Good day, and welcome to the KVH Industries, Inc. Q4 YE 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brent Bruun, CFO. Please go ahead.

Thank you, operator. Good morning, everyone. Thank you 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 Kits van Heyningen, the company's Chief Executive Officer. The earnings release is available 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. 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 do not have an 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 on our SEC filings, specifically those under the heading Risk Factors in our third quarter Form 10-Q 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 $1 million from last year and reported total adjusted EBITDA of $3.1 million, which is a $7 million improvement compared to 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 5 years. We recorded very strong TACNAV revenues, record VSAT unit bookings, and record VSAT 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 pose 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 of the previous year. Year-over-year, our airtime margins were up almost 4 points to 34.2% compared to Q4 of 2019. Our AgilePlans program continues to be a key revenue driver as customers recognize the benefits of an innovative, all-inclusive model. AgilePlans revenues increased by 53% compared to Q4 of the previous year. We also recorded strong sales of our AgilePlans Regional service, which employs our smallest VSAT, the 37-centimeter TracPhone V3-HTS. AgilePlans 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 took 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, AgilePlans Regional's 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, AgilePlans 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 in the Baltic dry index have both more than doubled this 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 depressed. And within our Media 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 $1 million decline in 2020 compared to 2019. We launched our legacy mini-VSAT Broadband Network in 2007. And after 4 years, we're shutting it down at the end of this year. The majority of our customers are already on our new HTS network, which we launched a few years ago. We're planning to migrate the remainder of our legacy customers to the HTS 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 HTS 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 million 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 AgilePlans service. Moving on to KVH 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 KVH 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 have established relationships with a range of firms, including IoT service providers such as GreenSteam, IoT platform integrators like TMS Maritime, OEMs like Kongsberg, and multicard service providers like Kilo Marine. We've established a formal working process with each of these partners. We work with them to define and develop a solution that integrates KVH Watch with their systems. We provide training for their sales teams, establish joint marketing agreements, and deploy trial programs with their customers. KVH 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 was 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. To our view, 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 the vessel performance optimization systems not be connected to the onboard network. We believe KVH 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 offers affordable, remote expert intervention and high-quality video on demand. Plus, it provides a dedicated air gap 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 to the AgilePlans, 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 were so exciting. While the commercial market can take some time, we believe that 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. TACNAV 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 TACNAV, FOG order we announced last July. Stand-alone 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 TACNAV systems. However, we enter 2021 with a very strong backlog for both TACNAV 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 stand-alone 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 with 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 MEMS 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 assist 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. KVH 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 inertial products were first integrated into the U.S. commercial self-driving car prototypes in 2012. KVH 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. 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 in autonomous markets 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 we are 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 related to 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 from 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 TracVision product sales and a $0.2 million decrease in land mobile 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 AgilePlans. 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. Mini-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 AgilePlans. VSAT shipments in connection with the AgilePlans program approximated 58% of our total unit shipments and 73% of our commercial shipments this quarter. AgilePlans 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 inertial 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 on 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 this 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 valuation advisers that the goodwill and intangible assets in the Media Group were less than the carrying value, indicating an impairment and resulting in a noncash charge of $10.5 million. Including the impairment charge, the mobile connectivity segment generated an operating loss of $10.6 million. Without this 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, nonrecurring 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 $0.5 million last year. EPS for the fourth quarter, again, including the impairment charge, was a net loss of $0.65 per share compared with a net loss of $0.17 per share in the same period last year. Non-GAAP EPS for the fourth quarter was $0.07 per share compared to a non-GAAP EPS loss of $0.03 per 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 a 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 our 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, watching 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'd like to 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. That mentioned that Roger Kuebel will be joining KVH next week as our new CFO. Roger is an accomplished financial executive, having served as CFO of Seaborn Networks and Treasurer at Aspen Technology, amongst others. He has great expertise across financial planning, reporting, capital markets, and strategic transactions, 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 KVH as our financial performance has real positive momentum, and we focus on building our business through innovation and market leadership while containing costs. And we're all very excited to have him aboard. And I also want to thank Brent Bruun for taking over as CFO for the last 6 months; done a great job, put together 2 solid quarters. So you're setting a high bar for Roger to come in. But on behalf of myself and the Board, we just want to thank you for doing that. So operator, I think we're ready to take questions now.

Okay. It looks like we have a question on the phone line from Rich Valera with Needham & Company.

Martin, it's understandable that you will be transitioning your customer base to the HTS network this year, which appears to offer significant long-term savings. Can you provide an estimate of the additional costs you foresee this year for transferring your remaining customer base to the HTS network?

