KVH Industries Q1 2024 Earnings Call Transcript

There are 4 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to Quarter 1 20 24 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 session.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anthony Pike, Chief Financial Officer. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and thank you for joining us today for KVH Industries' 1st quarter results, which are included in the earnings release we published earlier this afternoon. Joining me on the call is the company's Chief Executive Officer, Brent Bruin. Before I get into the numbers, a few standard statements. Firstly, 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 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. You will 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 2023 Form 10 ks, which was filed on March 15. 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 Q1, I'll turn the call over to Brent.

Speaker 2

Thank you, Anthony, and hello, everyone. Let me start out by providing a high level overview of our results. Q1 airtime revenue was $23,600,000 down $3,500,000 from Q1 2023. Airtime gross margins remained steady compared to Q1 2023 and total revenue for Q1 was $29,300,000 roughly a 14% decrease from Q1 2023 due to the continuing decline in our product sales and an approximate 4% reduction in our vessel base. We believe that the changes we're making within our business will reverse the contraction in revenue that we have experienced.

Speaker 2

We've had a very productive 2 months since our Q4 2023 earnings call. We made substantial progress on our reorganization effort, which was initiated in February. This effort enables us to focus on our commitment to deliver integrated services using our multi orbit, multi channel network strategy and to accelerate our evolution from a capital intensive hardware focused business into a more nimble integrated solutions oriented organization. KVH's maritime VSAT and television antennas continue to be a valuable component of our portfolio. However, the changing product mix driven by new LEO services did not warrant continuing operation of a dedicated manufacturing facility.

Speaker 2

We are in the midst of buying components to complete our final build plan. All component purchases in a substantial portion of the VSAT and TVRO terminals will be completed by the end of June, at which time we will significantly reduce the number of employees in the facility. The remaining reduced staff will focus on repairs, refurbishments and will continue to slowly build antennas for the remainder of this year and next year. We will have sufficient TrackNet and TrackVision terminals to meet anticipated demand through 2025 and possibly a portion of 2026. We anticipate that our reorganization efforts will result in annualized savings of approximately $9,000,000 with the initial benefits being realized in the Q3 of this year.

Speaker 2

New additions to our product and service portfolio are generating significant interest. During the Q1, we introduced Combox Edge, an advanced network and bandwidth management solution. As fleet managers and yacht owners begin to add new communication systems such as LEO and 5 gs cellular to their existing VSAT systems, we expect that the ability to manage those channels will become increasingly vital. Our Our Combox Edge

Speaker 1

service offering delivers those capabilities affordably and securely using the Combox Edge 6 and

Speaker 2

Combox Edge 2 Below Dex units and powerful cloud based tools. Combox Edge also augments the tools available from other services.

Operator

For example,

Speaker 2

Combox Edge expands the reporting for Starlink data usage and adds management tools not currently available from Starlink. We are very excited about the enthusiastic response of these tools and their modern mobile friendly user interface received from our customers. The fastest growing addition to our portfolio is Starlink. Demand remains strong. In fact, we almost doubled our strong our STARLINK terminal shipments compared to Q4 of last year.

Speaker 2

Just under half of those systems have been activated. So we will see airtime subscriptions from Starlink and the companion KVH1 Care service fees begin to contribute in Q2. Offering Starlink also lets us engage with new customers who have never worked with KVH and retain existing customers who might have otherwise left as they shift their primary communications away from VSAT to this new low earth orbit service. At the same time, we are making excellent progress integrating OneWeb's global service into our multi orbit, multi channel network strategy. We expect to launch the service by the end of the second quarter.

Speaker 2

We have commenced pre sales efforts and which are resulting in a robust opportunity pipeline. Subscriber growth through Starlink, OneWeb, Combox Edge and other value added services are key to our future success. Where we once measured our progress based on the number of terminals we shipped, airtime and service subscriptions now represent the bulk of our revenue. With that in mind, we are changing how we calculate report our active subscribers. Previously, we reported the number of VSAT terminals as our subscriber count.

Speaker 2

That worked fine when we were only shipping VSAT systems. However, our evolution to a multi orbit, multi channel model means more vessels are turned to KVH for more than one satellite based communications terminal. As a result, we are now using a more straightforward approach and report on the total number of subscribing vessels. We believe this is representative of the changes in the market and our business while providing more clarity on the number of subscribers. Based on our previous reporting method, we ended Q4 of 2023 with roughly 6,900 subscribers.

