KVH Industries Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q3 2023 KVH Industries Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Roger Kiebel, Chief Financial Officer. Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us today for KVH Industries' 3rd quarter results, which are included in the earnings release we published earlier this morning. Joining me on the call are the company's Chief Executive Officer, Brent Bruin and Chief Operating Officer, Bob Balog. Before we dive in, the usual announcements. 1st, if you would like a copy of the earnings release or if you would like to listen to a recording of today's call, Both will be available on our website.

Speaker 1

If you are listening via the web, feel free to submit questions to irkvh.com. Further, this conference call will contain certain forward looking statements that are subject to numerous assumptions and uncertainties that may cause our actual results to materially from those expressed in these statements. We undertake no obligation to update or revise any of these statements. We will also discuss adjusted EBITDA, which is a non GAAP financial measure. You'll find a definition of this measure in our press release as well as a reconciliation to comparable GAAP numbers.

Speaker 1

We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading Risk Factors in our 2022 Form 10 ks, which was filed on March 16 and Form 10 Q, which we plan to file later today. The company's other SEC filings are available directly from the Investor Information section of our website. Now to walk you through the highlights of our Q3, I'll turn the call over to Brent.

Speaker 2

Thank you, Roger. Good morning, everyone. Let me start by saying KVH is on the right track, Thanks to our successful efforts over the last year and a half. We divested non strategic businesses, right sized our staff In 2022 to focus exclusively on mobile connectivity products and services, grew our subscriber base by more than 1,000 vessels and maintained a debt free balance sheet. In our most recent quarter, our airtime sales grew 3% year over year And we maintained our airtime subscriber base at roughly 7,100 vessels, a slight dip from the all time high we hit last quarter.

Speaker 2

Although we are pleased with modest year over year growth, it is a bit lower than past quarters due to increased demand for competing data and content streaming services. We are now focused on positioning KVH within a rapidly changing marketplace. Ever since we have entered the satellite space with our maritime TV receive only antennas and then with our VSAT terminals and network, We won against traditional competitors due to 4 key differentiators. 1st, our proprietary terminals 2nd, our geosynchronous VSAT network. 3rd, our Combox integrated network management tools.

Speaker 2

And 4th, our outstanding global service and support. However, the market has changed as communication solutions by our faster speeds, highly competitive data rates, lower cost terminals and multiple communication options. We believe we are well positioned to maintain our mobile connectivity leadership role as we continue our ongoing strategic evolution as an integrated solutions provider. This evolution includes a terminal agnostic approach that permits us to integrate Our VSAT and cellular terminals with new and emerging hardware from Starlink and other manufacturers. A multi network approach that includes integration of our global VSAT network with cellular, Wi Fi, LEO and other services.

Speaker 2

Our seamless approach to network management that delivers versatile bandwidth management tools along with cybersecurity and value added services. And of course, our global service and support capabilities. In recent months, we have made 2 major strategic moves critical to our future growth. First, we strengthened our position as a multi orbit, multi channel integrated solutions provider When we entered into an agreement to be a StarLink reseller, we're now offering StarLink both as a standalone solution and is a hybrid companion with our TrackNet, TracFone and OpenNet terminals. We are activating the StarLink terminals through KVH's airtime services group, providing 20 fourseven live technical support And working with leisure boaters, commercial customers and boat builders to deploy the STARLINK service as part of a comprehensive KVH solution.

Speaker 2

2nd, we entered into an exclusive maritime distribution agreement with Cognitive Networks, giving us access to their dynamic suite of network and bandwidth management tools. This agreement expands our network management portfolio, which already includes our Combox bandwidth management suite of services and managed firewall from Fortinet. The cognitive technology enables us to seamlessly integrate communication channels aboard commercial and leisure vessels such as LTE, 5 gs, VSAT, Starlink and WiFi. We can also deliver sophisticated network and bandwidth management for shipboard operations, crew, owners and guests over the KVH 1 global hybrid network. I believe this new technology and service will be integral to KVH's multi orbit, multi channel communication solutions.