We have been working on this for two years now, and we're essentially speeding up our efforts. We will be providing incentives such as hardware discounts and installation support. Some of these costs may be capitalized if customers transition to AgilePlans, while others will be reflected in product discounts and installation credits.

Got it. And then just wanted 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. Could 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?

Yes, you've accurately captured the situation. There are advantages in terms of both margins and product performance and size. As I mentioned previously, we initially integrated PIC into our high-end products to demonstrate its effectiveness. We are now expanding its use across all our other products. In the fourth quarter, we completed the engineering necessary to include it in our standard offerings, and those products are now entering production. We anticipate cost savings as we phase out the current fabrication methods, which involve couplers, polarizers, and fiber manufacturing—which carry substantial costs and overhead. Once we fully transition away from that approach, we expect a significant improvement in margins and reduced manufacturing overhead, which will positively impact our gross margin. We plan to start ramping this up in April, having ordered a second precision assembly system to facilitate the move to this new automated manufacturing process. Realistically, by the end of June, we aim to have fully transitioned.

That's really helpful. I just wanted to follow up on the autonomous opportunity. A couple of years back, I think you've provided at least samples of your FOG products at the time to a number of players in that autonomous market. And just wanted to understand sort of where things stand there and how you're thinking about that opportunity today, particularly now that you've got the PIC in production?

Yes. So we're in over 20 different platforms. So we continue to do well. And as all of 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, from when DARPA first 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. We have the experience. We've literally been in millions of miles of autonomous driving on roads today through our customers. And some of these markets, we think, are going to develop faster than others. And we think autonomous trucking, for example, will develop faster than a fully autonomous consumer vehicle. And the reasons for that are both economic, and 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 5 doesn't mean that level 5 is on every single road that you could possibly drive on, but it might be level 5 on the Interstate Highway System. So we think things like trucking and autonomous vehicles for public transport and people movers, which are, again, are in more defined geo-sense areas, this will happen faster. And we're already seeing customers in those areas.

We'll take our next question from Ric Prentiss with Raymond James.

I have a couple of questions. Following up on the migration conversion, how should we consider the revenue aspect, particularly regarding those who are not converting? Did I understand correctly that by the end of 2021, there would be a savings of $4 million to $5 million in operating expenses on the network side?

Yes.

Well, it wouldn't be OpEx, but savings, the cost of sales.

Cost of sales, you're right. Yes.

That was $4 million to $5 million at the kind of exit '21 into '22?

Right. So reduced bandwidth costs, so we're not running 2 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, we put the bandwidth on the new network. But the net savings, we estimate is $4 million to $5 million.

Right. And any concerns on the subscriber side? You think you'll get everybody switched over, so it's really more just a...

There is definitely a concern regarding the subscriber transition. It’s a major priority for us to get this completed. However, people tend to wait until the last moment. We are providing incentives for early switching. We don’t foresee this being a revenue risk in 2021, though some may delay until 2022 and then forget, needing to transition in January. We've observed that our high-value customers have already made the switch, while those still needing to convert are generally low ARPU customers who are not prioritizing this, as our larger fleets have mostly already transitioned.

Right. And obviously, it could also be some Agile sales. How should we think about CapEx in '20 and what this final process might do to that?

I'll let Brent answer that.

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

He's asking about CapEx.

Yes. For 2021, we generally believe that higher capital expenditures are better for AgilePlans. Our total capital expenditures are expected to be in the range of $15 million to $20 million. However, if we receive significant Agile orders that increase our network subscribers, revenue, and airtime revenue, this figure could be higher. It's a dynamic number. The budgeted capital expenditures that are not associated with generating revenue, like those for Agile, are relatively low.

Got you. Okay. And obviously, we've got a new president, a new administration there. Can you talk a little bit about how you see it affecting orders and also international orders?

Is a question on the defense side, Ric?

Yes, defense side and also just any thoughts on the administration and your view of the business.

Well, too early to tell. I think that it's clear that this administration is probably going to be less focused on defense spending. So what that means to future budgets, we'll have to wait and see. Also, depending on what happens politically with the Middle East, that could impact some potential TACNAV business if there's embargoes or bans on exports and things like that. So hopefully, that doesn't happen. So...

Okay. Any thoughts on the situation? It's still strong, and it's good to be asked about it considering the pandemic. Hopefully, we are looking towards a better future.

Ric, I'm having trouble hearing you. Ric, if you could maybe...

I'm sorry. Can you hear me any better now?

Yes. That's perfect. Yes.

