KVH Industries Q4 2023 Earnings Call Transcript

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March 15, 2024
Earnings Conference Call
KVH Industries Q4 2023
00:00 / 00:00

There are 4 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the KVH Fourth Quarter 2023 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 session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to 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' 4th 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 our Corporate Controller, Anthony Pike. As you probably saw in our press release, Anthony will be taking over as CFO as of April 1. Before we dive in, the usual announcements.

Speaker 1

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. 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 differ 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.

Speaker 1

You'll find a definition of this measure in our press release as well as a reconciliation to comparable GAAP numbers. We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading Risk Factors in our Q3 Form 10 Q filed on November 9, 2023 and our 2023 Form 10 ks, 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, I'll turn the call over to Brent.

Speaker 2

Thank you, Roger, and good morning, everyone. In March 2022, we kicked off a transformative period in our company. We did this because we recognized that we needed to change how we operated. We focused on our core business, mobile connectivity, and we have made excellent progress in 2022 and throughout 2023. Last year, we expanded our multi orbit, multichannel portfolio with the addition of OneWeb to our service offerings and look forward to launching the service in the Q2 of this year.

Speaker 2

We entered into an exclusive maritime distribution agreement with Cognitive Networks, resulting in our new Combox Edge, which I will discuss shortly. Thanks to our StarLink service provider agreement, we are delivering StarLink hardware, airtime and our OneCare service to support end users and OEMs. And we successfully renegotiated our Intelsat contract to sustain our global GEO network on more favorable financial terms. But we also experienced competitive headwinds in 2023. Changes in the market impacted our VSAT and satellite TV terminal sales, which have been an essential element of our offerings, but are no longer contributing toward achievement of our profitability goals.

Speaker 2

At the same time, demand for LEO service began to accelerate, putting pressure on GEO airtime services. We did have a sequential subscriber contraction in the 4th quarter due to competitive factors, with quarterly airtime revenue of $25,900,000 down 4% from Q4 last year. We expect to offset that contraction and resume subscriber growth in 2Q with additional StarLink activations and with the launch of our OneWeb service. Annual airtime overall was up 4% to $107,000,000 While airtime margins have softened, they remain strong and our subscriber levels at the end of 2023 were even with year end 2022. However, our annual airtime revenue growth was offset by a decline in hardware sales, which require a high fixed cost dedicated manufacturing facility.

Speaker 2

Airtime revenue is core to our business, and we are confident in its future as we increase our STARLINK airtime sales and add exciting new services such as OneWeb to our portfolio. At the same time, we believe that demand for our hardware products no longer justifies a dedicated manufacturing facility. In February, we began a reorganization that allows us to focus on our commitment to deliver world class integrated services using our multi orbit, multi channel network. These changes also accelerated our transition from a capital intensive hardware focused business to a more nimble integrated services oriented organization. Between now and the end of June, we plan to build sufficient TrackNet and TrackVision inventory to meet anticipated demand for the foreseeable future, after which we will wind down our manufacturing operations.

Speaker 2

In addition, we have ample inventory of agile planned VSAT terminals, which we will continue to refurbish and use to support new AgilePlan VSAT subscriptions for years to come. We also own our satellite terminal intellectual property and would investigate outsourcing future manufacturing should the demand warrant it. Because of the reduced need for manufacturing and support services, we are in the process of reducing our headcount across several departments, a process that began last month and will continue until the end of June. I do not expect these reductions to impair our ability to deliver products worldwide or to provide 20 fourseven, three sixty five services and support to our customers and partners. Although we will have a smaller team, we our innovative research and development approach for new products and third party solutions that we can add to our profit portfolio.

Speaker 2

Separately, we've expanded our sales team globally, in particular in Japan and South America. I'm excited about the prospects ahead of us and believe that our growing product and service portfolio will strengthen our position as a world class integrated solutions provider. Our newest addition is the CommBox Edge, a result of our exclusive distribution agreement with Cognitive Networks. Combox Edge offers intuitive network and bandwidth management tools and onboard edge computing simplifying the multi orbit, multi channel connectivity found on commercial vessels and yachts. Combox Edge is an outstanding resource for maritime IT professionals who want to control the growing array of communication options such as VSAT, LEO and 5 gs cellular.

Speaker 2

We are also working closely with OneWeb to introduce their global LEO network with custom KVH airtime plans in the Q2 of this year. We are eager to offer this fast affordable enterprise grade solution as a new option for mariners considering LEO services for their vessels. As part of this initiative, we expect to announce a new distribution agreement for commercial grade maritime flat panel terminals to support the OneWeb service. We also believe that the expanding coverage and capabilities delivered by 5 gs cellular service will bring tremendous value to mariners and coastal waters. 5 gs connections offer low per gigabyte cost and data speeds as fast or better than LEO services.

Speaker 2

Additionally, the compact affordable technology is well suited for smaller vessels and integration with VSAT and LEO systems on ships of all sizes. We look forward to sharing more news about our developments later in the Q2. So to wrap things up, we are firmly focused on the future following the recent changes in our organization. We are making excellent progress in our evolution as a world class integrated solutions provider. We are expanding our multi orbit, multi channel capabilities with LEO connectivity and we'll be adding a new 5 gs service.