Speaker 2

We are excited by these 2 strategic moves and their implication for our long term strategic direction. Our arrangements with StarLink and Cognitive Networks are examples of how we will continue to expand our position within the mobile connectivity market. Looking ahead, we will continue to leverage our strong distribution channel while drawing on our large pool of Looking ahead, we will continue to leverage our strong distribution channel while drawing on our large pool of AgilePlant terminals, which will help us reduce CapEx going forward and support our continued focus on free cash flow. We also plan to continue our efforts for some context regarding our results.

Speaker 1

Thanks, Brent. First, I would like to note that unless specifically stated otherwise, My comments with respect to Q3 of last year relate to our continuing operations, which exclude the results of the inertial navigation business that we sold in August last year. Also in a change from prior calls, I will not restate data that is in the earnings release or clearly described in our 10 Q. I'll focus my comments on information that either elaborates on or clarifies the published data. Therefore, Airtime gross margin, which is not called out in our earnings release was 42.4%, down from 44.0% last year.

Speaker 1

However, due to a number of factors is still above our near term expectation of high 30s, which has not changed. Total Drivers were up about 4% from Q3 of last year. However, growth has slowed and Q3 ending subs were basically flat from the end of Q2. Product gross profit was negative by about $600,000 and while the MD and A section of our 10 Q describes the change from Q3 of last year, The primary driver of the negative margin was low unit volumes. Operating expenses excluding the impairment charge were 11,600,000 We expect that will tick up in the 4th quarter as we filled several key positions and we also have some normal seasonally higher OpEx in Q4.

Speaker 1

As such, we continue to expect the normal quarterly run rate to be between $12,500,000 $13,000,000 The impairment charge of approximately $6,000,000 represents a write off of all the company's remaining goodwill as well as approximately was driven by the decline in our stock price in August, when the market value of our equity fell below the book value of our net assets. Our adjusted EBITDA for the quarter was a positive $4,500,000 and our earnings release has the usual reconciliation of that. Capital expenditures for the quarter were $2,400,000 and so adjusted EBITDA less CapEx was positive by over $2,000,000 Our earning cash balance of $69,000,000 was down $1,800,000 from the beginning of the quarter. However, That decrease was due to increases in our inventory and prepaids. So without those, our cash balance would have been up by more than the amount of our interest income.

Speaker 1

With respect to the full year, given that adjusted EBITDA for the 1st 9 months was $12,000,000 we are increasing the low end of our guidance from $12,000,000 to $13,000,000 giving a new range of $13,000,000 to $15,000,000 For total revenue, we are also narrowing the range to $133,000,000 to $136,000,000 This concludes our prepared remarks. And I will now turn the call over to the operator to open the line for the Q and A portion of this morning's call. Operator?

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from the line of Chris Quilty of Quilty Space. Your line is now open.

Speaker 3

Thanks, gentlemen. I wanted to follow-up a little bit on StarLink. I think originally your plan was to only bundle that With the KVH VSAT suite, it sounds like you're now selling that individually. Two questions. 1, what sort of drove that Change.

Speaker 3

And number 2, can you just remind us, I mean, when you sell StarLink hardware that is Sold at basically no margin. So really it's only the services associated with that. So if you're selling STARLINK alone, are you able to actually wrap in some services with it?

Speaker 2

Yes. Good morning, Chris. To answer the first part of your question, We felt it was a requirement to sell it as a standalone service in particular for leisure marine. Leisure marine users aren't as focused on having a bundled solution along with the VSAT. So And the majority of our activations that have been standalone have been leisure marine.

Speaker 2

In regard to your second question, Yes, the margins are rather tight. We do add a few other components that aren't necessarily included like such as a longer length cable And other type of options, we do the installation And we provide other value add services on board.

Speaker 3

Got you. So the year over year having the Subs about flat. Is there something seasonal or is it really just a STARLINK impact? And I guess question on how you treat those STARLINK subs. Do they count as subs for your total or Do they not count since you're not doing the service revenue?