Okay. Very good. Yes, obviously, balance sheet does the cash position negative net debt. Any thoughts on M&A or what else might be out there that you might want to tuck in?

We're not a company that makes a lot of acquisitions, but we've completed about four or five deals over the past decade. We are open to exploring opportunities, but many I've seen recently are quite troubled and hard to justify. If we were to pursue something, it would need to be very compelling and not create significant debt pressure for us. Overall, we are content with our current situation. We have new products launching, and we believe we will be very competitive this year. We also see considerable potential in the airtime business, so we feel positive about our position.

It looks like we have another question from Chris Quilty with Quilty Analytics.

I think Brent may have given this in the script, but he was talking too fast. What was the gross margin for the mini-VSAT Broadband service specifically?

34 and change?

The gross margin for the mobile connectivity business unit was 33.8%.

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 are not expected this year. We are referring to the savings from 2022. We will continue to operate two networks until the end of the year, which will exert some pressure on our gross margin percentages, especially in our airtime business. However, as we move into next year and operate with just one network, we expect to see improvements.

Got you. So for the full year in 2021, will they remain in the mid-30s? And by next year, will they push back up to the 40% goal you have long talked about?

I believe that's a reasonable estimate. This year, costs are expected to decrease for the old network while increasing for the new network, but overall, it should improve. The situation is somewhat complex, Chris, given the migration pace. If the transition is smooth throughout the year, that's one scenario, but if it's more concentrated towards the end, we would still bear costs during that time. Interestingly, having more subscribers on the old network is actually beneficial since it reduces the need for increased bandwidth on the new network, making forecasts somewhat challenging. However, our models indicate that margins will generally remain stable or slightly improve.

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

I'll address the watch aspect, although we're not ready to discuss it in detail yet. We anticipate that it will adopt a business model similar to what we experienced with AgilePlans, where growth builds over time. Currently, most of our business is not very capital-intensive apart from AgilePlans. The new equipment we talk about for the photonic chip is relatively expensive, around $0.5 million for installation and setup. However, the bulk of our capital expenditure budget is allocated to AgilePlans.

Great. And where are you seeing the strongest demand for AgilePlans, either amongst your higher-end customers, lower-end geographically or by application? And has that changed over the course of last year?

The geographic distribution remains unchanged, fairly balanced among the Americas, APAC, and Asia, which is a positive aspect. A significant development we observed in Q4 is the strong performance of V7 and V11, along with a notable increase in V3 sales, which had not been part of the AgilePlan service before and was previously purchased. In Q4, unit sales for V3-HTS surged by 175%. This product has been available for three years, and the growth was fueled by AgilePlans targeting a new market of smaller fishing boats in countries like Indonesia, Vietnam, and various parts of Africa, indicating a new incremental market for us.

What impact does the increase in V3 have on the overall ARPUs? It will likely dilute it, but aside from that, what trends have you observed with AgilePlans?

ARPUs have remained quite constant, demonstrating surprising stability over the years. AgilePlans are also very stable. V3 is being offered at a lower price point for both hardware sales and airtime, as well as for Agile. Moving forward, we might report ARPU by product if this continues to gain traction. I want to emphasize that this development is incremental; it isn't lowering ARPU in the traditional sense but instead is introducing a new category at a lower price point.

Got you. And I guess the other question with AgilePlans, how has the churn changed over the course of the year?

Churn has been very low in Agile.

Yes, very low.

I wish all our products performed as well as Agile, which has the lowest churn of any product we offer. In contrast, the old network experiences very high churn compared to the HTS network. Most of the churn is associated with the old network as many of these older products are being sold or laid up. Therefore, we anticipate that starting next year, or as we move through the year, there will be a significant reduction in churn simply because we will be transitioning people away from that old network.

Great. And final question just on the government defense markets. You've got a couple of big programs with a better plan for a rollout. Are any of those schedules being impacted by the change in administration? Or does everything look generally on time with AT&T and AMPV and others?

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

Speaking of which, I think you had a $10 million TACNAV 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 correct. Some of it was shipped in January. Yes, you're absolutely right. However, everything has been shipped, payment has been received, and the program is complete.

Great. And I think you had talked previously about 2 to 3 potential orders going into 2021 and you hope to win 1 or 2. And I assume all of that is still on track?

Yes. As Brent mentioned, we have approximately $20 million in backlog, with $19 million attributed to inertial navigation. We anticipate significant growth in our FOG business this year. Regarding TACNAV, we tend to be conservative with our forecasts until the orders are in backlog, so those numbers are not included in our guidance at this time.

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.