Q1 2021 KVH Industries Inc Earnings Call
Okay. Good morning, everyone.
Alright.
Okay.
Ill turn the call over.
Good day and welcome to D. K V. H Industries, Inc. Q1, 2021 earnings Conference call. Today's conference is being recorded at this time I would like to turn the call over to Roger Keeble. Please go ahead Sir.
Thank you operator.
Morning, everyone and thank you for joining us for today for KPH industries first quarter results, which are included in the earnings release, we published this morning.
Joining me on the call are the company's Chief operating officer, Brent Bruun, and CEO Martin kits fan Huntington.
Before we dive in a couple of quick announcements first if you'd like a copy of the earnings release. It is available on our website and from our Investor Relations team.
You'd like to listen to a recording of today's call. It will be available on our website.
If you are listening via the web feel free to submit questions to IR at cave H Dot com.
Finally, 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 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.
Agree those under the heading risk factors in our 2020 form 10-K filed on March 3rd the company's other SEC filings are available directly from the Investor Relations section of our website now to walk you through the highlights of our first quarter I'll turn the call over to Martin.
Thanks, Roger and good morning, everyone. Thank you for joining us today.
Our strong first quarter sustained the momentum we built during the second half of last year exceeded many of our expectations and reinforced our confidence for 2021 and beyond.
Revenues increased 16% in the first quarter to $42 3 million from $36 6 million in the first quarter of 2020.
Non-GAAP adjusted EBITDA in Q1 was $1 1 million compared to a loss of $3 7 million in the first quarter of 2020.
Thanks to increasing airtime margins strong shipments of high margin inertial NAV products and continued cost containment, we were strongly cash flow positive from operations as well.
We also achieved positive results in our key business areas and continue to make progress against our strategic initiatives, we set our second consecutive quarter for visa record quarter for VSAT shipments.
<unk> completed the shipment of a significant tax out of order and made outstanding progress on our photonic chip technology with the recent announcement of an all new inertial product line for our I M is.
So now I'm going to go into some of the details on each of our core markets.
Q1, airtime revenue increased 11% compared to the first quarter of last year, driven primarily by a 7% increase in subscribers and almost a 7% increase on our pool.
While our media news link business continued to be negatively affected by the shutdown of cruise ship operations worldwide. Our revenues for agile plans, our connectivity as a service program for the commercial market.
<unk> revenues were up 48% compared to the first quarter of 2020.
The continued strong demand for agile plans is a significant indicator of the robust health of our business.
Since launching agile plans four years ago, we've expanded our target market to include smaller commercial vessels.
This long term growth strategy is paying off as agile plans amounted to 84% of our commercial total commercial maritime VSAT shipments this quarter at 67% of total VSAT shipments.
Actual plants now represents 41% of our VSAT subscriber base.
Remember that we forgo the upfront revenue for the equipment, but now many years and we have a growing and recurring subscription revenue business.
During this quarter, we have initiated new net new incentives to migrate customers from our original legacy network to our new Global HTS network.
We've seen a very positive response from these customers. Many of them are taking advantage of system upgrades and targeted customer loyalty programs for new HTS terminals.
Customers, making this move enjoy more affordable data faster speeds and greater versatility.
We saw the benefits of this effort in Q1 as revenue from the HTS network airtime was up 56% year over year due to the due to the mix of migrations, new customers and expanded airtime demand from existing customers.
Your time on the HTS network also has higher margins. So every migration or new customer, it's worth incrementally more to the bottom line than our legacy subscribers.
We expect to shed roughly $12 million in annual network operating expenses with the termination of the legacy network on December 31 this year.
This should further benefit our overall profitability.
Right at the end of the quarter, we introduced a revolutionary new Tracfone vs 30.
It's an ultra compact ku band VSAT antenna designs have delivered data speeds as fastest six megabits per second down on two megabits per second up for leisure and commercial boats.
The track don't be thirties design permits quick and easy installation and retrofit using a single power data coax cable and it runs on D. C power, which is a big plus for smaller boats.
The vs. The V 30 is the first caveat antenna to incorporate several innovations that we plan to integrate into our future generation of terminals. These include the modem and the dome, which delivers improved signal efficiency commercial grade rotary joint for uninterrupted tracking as well as high performance stabilization thanks to dual.
Inertial measurement units.
Our streamline Belowdecks unit called the VSAT hub provides Ethernet connections built in Wi Fi data routing and avoid the adapter for phone calls. This belowdecks component is only 10% of the size of the previous below decks unit there was 90% smaller.