Speaker 2

Based on this new reporting method, we ended 2023 with 6,700 subscribing vessels and 6,600 vessels at the end of the Q1. We believe that our accelerating StarLink activations, the addition of OneWeb and Combox Edge deployments will spur new subscriber growth beginning in Q3. The reality of our industry is that Jio only subscriptions are contracting, while Jio LEO hybrid solutions are becoming more popular. The planned acquisition of Intelsat by SES is an illustration of the pressure on the GEO market. Intelsat is our Ku GEO partner and at this time we do not anticipate any disruptions to our service or changes to our arrangement with Intelsat.

Speaker 2

We are on a way to achieving strategic and operational goals. We have a plan to resume the growth of our subscriber base, airtime revenue, value added service subscriptions in the second half of this year. While we are facing some turbulence during this transition, I believe we're on the right path and will emerge as a financially sound growing world class solutions provider built on global airtime and superior service and support. Now I'd like to hand it back to our CFO, Anthony Pike for a look at the numbers.

Speaker 1

Thank you, Brent. As a reminder, I would like to note that similar to our call for Q4, I will not restate data that is in the earnings release or clearly described in our 10 Q. I will focus my comments on information that Eva elaborates on or clarifies the published data. So with respect to our Q1 financial results, Airtime gross margin, which is not reported in our earnings release, was 41.8%, essentially flat compared to prior year gross margin of 42.0%. As noted during prior calls, we do expect airtime margin to compress slightly as LEO services become a larger percentage of our total airtime revenue.

Speaker 1

As Brent noted, total subscribing vessels at the end of Q1 were just over 6,600, which is approximately 4% down from Q1 of last year. Compared to year end 2023, total vessels were lower by approximately 2%. Reported Q1 product gross profit of negative $1,100,000 included $400,000 of employee severance charges related to the reorganization and manufacturing wind down. Excluding the manufacturing restructuring charges, product gross profit was a negative $700,000 as compared to a positive $100,000 in Q1 of last year. Once we have completed our manufacturing wind down initiatives and have built sufficient inventory levels to satisfy demand for the foreseeable future, we expect product gross profit to return to positive territory.

Speaker 1

The Q1 operating expenses of $13,700,000 include $1,700,000 of employee severance charges relating to the restructuring initiatives and manufacturing wind down announced on February 13. Overall, we expect to incur further employee severance charges of $1,100,000 in Q2, but these changes will generate $9,100,000 of annualized savings in employee costs. Around $3,700,000 of this will benefit product gross profit and around $5,400,000 will reduce operating expenses. Our adjusted EBITDA for the quarter was a positive $2,000,000 and our earnings release has the usual reconciliation of that. Capital expenditures for the quarter were $2,300,000 and so adjusted EBITDA less CapEx was negative by about $300,000 This compares to a positive $1,600,000 in Q1 of the prior year with adjusted EBITDA of $3,700,000 less capital expenditures of $2,100,000 Our ending cash balance of $66,600,000 was down approximately $3,000,000 from the beginning of the quarter.

Speaker 1

This was mostly driven by an increase in our working capital with reduced payables to our satellite bandwidth providers. In light of the intensifying competition that we are seeing from lower cost LEO satellite service providers, customers are reducing their level of GEO services. In consideration of this industry transition and the specific risk factor described below, we are reducing our expectations for revenue and adjusted EBITDA in 2024. At this time, we expect that our 2024 revenue will be in the range of approximately $117,000,000 to $127,000,000 and that our 2024 adjusted EBITDA will be in the range of approximately $6,000,000 to $12,000,000 A key driver of the previously disclosed transition by one of our largest customers, the U. S.

Speaker 1

Coast Guard of its primary satellite service relationship to StarShield. As a result of the accelerated transition, the decline in revenue from this customer will occur earlier than originally anticipated, reducing the aggregate amount of revenue we expect to receive in 2024. Investors should appreciate that in light of the uncertainty caused by the broad industry transition currently underway, there is an increased risk and variability between our forecasted and future actual financial results. As the year progresses, we may announce further revisions to this guidance. 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 afternoon's call.