Speaker 2

Our goal is to continue to grow our service revenue and resume growth of our subscriber base following the launch of OneWeb. We have a strong business built on global airtime and value added services. We have an outstanding team and I'm confident in our company's future growth and success. Now with that, I'll turn it over to Roger for additional insights into our results.

Speaker 1

Thanks, Brent. As a reminder, I would like to note that similar to our call for Q3, I will not restate data that is in the earnings release or clearly described in our 10 ks. I will focus my comments on information that either elaborates on or clarifies the published data. First, in the process of completing our audit, we concluded that a correction was required in how we recognize revenue for certain product sales to our commercial customers. Back in 2018, we adopted accounting standard ASC 606 and as a result for certain product sales, we deferred both revenue and cost over the expected life of the customer, treating the product sale and the related airtime service as a single performance obligation.

Speaker 1

In discussions with our auditors during our 2023 audit, we concluded that these product sales should not be deferred, but rather taken as revenue at the time of the sale. This has resulted in a non material correction to our financial statements for 2022 and the 1st 9 months of 2023. The exact impact of this can be seen by quarter in the footnote 16 of our 10 ks. But at a high level, we are reporting total revenue for 2023 of $132,400,000 and on the prior basis that would have been 100 and $3,400,000 so a reduction of $1,000,000 for this accounting change. Gross profit would have been $130,000 more under the prior method.

Speaker 1

Related to our decision to wind down manufacturing, we took 2 charges related to raw materials. First, we took a $5,200,000 write down to our inventory to account for inventory on hand that is in excess of what we anticipate our future need will be. 2nd, we took a reserve of $3,600,000 to account for purchase order obligations for raw materials that are not on hand, but for which we've placed non cancelable orders that we do not anticipate needing. This primarily relates to orders placed in the first half of twenty twenty three for components with extremely long lead times due to supply chain shortages. As demand softened, these delivery schedules were pushed out and it was ultimately concluded that a portion of these orders will not be needed.

Speaker 1

The charges totaling $8,800,000 are both included in cost of product sales and account for all but about $600,000 of the $9,400,000 Q4 gross margin loss for products. However, we believe that we are now fully reserved for both of these issues and hopefully we'll cover some of that later this year. Also related to our decision to wind down manufacturing was the reorganization we announced and the elimination of 75 positions. As noted in our press release and related 8 ks filing, we expect to incur approximately $3,300,000 in severance charges and realize annualized cost savings of approximately $9,300,000 from the headcount reductions. Of that $9,300,000 approximately 3 point $7,000,000 relates to cost of goods sold and $5,600,000 relates to OpEx.

Speaker 1

With respect to our Q4 financial results, airtime gross margin, which is not reported in our earnings release was 34.9% down from 43.5% last year. The decline being due to lower average revenue per subscriber and higher bandwidth commitments. Total subscribers were roughly flat with Q4 of last year. The Q4 operating expenses of $13,000,000 include a $2,100,000 write off of a discontinued software project, but also benefited from an accrual reversal of approximately $1,000,000 So the run rate exiting the year on a normalized basis was around $12,000,000 per quarter. Our adjusted EBITDA for the quarter was a positive $2,300,000 and our earnings release has the usual reconciliation of that.

Speaker 1

Capital expenditures for the quarter were $3,500,000 and so adjusted EBITDA less CapEx was negative by about $1,200,000 for Q4. For the full year, adjusted EBITDA was $14,300,000 and CapEx was $10,600,000 so the net result was a positive $3,700,000 Our ending cash balance of $70,000,000 was up approximately $500,000 from the beginning of the quarter. Our earnings release provides our guidance for 2024, which is revenue of $125,000,000 to $135,000,000 and adjusted EBITDA of $11,000,000 to $17,000,000 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

Our first question will come from the line of Chris Quilty with Quilty Space.

Speaker 3

Hello. Can you hear me guys?

Speaker 1

Yes. Hi, Chris.

Speaker 3

Okay, great. So first, I just wanted to follow-up on the guidance and what should we assume for product sales is sort of the Q4 exit rate? And obviously, there's a lot of seasonality to product. I'm just trying to figure out how much we should expect that to wind down by the end of the year? Yes.

Operator

I can answer the

Speaker 2

specific question. We're not going to wind down product sales. We're winding down our build. And we're going to have ample inventory for 2025 and going into 'twenty six. It all depends on how much the demand is, but we won't have any changes as far as the wind down as far as the availability of hardware.

Speaker 3

Yes. Is that for both the TracVision and TracNet product lines or is TracVision go do you intend to keep those refurbished and running as long as there's demand or is the track vision being shut altogether?

Speaker 2

TrackVision will have there again, that's more what we're looking at. We'll have ample inventory to sustain the business in demand through 2025 and into 2026. Great. And

Speaker 3

should we assume that most of or all of the charges related to the manufacturing wind down employee reductions are complete as of Q4 or might we expect additional charges or follow on charges associated with those actions going into next year?