Speaker 2

At this point, they're not a Factors as far as our overall sub count, we just entered into the arrangement with StarLink at the end of September. So in regard to 3rd quarter results, StarLink terminals are not included in those subs. As we go forward, we very well may break those out separately. We haven't really crossed that bridge yet.

Speaker 3

Got you. Cognitive, can you I know you had the press release, which I read, but can you give us maybe a little bit of background on both the relationship, The decision to do an exclusive and what you gave up to get that exclusive and How that positions you relative to other players in the market? Clearly, StarLink offers almost nothing, but a lot of your larger competitors do have these Does this feel like it's something that is hugely incremental or is it just bringing you up to par with where our competitors are?

Speaker 2

I think it's a bit of both actually. It is definitely incremental in regards to where we're going with Our multi channel, multi orbit approach that we need to join different types of communication channels onboarding network, they can do a tremendous number Activities that we couldn't do with our core Combox functionality such as channel bonding, which is It's important to take advantage of the multiple channels onboard the vessel. And it also enables us to have a seamless approach to bringing on competitors' VSATs. We have our own VSATs. We have our Combox technology embedded software embedded into our VSAT design, But when we're bringing on a terminal made from another manufacturer, it enables us to provide onboard bandwidth management tools that are actually more advanced than what we've previously have provided with our Combox suite of services.

Speaker 3

Got you. And the relationship there, how did you come together with them?

Speaker 2

They've been in the market, they've shown into maritime. I've been in the satellite industry for quite some time. I'm familiar with I know it's time at Gogo. It's just we were working with them in regard Some standalone customers, airtime customers that migrated over to our network talking about competing terminals. So it's just a it was just a natural progression.

Speaker 2

Yes. Bob Belay wants to add something.

Speaker 4

Yes. Hey, Chris, an easy way to think about it is, of course, For years, we've had Combox and we've had built in switching in the H Series to switch between the different WAN channels. And it provides a really decent functionality. It automatically does the switch and keeps you connected, keeps your user experience Always in a state where you're online. What the cognitive networks devices do is they're really sort of the next Generation step up as far as network management goes.

Speaker 4

And they're providing things and it's really a tiered layered offering. When you upgrade to that sort of performance, now you're getting shared channel bonding, you're getting channel balancing And that kind of stuff is super important when you throw on multiple, say, on a larger boat, multiple StarLink terminals where you've got blockage on 1 or the other and you want to make sure the experience stays seamless. They also allow us to provide Not just application filtering and things like that, data usage monitoring, it allows us to do it all the way down to the device level. So we can, for example, let one of the ships turn off a crew member that was using up too much data on a specific application. So there's several tiers of that offering.

Speaker 4

So really what we're doing is going really strong into the value added services To layer all of that stuff on to give the customers exactly what they're looking for in levels of performance.

Speaker 3

Great. That's good detail. Switching gear on the hardware, I mean, we've run negative margins for several quarters now. Do you see a path forward to getting back to profitability? Or are you engaging in some sort of strategic review around what you should do with the manufacturing side of the business on hardware?

Speaker 1

I think it's something we've been evaluating. It's a somewhat complicated issue. I would say we're just in the process of sort of evaluating what the right next step is.

Speaker 3

Fair enough. And I missed on the forward guidance. I think you gave revenue of $33,000,000 to $36,000,000 Did you give EBITDA?

Speaker 1

Yes, 13% adjusted EBITDA, it was 12% to 15%. We're moving at 13% to 15%.

Speaker 3

Great. And I guess final question here, with regard to AgilePlans that was historically a big CapEx component for you, do you expect that to be as large now that you're Forgive me, I forgot the service. The KVH 1 where you're putting using competitors' hardware?

Speaker 2

We will be backing off on the amount of CapEx in the Agile plants. One of the reasons is using competitors soft hardware as you just indicated. Secondly, we've been had the program in place here for almost 10 years. Of course, we've had a bit of churn, which we do in just in the normal course. So we have a pool of assets that we refurbish and redeploy.