Speaker 1

Operator?

Operator

Our first question comes from the line of Chris Quilty from Quilty Space.

Speaker 3

Hey, guys. Question for you. The gross margins here in the Q1 were a little bit better than I was expecting. Were there some one offs there? And I think you did indicate we should expect more towards mid-30s gross margin on the airtime?

Speaker 2

Yes. As we've been reporting for a while, Chris, we anticipate the margins to contract somewhat. We had some good pickup in the quarter, in particular on the StarLink side, not only we're on the base StarLink, but more for the services that we're combining with StarLink. Do you have anything to add to that?

Speaker 1

No. Other than just to say that, of course, the vast majority of our airtime is still driven from our geo network, which still has a higher margin. So I think we still anticipate a slight reduction in our margin on airtime as StarLink becomes a bigger proportion of our overall revenue.

Speaker 3

Got you. And I mean, you can't go into too much detail, but the contract that you have with Intelsat for capacity up in a year ago, you were sort of scaling up the amount of capacity and agreements there. What are the provisions for that contract as we're seeing demand for GEO capacity going down? Do you get stuck with some percentage of fixed costs associated with that impact or?

Speaker 2

I'm sorry, I cut you off.

Speaker 1

No, no.

Speaker 2

But anyway, basically our contract with Intelsat really mirrors what we anticipate going on within the market as far as reduction in bandwidth. As you said, I can't really go into a lot of details on that, but we feel comfortable with how we structured our renewed arrangement with them, which we renewed last year and it commenced at the beginning of this year.

Speaker 3

Got you. And how about OneWeb? How is that capacity arrangement? Is that where you're sort of paying by the drink or do you anticipate entering into some sort of a long term agreement there?

Speaker 2

We've already signed an agreement with OneWeb last year. They're just building out their lander stations. We've made arrangements to procure terminals. It's basically a multiyear arrangement where we can buy wholesale from them and create our own unique airtime plans.

Speaker 3

Got you. And presumably that capability is already layered into the Combox Edge? Yes. Great. And did you I hear you mentioned that you have already begun shipping the Edge or is that a product that starts shipping?

Speaker 2

Yes. The Combox Edge, we shipped it to the services launched. We have 2 variances of the Blodex unit, 1 with 6 ports, 1 with 2. It's been very well received and we've done a tremendous amount of work as far as getting the word out, if you will, through both training sessions with our service providers, our employees, our dealer network and we've done it all and we provided these training sessions all around the world and through web based or teams based overviews.

Speaker 3

Got you. And to be clear, is that product mostly targeted at a commercial user or is there a government and or leisure market component?

Speaker 2

Well, absolutely commercial. With leisure marine, it's definitely, but more at the higher end of leisure marine where you'll have more than one communication path onboard the vessel or boat. Government, it would be an attractive solution as well. And we're focusing on all 3.

Speaker 3

Great. And I guess finally just circling back to StarLink. Do you see them their penetration of the market, is it fairly steady? Do you think see things accelerating? And I think you did mention that some of the customers who are signing up are non traditional customers that you wouldn't have seen before.

Speaker 3

Are there opportunities to sell them other services that they might not have?

Speaker 2

Yes, absolutely. And we are seeing an acceleration. As I said on the call, we shipped twice as many terminals in the Q1 as we did in 4th, but only half of those have been activated. So we should see the tail effect from an airtime taking hold. And we're selling that both as a standalone solution as well as a bundled solution with our VSAT service.

Speaker 3

Got you. And can you share the split between those two solutions?

Speaker 2

Pretty close to fifty-fifty. I don't think you have that. I can look into that and get back to you, but it's very close to half. That's good. I mean, it's

Speaker 3

better than I would have expected. Okay, great.

Speaker 2

Appreciate it. Let's say most to half

Speaker 1

are hybrid.

Speaker 2

Sorry. Sorry, go ahead, Chris.

Speaker 3

No, no, that's good. Appreciate all the feedback and good luck here.

Speaker 2

Okay. Thanks, Chris.

Operator

Thank you. At this time, I'm showing no further questions. This concludes today's conference call.

Earnings Conference Call
KVH Industries Q1 2024
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