Speaker 1

Yes, we think we're fully reserved as far as charges.

Speaker 3

I

Speaker 1

mean, we will continue to have sort of product related operations. They won't be manufacturing, but we'll still have a warehouse. We're going to be having the LEO systems coming in and out of that. We're also going to be continuing to do repair and refurbishment. So there will be activity around the operation product operation side, but they won't be manufacturing, but all of the charges we believe we believe we're fully reserved for everything that would be a charge.

Speaker 2

From an inventory perspective, that's absolutely correct. Since we're going through a staged wind down, we'll have additional severance charges in both the 1st and second quarters, right?

Speaker 1

Yes. The severance charges I mentioned, the $3,300,000 of severance charges that's to occur over Qs 12, with the majority of that will probably 2 thirds of that more than 2 thirds will be in Q2.

Speaker 3

Okay, good. Thanks for the clarification there. A question on the gross margins. I think you had said last quarter, we should expect about 500 basis point drop or sort of mid-30s gross margin range. Is that still a good range to use?

Speaker 3

And associated with that, when we're looking at the STARLINK services, is that all fall into the product sales category or are there associated services with that?

Speaker 1

What we had said previously was we expected airtime margins in the high 30s. I think there's right now we reported roughly 35%. I think that's probably in that sort of mid sort of high end of the mid low end of the highs sort of range is probably about right. With respect to StarLink, I mean there are other services that we're going to be providing and associates with that and in fact as we go forward, you can't really think about it, it's not just one or the other, it's going to be VSAT combined with LEOs is what we really see sort of the future being. So, it's going to be a combination.

Speaker 1

That's what we're really focused on as well as the 5 gs that Brent talked about. We think particularly for everything close to shore, 5 gs is going to become a big part of that.

Speaker 3

Great. And are there competing products out there with 5 gs that other resellers are offering?

Speaker 2

5 gs services are just starting to take hold and there will be competitive services and there's a number of companies that are offering it now.

Speaker 1

So one of the things I think is key not to forget is, it's not just a matter of having 5 gs, it's a matter of how you integrate 5 gs with everything else that you've got. So if it's just a leisure customer and that's all they've got is 5 gs, that's one thing, but for commercial customers it's going to be 5 gs integrated with VSAT and also integrated with LEO and it's how you're going to manage all those together is going to be very critical for commercial customers and that's one of the things what we think the Combox Edge is going to do, we think better than anything else.

Speaker 3

Yes. And I actually want to ask you, is there a version of that Combox Edge that would be appropriate for a leisure market or is that purely a commercial?

Speaker 2

No, it definitely it's leisure and it depends on how far down the chain you want to go in leisure, but absolutely for both leisure and commercial. We offer 2 different tiers of services, which all can be found on our website and I'm happy to send those to you as well.

Speaker 3

Okay. And the Combox Edge is the product you co developed with Cognitive.

Speaker 2

They're doing all the yes, they developed it. We have an exclusive maritime distribution agreement. They're going to be doing additional development with some of our suggestions and guidance that they're doing the development.

Speaker 3

Great. And so when is that product? Is it commercially released now?

Speaker 2

Yes.

Speaker 3

And I haven't seen any marketing materials on it and I know there are similar products out in the market. How do you position that relative to other integrated systems in terms of its performance or speed or cost or how does it compare to what's currently there?

Speaker 2

We think it's highly I'm sorry to interrupt you. We think it's highly competitive. The services and the elements that come along with the offering are highly competitive and not better than others that are introduced in the market. Additionally, the user interface is incredibly user friendly. And that's one of the things that we're very focused on.

Speaker 2

I can set it up on my own desk in our office and I'm not overly technical. So it's really about the services that we're able to offer with that, but also the ease of use and integration.

Speaker 3

Got you. And you had mentioned, a OneWeb terminal distribution. Can you inform me who has maritime one web terminals available at this point besides Intel?

Speaker 2

Yes, they're being developed and released and it's Intellion as well as chimeta. I was going to say cognitive, chimeta, another K name.

Speaker 3

I didn't know they had a maritime product. So okay, that's good. You had talked about sales and distribution. You mentioned Japan where you've had a pretty long standing market presence, but why the emphasis on South America?

Speaker 2

South America, there's a tremendous amount of business. We have a presence in Brazil. As you know, Brazil is Portuguese speaking. We felt the need to have a local person who's actually out of Colombia, who speaks Spanish and can really cater to the rest of the market. And we've been managing South America outside of Brazil from Brazil, but also from the U.

Speaker 2

S. And we felt that we were best suited and we felt there's more opportunity if we actually had a dedicated resource in region.

Speaker 3

Great. And I guess a final question, you had mentioned focus on R and D and developing more products and services for delivering connectivity. Should we expect a step up in R and D on a go forward basis? And if so, how much?

Speaker 2

No. It's a step down. It's a scaled back team, but the point of the comment was that we're still focused on it. We're not ignoring it altogether.

Operator

Great. All right. Thank you,

Speaker 3

gentlemen. Thanks, Chris.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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