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

Good morning, everyone. I am Pat Spratt, Chief Financial Officer of KVH Industries, and with me is Martin Kits Van Heyningen, Chief Executive Officer. This call will address the third quarter earnings release that we issued earlier today. Copies of the release are available on our website and also from our Investor Relations department. This call is being simulcast on the Internet, and will be archived on our website for future reference. If you are listening via the web, feel free to submit questions at ir@kvh.com, and we will answer them following this call. This conference call will contain certain forward-looking statements that involve risk and uncertainty. For example, statements regarding financial and product development goals are forward-looking. The company’s future results may differ materially from the projections described in today’s discussion. Factors that might cause these differences include, but are not limited to, those mentioned in today’s call and risk factors described in our quarterly report -- excuse me, in our annual report on Form 10-K filed with the SEC on March 8, 2012. The company’s SEC filings are directly available from us, from the SEC, or from the investor information section of our website. Now, I will turn the call over to Martin for today’s discussion. Martin?

Thanks Pat, and thank you all for joining us today. Overall, Q1 came in about where we expected and we're within the range of our quarterly guidance. First quarter revenue was $26.7 million, which is up 10% from the first quarter of 2011. Our VSAT sales were extremely strong with unit shipments up 120% year-over-year. We're also seeing improving momentum in key commercial markets. Airtime sales were very strong for the quarter and the increase in the service gross margin shows the leverage potential we have in our operating model. We are also beginning to see recovery in our satellite TV business, which is encouraging. This growth in the satellite business offset a 32% year-over-year quarterly decline in our guidance and stabilization business, part of which was anticipated due to the normal, uneven nature of our military navigation system business. But for our FOG products, we seem to be caught in a product transition cycle and sales of existing DSP-3000s are not as strong as they had been and sales of our new product the DSP-1750, which are being designed into products by key OEMs, are not going into production as fast as we had hoped. So, overall, revenue was a little below the midpoint of our guidance and this was due entirely to the slow FOG sales. Pat will go over the numbers in detail. So let me go over the progress in each of our major business areas. Starting off with our Satellite business, as we discussed in our last conference call, providing broadband connectivity to offshore vessels is one of the major opportunities that will fuel KVH's growth. We're very excited about how well we're doing in this market. Our first quarter revenue for mini-VSAT overall grew 61% compared to the first quarter of 2011, and our…

Thank you, Martin. The following summarizes our Q1 revenue by business. The total VSAT business was approximately $12.7 million, of which airtime services was about $6.8 million and increased 59%. Total VSAT revenue increased 61% year-over-year. ARPU for by-the-megabyte plans increased a bit to the high-end of the $500 to $700 per month range, and fixed rate plan ARPU also increased to the high-end of the $1,800 to $1,900 per month range. The mix of unit sales for the quarter was roughly 40% V3 and 60% V7. All other marine satcom revenue, including, TV systems and Inmarsat systems and airtime was $6.3 million. Within that amount marine satellite TV sales increased 19%, while sales of Inmarsat L-band satellite systems declined close to 50%. Land, satcom, and aviation system maintenance services combined was $1.8 million, down 11% year-over-year. TACNAV revenue was $1.1 million, down 44% year-over-year. FOG was $3.1 million, down 50%. Other guidance and stabilization products and services was $1.7 million, up over 200%. Gross margin was 37.2%. This was a little below our expectation due to the shortfall in FOG revenue, and the absolute level reflects the relatively low level of overall TACNAV and FOG product sales. The variable margin impact for FOG production, especially, is relatively greater than what we experienced with our other products. The gross margin for VSAT airtime increased to approximately 28% for the quarter, up from only 4% one year ago. In fact, the marginal gross profit that was earned on the incremental year-over-year quarterly revenue exceeded 65%. This is indicative of the beneficial leverage effect within our mini-VSAT business model. As expected, we also saw a meaningful sequential increase in airtime revenue, which led to a sequential gross margin improvement of about 900 basis points. Although we should see another sequential margin increase…

[Operator Instructions] And we'll go first to Rich Valera of Needham & Company.

Martin, as far as responding to Inmarsat's raising of fleet broadband prices, obviously not everyone is going to out and buy a new V11, though that's an elegant solution, if you already have a V7 or a V3, I presume you probably don't want to do that. So I'm wondering what you're thinking about for those customers, if you looked at using other backup solutions, like maybe an Iridium or potentially actually subsidizing the V11 to make that more attractive to them?