We introduced the Tracfone vs 30 in late March at the West Palm Beach International Boat show, where high consumer interests translated into stronger than anticipated demand and a backlog of orders in the week since we.
To be 30 to be a catalyst for new competitive migration opportunities as well thanks to its ultra compact size easy installation and low airtime costs. We believe it is an appealing alternative to the tens of thousands of old slow and expensive fleet broadband terminals that are still deployed around the world.
We believe that the vs 30 will significantly strengthen our position in the commercial market for fishing vessels and offshore work boats around the world.
Summary, it's smaller lower power runs on D. C voltage is dramatically easier to install and has higher data rates.
And it's also a lot more affordable.
Moving on to our Iot connectivity initiatives and our caveats watch product, we continue to expand our ecosystem of watch solution partners during Q1 and anticipate several new announcements in the coming weeks.
Our solution partners now include Iot service developers data analytics firms technical service providers vessel informatics companies and more.
They're all beginning to actively promote and include KPH watch and proposals to their existing commercial maritime customers and new prospects.
In fact, we've been informed that the watch solution partner proposals that include caveats watch already represent opportunities for more than 500 vessels.
And our work with these partners were saying how COVID-19 each watch meets the needs for Iot connectivity as a service and were encouraged by our growing funnel of potential watch solution partners and trials on vessels as well as by new applications like remote surveys and reefer container monitoring.
Turning to our inertial navigation market.
Our military tax net product sales increased significantly in the first quarter of 2021 compared to the first quarter of 2025.
Via fiber optic gyro and OEM product sales also increased by about 16% in Q1 compared to Q1 of last year.
More importantly, we completed our transition to an all photonic integrated chip or a new product line as well as we completed the launch the integration and production of three all new nurse measurement units. The two P. 17, 25 P. 17, 50, MP 17, 75 I am is.
Which we announced two weeks ago feature New high performance Accelerometers. In addition to our latest photonic chips with our patented Pic technology. The P series I'm used accelerometers offer greater sensitivity and accuracy and higher dynamic ranges.
As a result, the P series delivers an order of magnitude better bias instability and noise performance than our older products.
These new on amuse are offered in the same proven compact on new housing design enables easy integration using flexible power and communication and interfaces and deliver outstanding Repeatability unit to unit with increased product life.
Using the same new P. 17, 75, we also upgraded our own tech they have three D. Tactical navigation system. It marks the first time, we've integrated our Pic technology and new accelerometers into our military NAV system from.
Pleased to offer the U S and Allied forces the same reliability and performance benefits with our field proven assured position navigation and timing solution.
While we are thrilled to bring the P series I'm used to market. This is merely the latest milestone in our long term strategic initiative to reinvent inertial technology.
We expect to update our standalone fiber up fiber optic gyros with the pic inside in the coming months.
These new Pic inside systems result from our three year strategic initiative to revolutionize fiber optic gyro design through the invention of an integrated planar optical chip that replaces individual fiber optic components to simplified production and increased reliability.
We've now accomplished that our new technology also positions us to develop next generation modular systems that we believe will offer greater flexibility versatility and performance.
Development work is already underway.
<unk> enables the future roadmap of new products that will target incremental new customers with new applications as we can expand our range of performance.
But even as we look forward to those new technology developments, our P series I amuse already designed for the most challenging land sea and air applications, including autonomous trucks shuttle buses drones are obese and others.
The industries that leverage these applications include transportation military agriculture, construction and mining.
While the integration with driverless cars remains the largest long term opportunity for us. We're excited by the short term opportunities for autonomous applications that can make use of our inertial systems now.
The commercialization of autonomy is farther along and more prevalent right now in higher value platforms like shuttles trucks construction and agriculture.
We have a funnel of opportunities with both startups and established players in these industries.
As an example, we recently delivered the P series I am used to multiple leading autonomous truck developers for evaluation and we're very confident that we have the best performing solution for these applications.
So in summary, we entered the year with positive momentum and built on that in Q1, which had better than expected results and enter Q2 with around $17 million in backlog.
Q1, we shipped a record number of VSAT system, an all time record continued the robust growth of our agile plans and airtime subscribers. While also moving closer to the consolidation of our satcom customers on a single higher margin Global network.
We launched an exciting new product in the B 30, that's exceeding our expectations for consumer and commercial demand.
We have more new products in the pipeline.
Our Iot watch initiatives continues to move forward with innovative and enthusiastic new solution partners.
And we achieved a major milestone in our inertial technology strategy that directly supports our autonomous initiatives.
