Agile sales. How should we think about CapEx in 2020 and what this final process might do with it?

I'll let Brent answer that.

Can you ask the question again? I'm sorry?

He's asking about CapEx. You're a little hard to hear there, Rick. I think he's asking about CapEx for 2021 for Agile related.

Yeah, well, CapEx for 2021 – Generally, the more CapEx, the better when it comes to Agile plans as far as we're concerned. Total CapEx will be somewhere in the neighborhood of $15 to $20 million. As I said a moment ago, if we get some significant Agile orders, which mean more subscribers on our network and more revenue, more airtime revenue, it could be higher. The very fluid number, the amount of CapEx that we have budgeted for that's not revenue-generating CapEx, such as the Agiles, is relatively low. Okay, and obviously we've got a new president and an administration from there. Can you talk a little bit about how you see it affecting orders and also international orders?

It's a question on the defense side, Rick?

Yeah, defense side and also just in the administration things here via the business.

Well, too early to tell. I think that, you know, it's clear that, you know, this administration is probably going to be less focused on, you know, defense spending. So, you know, what that means to future budgets, you know, we'll have to wait and see. Also, you know, depending on what happens, you know, politically with the Middle East, you know, that could impact, you know, some, you know, potential in attack to have business if there's, you know, embargoes or bans on, on exports and things like that. So hopefully that, that doesn't, that doesn't happen. No. Okay. And, um, and it, it thoughts that you could obviously still strong, good to be in this COVID pandemic, uh, Hey, Rick, I'm having trouble hearing you, Rick. If you could maybe... Can you hear me better now? Yes, that's perfect.

Okay, very good. Yeah, obviously, balance sheet, cash position, negative net debt.

Any thoughts on M&A or what else might be out there that you might want to tuck in? You know, we're... you know, we're not a super acquisitive company, but we've done some, you know, you know, four or five deals over the last, you know, 10 years. So, you know, we are, you know, we'll always look. I think that, you know, some of the things that we've seen that have come out have been really troubled and, you know, very difficult to justify doing. So, you know, if we, you know, if we were to do something, it would have to be, you know, something that's very compelling and, you know, doesn't put pressure on us with a lot of debt or anything like that. So we kind of like where we are. We've got some new products coming. We think we're going to be very, very competitive this year. I think we see a lot of upside in the airtime business. So overall, we feel pretty good about our position. Very good. Thanks, guys. Stay well. Thanks. Thanks, Rick.

All right, and I'll prompt one more time that that is our one to ask a question. I'll pause for another moment to allow anyone to ask a question. It does look like we have another question from Chris Quilty with Quilty Analytics. Please go ahead.

Thanks, guys. I think Brent may have given this in his script, but he was talking too fast. What was the gross margin for the Mini-DSAT broadband service specifically?

34 and change.

Are you certain? The gross margin for the mobile connectivity business unit was 33.8%.

Yeah, that's about a four-point increase over Q4 last year, I believe.

Right. And where do you expect that to go this year, assuming you don't get the $4 million to $5 million of savings this year? The savings is not this year. We're talking about the savings in 2022. We're still running two networks to the end of the year. And it does put a bit of pressure on the gross margin percentages, particularly for our airtime business. But coming out of the year, when we're down to one network, we're anticipating improvements. Gotcha. So for the full year in 2021, will they remain in sort of the mid-30s, and by next year they kind of push back up to the 40% goal you've long talked about?

I think that's a good estimate. I think they should be increasing this year. You know, so it would be winding down costs on the old network and ramping up costs on the new network, but incrementally it will be better. And it's a little bit tricky. Chris, because it's sort of the pace of the migration. If the migration happens evenly throughout the year, then that's one thing. But if it's all back and loaded, we're carrying the costs throughout more subscribers. On the old network, perversely, it's actually better because you're not needing to add bandwidth on the new one. So it's a little bit tricky to forecast. But we do – in our models, we do have – The margins generally, you know, where they are, are slightly increasing.

Okay. And a follow-up on the CapEx, of the $15 to $20 million, how much of that, you know, ballpark might come from Agile plan? And also, are you seeing a significant CapEx contribution developing for KDH Watch?