Speaker 2

So as far as the CapEx is concerned, Every unit that goes out the door, even though we're activating new agile customers all the time, the CapEx for that unit Could have been spent many years ago, 2 or 3 years ago. So the answer is we're going to be reducing CapEx on a go forward basis.

Speaker 3

And have you seen any change in the churn? I mean, you made it through the COVID without a big spike in churn as StarLink started to impact that at all?

Speaker 2

We've had an uptick in churn in particular with leisure marine, going back to your original question about selling Sterling is a standalone basis on a standalone basis. That's where we've seen the most.

Speaker 3

Got you. And you're still good in terms of satellite capacity, still 100% Ku based.

Speaker 4

Yes.

Speaker 3

Are you good on capacity and what do you I mean, I know, obviously, Intelsat has 4 Software defined satellites on orbit, but you've got more than a year out for that capacity to come online and StarLink's growing every day. Are you still in a good position?

Speaker 2

Yes, we're in a fine position in regard to the satellite capacity.

Speaker 3

Great. And final question, I know I said that before.

Speaker 2

You were to have

Speaker 3

the final question. I know, I know. So the with the competitor terminals, when you bring those on, those just show up as regular subs, right? If you switch Yes, Swast, a competitor? Okay.

Speaker 3

And have you had I know that program was just launched Lee, I think last quarter you were just tooling up. Are you starting to see any pickups?

Speaker 2

A small amount.

Speaker 3

Okay. Very good. Well, appreciate all the color guys and good quarter.

Speaker 1

Okay. Thank you.

Operator

All right. Thank you. One moment for our next question. The next question comes from the line of Ryan Kuntz of Needham and Company. Your line is now open.

Speaker 5

Good morning. Thanks. Most of my questions have been answered here, but just following up on the StarLink model, it sounds like Are you taking a proactive role on the support side there with StarLink that maybe your customers can't get direct?

Speaker 2

Yes. We're providing 20 fourseven live technical support for as we always have. So, Sterling is just another component Of that support that we provide.

Speaker 5

Got it. And on this cognitive relationship, Any more about the company you can share in terms of their position in the market? What are their markets they serve? Any of that color you can provide the company is helpful. Thanks.

Speaker 2

I think they made the most Inroads into the maritime industry, I know they would like to expand beyond maritime into other fixed and enterprise solutions. I'm really not in a position to speak on behalf of their company.

Speaker 5

Got it. All right. And In terms of the seasonality looking forward, any changes that we should consider there on the revenue line in terms of Your traditional seasonality going into the winter here?

Speaker 2

Yes, I mean, we don't see seasonality that we've experienced in the past, we expect to Experience again this quarter, the 4th quarter as well as the Q1.

Speaker 5

Got it. Okay, that's all I got. Thanks guys. All right.

Operator

All right. Thank you. This does conclude the question and answer session. I'm Seeing no further questions, I'd like to thank you for your participation in today's conference. This does conclude the program and you may now disconnect.

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Key Takeaways

  • 3% year-over-year growth in airtime sales with a subscriber base of roughly 7,100 vessels maintained, though growth momentum slowed and airtime gross margin was 42.4%.
  • KVH is evolving into a multi-orbit, multi-channel integrated solutions provider by combining VSAT, cellular, Wi-Fi, LEO and third-party hardware with its ComBox network management and global support.
  • Signed a Starlink reseller agreement to offer the service standalone or in hybrid bundles with KVH terminals, supported by 24/7 technical assistance for leisure and commercial marine users.
  • Entered an exclusive maritime distribution partnership with Cognitive Networks to deploy advanced onboard network and bandwidth management tools (including channel bonding and device-level controls) across all communication channels.
  • Generated Q3 adjusted EBITDA of $4.5 million and over $2 million of free cash flow, raised full-year EBITDA guidance to $13 million–$15 million, and narrowed revenue guidance to $133 million–$136 million.
AI Generated. May Contain Errors.
Earnings Conference Call
KVH Industries Q3 2023
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