And we've carried this momentum into Q2 with a record number of VSAT bookings in April and record backlog.
Done a good job of securing the electronic components, despite industry shortages and we expect to be able to deliver record units in Q2 once again.
As a result, we're confident that the progress, we're 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 Roger to go over some of the numbers Roger.
Thanks, Martin as Martin mentioned earlier, our first quarter revenue came in at $42 3 million compared to $36 6 million recorded in the first quarter of 2020.
Our consolidated gross profit margin was 37%, even as compared with 32, 1% in the first quarter of last year.
From our inertial navigation segment increased $4 1 million year over year with gross margin, increasing about 14, five percentage points to 44, 1%.
Revenue from our mobile connectivity segment increased $1 6 million with a gross margin of 34, 2% up around one five percentage points.
Product revenue for the first quarter was $18 4 million, an increase of $5 3 million or 41% from $13 1 million in the first quarter of the prior year.
By segment product revenue and our inertial navigation segment increased $5 million or 77% and in our mobile connectivity segment product revenue increased by zero point $3 million or 5%.
Within our inertial navigation segment Tech net sales increased by $4 2 million this quarter compared to the prior year's first quarter, while our fog revenues increased by 0.9 million compared to the prior year's first quarter.
Increase in mobile connectivity product sales was primarily due to a 0.4 million increase in mini VSAT product sales.
Service revenue for the first quarter was $23 9 million, an increase of zero point $4 million or 2% from $23 5 million in the first quarter of the prior year.
By segment service revenue in our mobile connectivity segment increased by $1 3 million or 6%. This increase was primarily due to a $2 $2 million increase in mini VSAT broadband airtime revenue.
<unk> revenue grew to $21 4 million or approximately 11% over the first quarter of last year and the related gross margin was 34%.
As Martin noted this was driven in part by a 7% increase in subscribers, primarily as a result of agile plans with agile plans now representing 41% of all mini VSAT airtime subscribers.
The increase in airtime revenue was partially offset by a zero point $9 million decline in our media business, which had been significantly impacted by the travel restrictions associated with COVID-19.
In our inertial navigation segment service revenue decreased by 0.9 million, primarily due to the prior completion of a project for a major U S defense customer, which has resulted in lower contract engineering service revenue in this quarter compared to last year.
Operating expenses for the quarter were $19 3 million down 1% from $19 4 million in the first quarter of the prior year as we have continued to hold the line on operating expenses as revenue grows.
At the operating income level. These changes in revenue margins and operating expenses resulted in a loss from operations of $3 6 million, a $4 million improvement compared with the $7 $6 million loss recorded in the first quarter of 2020 on.
Our mobile connectivity segment generated an operating loss of zero point $4 million compared with an operating loss of $2 3 million last year, while our inertial navigation segment had an operating profit of $2 1 million for the quarter compared with an operating loss of 0.8 million last year.
Unallocated loss was $5 3 million compared to last year's $4 5 million.
For the first quarter, our net loss was 4.0 million compared with a net loss of $6 2 million recorded in the same quarter last year on it.
Non-GAAP basis, which excludes amortization of intangibles stock based compensation and other nonrecurring costs, such as outside legal and advisory fees Foreign exchange transaction gains and losses, the tax effect of those and changes in our valuation allowance on the tax adjustment.
After those adjustments, we had a net loss of <unk> 9 million compared with a net loss of $4 3 million last year.
For the first quarter was a net loss of 22 cents a share compared with a net loss of 35 cents a share on the same period last year non-GAAP EPS loss for the first quarter was five cents a share compared with a loss of 25 cents a share last year.
Our adjusted EBITDA for the quarter was a positive $1 1 million compared with a negative $3 7 million in the first quarter of last year for a complete reconciliation of our non-GAAP measures. Please refer to the earnings release that was published earlier this morning total.
Backlog at the end of the first quarter was $17 million of which approximately $13 8 million is scheduled to be delivered this year backlog for our inertial navigation product and services at the end of March was approximately $16 3 million of which approximately $13 1 million is scheduled to be delivered during 2021 and includes $10 4 million.
A fog products alone.
Net cash provided by operations was a positive five point million compared to $2 9 million used in operations for the first quarter of last year capital expenditures were $5 2 million and other cash flows were a net positive of $1 six resulting in an ending cash balance of approximately $39 $1 million.
Our 2021 do you expect our capital expenditures will be on the range of $15 million to $20 million.
40 of which is driven by agile plans shipment growth.