Yes, that's a great question. So, in fact, a couple of months ago we did enter into a partnership with Iridium. So we actually have a very affordable backup solution for V3 and V7 customers who want occasional use coverage. In fact, some of our bigger customers like Varun and this new Dutch company that we just signed up elected to use Iridium rather than Inmarsat. So that is a very nice solution. And, as you know, they have true global coverage even at the pole, so if you want occasional use backup system, it's a great alternative and we're offering that.

How about this sort of perhaps subsidizing V11s upgrade?

Since the product is brand new, we're not looking at subsidizing it just yet, but we do offer currently with our V3 and V7 leasing programs and -- in effect, what we end up doing is bundling the airtime and the hardware so it's somewhat fungible which is airtime and which is hardware. So we try to get to the monthly expense number that the customer is trying to get to, and we have more flexibility since we're a one-stop shop with hardware and airtime. We're able to sort of tailor the monthly payment to what the guy can afford.

Great. And last call you referenced which sounded like a pretty sizable initial and the of course it's one order, but demand level for the V11 you had some the first, pick a number it sounded like 25, 30 units spoken for, for the V11 as it starts shipping in the third quarter. Can you talk about if there has been any pipeline development since then, have you either secured any additional sales or just how that pipeline has developed for the V11?

Yeah, we haven't really made any significant progress in terms of building firm backlog, which is not surprising. So what we're doing is, we have the initial customers lined up and we plan on starting testing next month and delivering units in Q3. So, we're pretty comfortable with what we have in our forecast for V11. But typically, the way this goes, and we went through with the V7 and then we went through with the V3, the process is you have to get a unit on one vessel for a trial. And there is just no shortcutting that in this industry. So, we didn't expect to go out and get an order for a couple hundred units, but what we have done is gotten of lot of interest in people who want immediately to start trials, so -- and that's exactly what's happening.

Okay. That's helpful. And then, with respect to the guidance and stabilization business, you can correct me if I'm wrong, but it seems like to get your annual target for revenue growth, you're going to need to see that business moves towards the $10 million per quarter level in the back half of the year. And you indicated in your prepared remarks that you -- a lot of orders you need to secure to sort of meet not just Q2 but the sort of the balance of the year it sounds like for that business. So, just wondering what kind of visibility you have to that kind of ramp in the back half, if in fact that's what you're taking into your, your overall revenue guidance for the year? Thanks.

Right. Yes, so I think you're correct. But we do, we're anticipating significant ramp in the back half of the year. But if you look at the guidance and stab business overall, we have a TACNAV business, we have the engineering business, and we have the FOG. So, between the three of those components, we're pretty comfortable with the full year picture, although the mix might change a bit. So, we think that we -- potential softness in the FOG might be offset by potential upside in the TACNAV. So, right now as a blend, we don't see any change from our original guidance for the year. And also we think that Q1 was a pretty big anomaly from the historical sales pattern for FOG over the last 5 years. So we don't expect that to continue in, even in Q2. So it was just a very low quarter in, in Q1.

You've referenced on the last 2 calls, I think, the prospects for some large TACNAV orders that are out there. Any updates on any of those in terms of potential timing of those awards?

No, I don't have any specific updates. But as time marches on, you get closer to the -- when you expect these orders to actually happen. We still expect them this year, how much of that would be this year revenue. There were a couple of large programs that we're working with existing customers in order of selling vehicles and we're part of those programs. So -- and in addition, some of this business is international, which is even further difficult to predict time wise. So right now those contracts are not in our guidance, but they're sort of risk mitigation elements and upside for the full year.

Great understood. And then sure one final one if I could, Pat, could you give the -- you may have given the cash flow from ops and CapEx numbers and D&A numbers for the quarter?

Yes, the cash flow from operations was $5.1 million. Depreciation and amortization, $1.1 million. And I also gave the equity expense number for the quarter, which was $1 million.

Okay. And what was CapEx?

Well, CapEx, I'm sorry, $2.2 million.

The next question will come from Chris Quilty of Raymond James.

Just to confirm on the year-over-year unit shipments, am in the ballpark if I'm looking at about 350 antennas shipped in the quarter?

The run rate that we've been getting to you last year was approaching, sort of, 250 a quarter, I think. We're now moving above that. But I don't think that you should assume 350 as a run rate, I think that's a little bit on the high side, so... I think that you, I also want to point out that a year ago we didn't have the V3. But the V7 is continuing to outsell the V3 by roughly 2:1 or something. So it's still, the majority of our sales are still V7, which is really a strong positive because it was some concern outside the company that the V3 might cannibalize V7 and we'd end up with lower ARPUs and things like that. So it's actually working out quite well.