Well, I'll answer the watch part. Not yet for watch, but we expect that to take on the similar business model that we saw with Agile plans, where that compounds over time. But the vast majority, the business right now is not very capital intensive outside of the Agile plans. So some of this new equipment that we're talking about for the photonic chip is know it's fairly pricey for a machine and maybe half a million dollars kind of thing um to get that you know installed and set up but the vast majority of the capex budget is for agile plans great and uh where are you seeing the the strongest demand for agile plans either

you know, amongst your higher-end customers, lower-end geographically or by application? And has that changed over the course of the past year?

Well, the geographic split hasn't changed. It's sort of, you know, evenly distributed between America's APAC and Asia. So it's actually a pretty nice distribution geographically. The one big change that we saw in Q4 is, you know, V7, V11 continued to do extremely well, but V3, which was, you know, not offered in the natural plant service, you know, V3 was purchased only in the past. That really took off in Q4, and that's, as I mentioned in my script, the, you know, unit sales for V3 HGS was up 175% in Q4, and that's a product that had been on the market for three years. So, you know, really, you know, and that was driven by Agile plans where we're addressing a new market, which is, you know, smaller fishing boats, you know, countries like Indonesia and Vietnam and parts of Africa with a lot of fishing. So it's really a new market for us. So it's incremental.

And what does that lift in V3 do to the overall ARPUs? Presumably it will mix it down But depending on that, what have you seen happen with the trends for Agile plans?

So ARPUs have been very, very constant. You know, so it's surprisingly stable over the years. You know, Agile plans are very stable. V3 is at a lower price point, both for the hardware sale and for the airtime and for Agile. So, you know, going forward, we may report ARPU sort of, you know, by product if this becomes... you know, if this continues to take off. But, you know, I just want to point out it's incremental. So it's not, you know, dragging down ARPU in the traditional sense. It's adding a new category, which is at a lower price point.

Gotcha. And I guess the other question with Agile plans, how has the churn changed over the course of the year?

Churn has been very low in Agile.

Yeah, very low.

products like Agile. So it's our lowest churn of any product we offer. And that's another thing is that, you know, speaking about the old network, the legacy network has very high churn compared to the HTS network. You know, the vast majority of the churn is on the old network. So these are old, you know, old products, you know, old network. A lot of these boats are getting sold or laid up. So, you know, we also expect that as a As a result, starting next year or as we progress throughout the year, we should see a significant reduction in churn simply because we're getting people off that old network.

Great. And final question just on the government defense markets. You've got a couple of big programs that are planned for rollout. Are any of those schedules being impacted by the change in administration or does everything look generally on time with APMT and MPV and others?

Yeah, the U.S. programs, you know, are all, you know, budgeted and, you know, moving forward. So we don't see any impact in U.S. programs. You know, our big one is with the AMPV program of BAE. You know, that program is on track, you know, at least as far as funding goes and all that. So I think the risk would be more, you know, some international, you know, what's going to happen in the Middle East, you know, who knows.

Speaking of which, I think you had a $10 million TACNAB that was supposed to ship in the fourth quarter. Presumably only a portion of that shipped, and we should see the balance in Q1.

You're right. Some of it shipped in January. So some of it, you know, you're absolutely right. Yep. But it's all been shipped and it's all been paid for. Cash has been received. So that program is complete.

Great. And I think you had talked previously about two to three potential orders going into 2021 and you hope to win one or two. And I assume all of that is still on track.

Yeah, we've got, you know, as Brent mentioned, we've got around $20 million in backlog. You know, $19 million of that is for inertial now. So, you know, we expect, you know, strong growth in our fog business this year. You know, TACNAV, you know, we try not to forecast that aggressively. You know, so TACNAV, we're always very conservative on our forecast, you know, until it's in backlog. So that's not built into our guidance at this point.

That's a good thing. All right. Thank you, gentlemen.

All right. Thanks, Chris. Thanks, Chris.

All right. And again, that's our one to ask a question. I'll pause for another moment to allow anyone to ask a question.

And it would appear that there are no further questions on the phone lines at this time.

That's great. So this wraps it up. And as always, feel free to reach out to us directly for any follow-ups. Thank you. Thank you very much.

And this concludes today's call. Thank you for your participation. You may now disconnect.