This concludes our prepared remarks, and I will now turn the call over to the operator to open on line for the Q&A portion of this morning's call operator. Thank.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment in force.
Star one to ask a question.
Yeah.
We have a question from Rick Prentiss Raymond James.
Yes, good morning, everyone. Good morning, Rick.
Hey.
Roger Welcome one get a sense of what have you learned in the first few months on the job.
Got you excited.
Service.
Next question please.
[laughter].
I think the company has great products, we're in great markets I've been really impressed by the team here I think everyone's doing a great job.
Very happy, particularly on the finance team as you when you kind of as a new CFO I think youre always concerned as everything buttoned up and I think it really is and I'd say I feel very good about that.
Obviously, I'm still learning a lot about the company.
Two months is really not a lot of time to sort of learned but I think there's great prospects and I think there's a great opportunity here you know on I think we're in a great industry, it's not like a situation where we've got you know an industry. That's just in a terrible terrible place and it's tough to make any money I think we're on a growing good spaces. We are in good markets and we've got really good product. So I think all of those things are extremely positive.
I think that the challenge that we have as you know.
Sort of executing on our strategy and as we move forward and look at various opportunities picking the right ones to pursue.
Okay and.
The guidance was maintained.
Maintained but it kind of says.
Assuming that early third quarter, we get back to a more normal level with customer activity. We're sitting here on Cinco de Mayo, which means took us almost halfway done how should we think about the visibility of that customer return to activity by early <unk>.
I think overall you know.
It's looking better and better I think debt.
So it's been a couple of months since our since we issued debt.
Statement originally and since then we've seen you know.
<unk> uptick in our demand for VSAT products <unk>.
<unk> are up.
Great response to our new product. So it seems like the markets are coming back strongly the only part of our business, that's still down significantly as the cruise business with our media.
Rumor is that will start to pick up again in Q3. So I think generally everything that we thought was going to happen is on track. So it looks like we should be in good shape.
For the second half of the year.
Makes sense.
The industry has gone through some some interesting items M&A jv's.
<unk> got an offer to go private Viasat did close its rig net deal last Friday, how are you thinking about your balance sheet and what you see as far as opportunities in this space given joint ventures, M&A or other items.
Yes, I think your.
Mentioning things that we that we internally think about a lot I think that the industry is consolidating a lot of our competitors have gone out of business or going bankrupt or have been.
Acquired.
And primarily they had too much debt.
But we've been growing market share we're growing revenues.
You know a very strong balance sheet with positive net cash.
So I think we're in a very strong position and we continue to evaluate opportunities but.
No.
Unlike our competitors our entire VSAT business was built with 100% organic growth. So we never acquired a single VSAT subscriber so we're continuing to gain market share.
And we feel we feel pretty good about where we are.
And final one from me is obviously some activist shareholders are starting to take a look as well.
Talk to us a little bit I didn't see the board refresh announcement talk to us a little bit about what you think the pressure points on what you can do to to address some of those.
Yeah, So primarily today I'd like to talk about the Q1 earnings and the great progress, we're making there we did put out a press release announcing that we have two fantastic new directors. If you haven't seen it I would encourage everyone to take a look at that.
Really strong backgrounds in maritime as well as in telecommunications.
We've also put out our preliminary proxy. So you can get the details on that.
Sure.
Okay.
That's all I got for the day, Thanks, guys Alright. Thank you. Thanks Rick.
Our next question comes from Chris Quilty Quilty analytics.
Alright, Thanks, Martin wanted to follow up on a point that you made in terms of network costs and migration I thought last quarter, you had mentioned cost savings of $4 million to $5 million and now you're saying 12 million is first of all is that correct.
Yes, So let me clarify that so the total network cost that will be shedding around 12 million.
If every single one of those customers moves over to the H, Yes will we will be adding capacity on H, yes on the order of let's call it half that.
So the net savings if there were no additional subscribers if everything stayed status quo would be probably closer to $6 million.
And then the four to five I mentioned previously is a savings but of course, we're adding subscribers were adding bandwidth.
So, but that's independent of the actual migration. So what I was talking about with the $12 million savings has come December 31.
Network is going dark and those costs go to zero come January one and that's a $12 million difference.
Gotcha, and so should we expect like a big bump in Q1 of next year.
<unk> margins and then they kind of go down a little bit as you continue to add capacity onto the network.
No.
I don't expect the margins to go down I think the margins will go up next year and then they should go up every quarter.
We don't anticipate any.
GAAP function increases.
In network cost and it'll be it'll be incremental as subscribers grow.