Okay. Did I understand correctly that you think shipments will be up sequentially, unit shipments partially driven by seasonal demand?

Yes. Yes, absolutely.

Okay. And do you also have any sense that you can give us of where those units are getting installed in terms of types of vessels, either leisure versus commercial or type of commercial?

Yes. I mean, the nice thing about our business model is we know exactly where they are going. We know the owner of the vessel, we know everything. So, the majority of the units are commercial, probably 10% to 15% of our business is leisure, something like that now. So the commercial accounts range from large fleet shipping companies to oil and gas, workboats, tugboats, really the full spectrum of maritime vessels.

Okay. And the strength you experienced in the quarter, I know Inmarsat made the announcement earlier this year of the price increase, but I don’t think it goes into effect until next month.

Right.

So, is it fair to assume that you probably haven’t yet seen an impact of customers making the shift?

That’s true. So, it wasn’t outlaid in the quarter and these things take time to ripple through. But the reaction has been swift and immediate. There has been a lot of negative press in the marine industry, including magazines like Digital Ship, where there is -- and there have been industry writing letters of concern, because partly Inmarsat has services that are mandated so people have to use some of their services by regulation. So people are not happy. So, a little bit of a Netflix moment for Inmarsat, for they have managed to annoy a lot of people all at once.

Okay, and I was actually going to ask about the GMDSS requirement. Is that something that you could in some way eventually get certified, which would really unhinge the sort of monopolistic position they have for those types of units.

Right. I think with the V11, we have a good shot at getting GMDSS. I think that that’s something that we're looking into applying for GMDSS certification, because it has same or better coverage than Inmarsat and it has dual mode capabilities, so that you have redundancy, both spatial redundancy with different satellite in view, you're not single-threaded in any area, so it’s probably something that we are going to take a hard look at.

Okay. And what about with the Iridium solution, have they applied for GMDSS?

I believe they have.

And if I remember correct, this is a bit of the multi-year process?

Right.

Inter governmental organization.

Yes.

You also announced recently a new customer in Boatracs. Can you talk to us about that relationship?

It's part of our strategy, is to expand our distribution network, so we are looking at ISPs who are selling competitive products. And one of the things we are looking at, for example with this price increase from Inmarsat, is to look at their resellers, their ISPs, because we have a nice value proposition in the V3, most of their business is metered, meaning they're paying by the megabyte. So, we have an opportunity to wholesale megabytes to these resellers where they can make a lot of margin and still be very competitive on price. Boatracs is another example of a company that has a nice installed base; they have been in the marine business for long time. So, they are a reseller going back at their customers who had low speed tracking and reporting capability and now looking to upgrade to broadband and all these services. So I think there are lot of customers out -- a lot of companies out there that fit that model, so it's an opportunity for us to expand our distribution and to go almost a wholesale model with some of these ISPs.

Got you. And two clarifications from Pat, the ARPU you mentioned or ARPU trend or the fixed plans set for the higher end of the range of 18 to 19?

Yes. I just -- what I was trying to do, Chris, was be consistent with the ranges we had given last time on the call. We set forth the by the megabyte plans, the range that we saw for the ARPU was $500 to $700 a month. And what I am saying is that, in Q1 of this year, we were near the top end of that range in the terms of the ARPU for the quarter but still within the range. And for the fixed priced plans, the range, as we had given in the past, was $1,800 and $1,900 per month, and we were near the top end of that range in the first quarter.

Got you. And the other clarification here, on the service margins for the VSAT business is it -- did I understand you to say that they should still increase but only marginally on a go forward basis because of the added C-band coverage?

Yes, it will be more modest for the next several quarters as the C-band covered just put in place and we start to build new accounts for the V11 and then the airtime associated with it. So, I do expect to continue to increase on a sequential basis, but it will be at much more modest rate for the next few quarters.

Certainly. [Operator Instructions] We'll go to Greg Weaver of Invicta Capital.

I have got a just a bunch random ones here. Did you do any share buybacks in the quarter?

We did not in the first quarter.

Okay. And on this, Martin, on the Japanese win you referenced here, that's not the same on from September, is it?

No, this is the new company. So, it’s a -- we'll probably putting out a press release talking about the name of the customer in a couple of weeks from a marketing point of view. So, it’s a nice win. Japanese market is a very closed market, very difficult to do business there without the right partners. We spent the last 3 years developing relationships in Japan with SKY Perfect JSAT, who is our satellite service provider there. We have a license in Japan, which almost nobody does for VSAT, which is critical, and we have sales partners in both Verono [ph] and JRC. So, we have got really have the best partners on the ground that’s selling the product as well.

And I know you referenced this but you cut out [indiscernible], is that guy taking the C-band or is that he's using some thing else?

Which guy, the Japanese?

Yes.

Japanese are using the V7.

Right, okay that the V7 only.

Yes.

So, part of the thought was that with this channel development that some of these larger fleet operators are waiting for the combo solution?

Yeah, I think that what we expect to happen is that the bigger fleets will use all of our products, so, if you look at a Verune [ph] or a V ship we expect them to use V7, V11s, than V3s, depending on the type of vessel and the route. So that if you are -- I mean, if you're out we've got Ku band coverage, so if you are operating in area doesn’t go in the C-band region, you don’t need it. So, we are hoping that may be 20% of our unit sales will be V11s, maybe 30% will be V3s and the rest will be V7s, something like that.

Okay, great. And on the C-band, how is it going on the permit front?

We have licenses applied for and so far so good. Nothing to report there.

And the timeframe you think for getting that wrapped up, the license?

It's difficult to forecast because it's the government. So -- right now our schedule is that we still should licenses this quarter.

Okay. In terms of your Inmarsat customer base that you resold years ago, how many folks on that plan that are buying time from you still?

We have between 1,000 and 2,000, I think. I don’t know the exact number off the top of my head. So, a lot of those are these occasional use customers who are using on sailboats and things, where they have it on board but they are not really generating a lot of minutes. They're using it more for emergency use, that type of thing. So, we had to push through this price increase to our own customers as well. And obviously we have an alternative for them, so...

Right, okay. So in terms of converting them to say V3, you haven’t seen much of that activity yet?

No.

Okay. And on your DSP-3000 you referenced, you think there's any issues there with current customers holding off and say I'll wait for this 1750 or you don’t know?

No, I don’t think so. And I think it is a pretty sudden drop off this quarter. So, it'd be hard to attribute it to macro trends or products. So, I think it was just a bit of confluence between a number of big customers in their product ordering cycle. But, to put it in perspective, we're not talking about a huge -- even though as a big miss percentage-wise, we're talking about between $1 million and $2 million in FOG sales. So that’s the difference between what we expected and where we ended up.

Great. And I guess in terms of things that maybe helped still in that hole, you mentioned about these TACNAV orders that are kind of out there. How many different deals are there? I know there was like one large number. Are there half a dozen or so that you are hoping to land that aren't baked in at this point?

Yeah, there are probably three significant ones that aren’t in the plan, and some of those are multi-year programs. So, we would book them this year and start work this year but they would carry out through many years so. But that is -- and is very consistent with the TACNAV. That is the way that business has gone for 10 years, so there is no -- there is nothing different in that.

Got it. And just last thing, hopping back to the mini-VSAT here, can you give us some of the new antennas you activated this past quarter here? Roughly how many of those would you say came through channel versus direct and kind of how is that, how many partners would you say are really actively selling for you now?

That is kind of hard to say, I do not know that figure off the top of my head. I mean typically the way our sales process works is that we get involved in the larger deals where we present directly to the customers and then the 1V business is handled by our distribution partner or somebody's who has got probably 200 people around the world selling our product. So, the 1V business happened through that channel and the bigger deal, like the V.Ships, we get involved directly.

All right. Okay. And in terms of the distribution channel, obviously as you referenced before Inmarsat came to be upsetting their channel as well. Any color there in terms of, maybe some significant resellers for them that or bars whatever you call them, come back to you now and say we are looking for a new friend here?

Absolutely. I think that that's, we anticipated that; we have been actively soliciting. And we've also been approached by people who are looking for something else, because not only is the pricing going up and their margins getting squeezed there, the long-term business model is that Inmarsat is buying resellers and selling direct, bypassing their channel. So these companies that have been in the business for 10 or 20 years selling Inmarsat services are now looking at the future and saying what's in it for me. It looks like my business model is disappearing. So, we are offering them a way out where they can improve their gross margins, sell a new product that has higher speeds and more capability. And we are willing to partner with them and continue to support them.

At this time, we have no further questions.

Okay. Great. If anyone thinks of a question and want to call us directly, please do so, or shoot us an email.

Thank you very much.

Thanks.

I think and that does conclude today's conference call. We'd like to thank you for your participation.