So we should see a nice bump in margins next year.
And that should translate into the bottom line.
And again still sort of longer term trending towards the 40% level from what was it 34% this quarter.
Yes, yes, that's still.
Good.
Internal metric that we use.
And.
And the reason for that is that as we add subscribers as you know.
Costs.
Subscriber go down for us in terms of whatever the fixed costs are but also in terms of maintaining our competitive pricing in the marketplace, we probably won't see margins higher than 40%, we will use debt to gain additional market share. We think 40% is a healthy sustainable margin for us.
Understand and sticking with the margin theme.
<unk>.
Product margins overall were up substantially and I guess most of that was product mix with the <unk>.
Benefit of tax net sales, but more generally as you look across the product lines and certainly with the shift to the new Pik should we see a sustained lift in margins across many of the product lines.
Well I'll, let Roger answer that in detail, but at the macro level, we have fixed overhead and factory costs in factory utilization is a big part of our margin calculation. What we're seeing is increased demand.
Both in our fiber optic facility as well as on our Satcom facility. So that fixed component is going to continue to go down.
Offsetting that is we've got you know.
We wanted to keep the product affordable so that we get the airtime revenue.
So generally we sell those at margins that are lower than you would from a standalone product because these products have a very long tail. The units go out typically we end up having a subscriber for five to 10 years and as you know our RP was around $1200. So it says 12 or $50 whatever it's a very nice.
<unk> business model. So we don't focus as much on hardware margins, but having said that we do expect them to increase.
Generally yeah, and I would say I have really just started digging into this this issue in earnest I really would be premature for me to make any comments on it yet, but hopefully by the next call. We have I can I can say more around that.
I understand and you mentioned <unk> I mean, typically you haven't for at least the last couple of years mentioned <unk>.
The fact that it was up this quarter.
Would you attribute that to just the lift in usage patterns or is it the type of service plans that individuals are signing up for it.
Well, we've seen a big increase in usage. So that's number one number two we have some new rate plans that are intentionally designed to be more attractive as you go up and plans.
Our HCS entry points are a little bit higher than the exiting old arclight.
<unk>.
Legacy network entry points, so I think that helps.
So as I mentioned, it was probably six or seven 8% increase in <unk> year over year and that's the.
That number does bounce around a little bit I would so I wouldn't put too much.
Importance on that but the point is it's going up as opposed to going down which is very very healthy metric for us because we are always you know from <unk>.
10 years, we've been watching to make sure that <unk> aren't going down as you get price pressure from competitors and things. So we're really happy that it's stable and actually increasing a little bit.
And as Martin said, they never does bounce around a bit.
And you also.
I made reference to our new vs 30, which is a 37 centimeter which typically.
The average <unk>.
37 standard meter customer has an <unk> lower than the overall average.
See some more success with that product and we hope to see a lot of success. It may have somewhat of an impact on Europe whoever that Martin just spoke about right.
That's great Ryan, even though it will drive total airtime revenue was up.
In total in total margin dollars up right Yep sorry.
Great.
<unk>.
Just a question on network capacity as you shift from mini VSAT to the HTS network. There is somewhat limited global Ku band each T S capacity.
On a handful of new satellites coming online over the next several years any concerns around <unk>.
Pasty constraints and any plans in the future to add a K a band type network.
Well.
We don't have any plans to do K a network today.
As you know we also have the C band network that we use as well as the Ku band network for our dual mode product like the V 11.
Kate we have ku band products like the.
Like our UHC seven for the.
Satellite TV market.
But where we are today, we've got a lot of capacity available to US there are a lot of people who want to sell ku band capacity.
So I think we're on a pretty pretty good spot today.
Frankly, we'd love to be in a position, where where that becomes our major hurdle.
Great.
Final question.
<unk> large orders pipeline how is it shaping up this year.
It's I'd say, okay. We have about I think 70% of our annual forecast already in backlog, which is good.
Still have some to book book and ship this year.
So I think we are.
We're about where we expect it to be but we're not we're not done.
And major program activity with the D O D or other foreign customers on track yes.
Yes, there's a lot a lot of a lot of different programs that we're pursuing.
There is no single program that we have on our annual <unk>.
Forecast or budget that we're counting on so it's really a mix of smaller ones would get us there. So.
Obviously, any large program with pushes way over the top.
Great. Thanks, a lot and congrats on the good Q1 results.
Thanks, Chris.
We have no further questions in the queue at this time.
Okay, well, we'll follow up with some of the other analysts directly after this call and thanks, everyone for listening.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.