Q2 2021 KVH Industries Inc Earnings Call
Good day and welcome to the J P. H Industries, Inc quarter, 2.2021earnings conference call Today's conference.
And is being recorded and at this time I would like to turn the conference over to Mr. Roger Keybanc. Please go ahead Sir.
Thank you operator, good morning, everyone and thank you for joining us today for our caveats industries second quarter results, which are included and the earnings release, we published this morning.
Joining me on the call are the company's.
And he was chief operating officer, Brent Brown, and CEO, Martin and kits and hand again.
Before we dive into a couple of quick and Alpha first if you would like a copy of the earnings release. It is available on our website and from our Investor Relations team.
And if 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.
And so you're afraid of from our questions to IR at J D 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 and 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 and 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 in our SEC filings specifically those under the heading risk factors and our 2020 form 10.
10-K, which was filed on March 3rd and form 10-Q, which we expect to file sometime this afternoon. 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 second quarter I will turn the call over to Martin.
Thanks, Roger and good morning, everyone. Thank you for joining.
Yeah.
The first quarter was a tough 1 to follow given the strength of our results, but I'm pleased to report that our second quarter was in many ways, even better both sequentially as well as compared to Q2 of last year.
Total revenues were $43.4 million Thats up 17% from $36.9 million and Q2 last year non-GAAP.
US today, EBITDA will and Q2 was $1.5 million compared to breakeven in Q2, 2020. We achieved these results. Thanks to record VSAT shipments double digit airtime increases and solid year over year growth and inertial navigation product sales.
And I believe that our success in Q2, along with the momentum over the last 4 quarters.
<unk> validates our business model and our long term strategic initiatives. Each of these priorities is at a different stage within its lifecycle and contributes to our result differently agile plans. For example is a successful product line with and expanding subscriber base and strong revenue growth now aided by the launch of regional services.
Adjusted and smaller commercial vessels.
At the same time, our new photonic chip technology is revitalizing our established inertial navigation product line. We're integrating this groundbreaking technology across our existing product portfolio doing so enables us to boost product reliability performance and realized new cost.
As for things that are manufacturing processes.
Establishing a technological foundation for new products.
And finally, our Iot connectivity as a service solution PVH watch is still in its early days looks like agile plans was 4 years ago, We've launched a disruptive new service for.
For a new market and the new customer base within the commercial maritime industry. We've made good progress assembling a team of solution partners, who are for some of the most innovative Iot applications and the maritime industry together, we're building a foundation for dynamic growth.
Working with us and all these efforts will be the newest members of.
Of our board Cielo Hernandez and Kathy more team.
Thank you to all of our shareholders for supporting these outstanding nominees. So convincingly we're excited to have them contributing their tremendous experience to the future of the company.
Now, let's look at our core market and in more detail and our mobile connectivity market.
We achieved our second consecutive quarter of double digit airtime growth with revenue up.
For the $23.1 million, which is a 14% increase compared to Q2 of last year.
In addition, our active subscriber base grew 13% year over year, and 6% sequentially from last quarter.
At the same time, we increased our quarterly Tracfone VSAT unit shipments by 87% versus the same period last year.
<unk>, our third consecutive quarter with record shipments.
In fact, we shattered Q1 record of more than 500 systems by more than 30% as we shipped more than 700 units in Q.
Q2.
We also set a new monthly record for agile plans VSAT system installations and June thanks to our expansive global service network.
Our subscriber growth and units shipped are excellent leading indicators for future airtime revenue and our key performance indicators.
Asked majority.
<unk> of new units shipped represent a future subscribers on the network.
Every new subscriber added during the quarter result, and a new higher airtime revenue base at the start of the next quarter.
Our results illustrate the value of compounding growth within our subscription based business.
And despite record shipments, we actually increased our VSAT product backlog.
Heading into Q3.
Within the commercial maritime sector agile plans revenue grew more than 54%.
Versus the prior year.
And that's due to adding additional new fleets for example, we added.
Rick ship management, which anticipates, adding agile plant systems to approximately.
Only 30 vessels over the next 12 months and.
And agile plans as a whole now represents 44% of our total mini VSAT broadband active subscriber base.
Our media and news linked business is still lagging due to the continued disruption amongst the cruise lines.
This is our highest margin business and we look forward to its eventual return.
Things normalize post COVID-19.
Nevertheless, we see continued demand for content on the commercial side as fleets like V ship's Norway purchased our caveats link hub and subscribe to our content services to bring movies and television onboard.
At the same time Anglo eastern and selected our Newslink Special edition sports.
As a morale booster for its crew.
The growing demand for our satcom systems and services parallel for industry trends, both for commercial and leisure Marine commercial Port calls reached $2.2 million and Q2, that's up 400000 versus Q2 of last year.
This port.
Packaged total is now within 5% of the pre pandemic port call numbers clear evidence that the commercial maritime market is recovering from the disruption for the last 16 months.
And the leisure marine sector power and motor Yacht magazine reported that Newbuild order books for 30% to 60 foot boats are filled.
Filled through 2023.
While Super Yacht Times announced the Super yacht brokerage sales increased 150% over the same quarter last year.
We've met the corresponding demand for commercial and lesser communications with our proven track zone HTS antennas, together with new innovative products and services.
Art called we began shipping our newest VSAT system, the Tracfone and <unk> in the middle of Q2. This 14 inch antenna offers worldwide coverage and download speeds of SaaS or 6 megabits per second faster than any other antenna and and size range.
It uses DC power and a single cable design for easy installation.
Available for purchase and and our agile plans for regional product.
When we announced the <unk> <unk> at the end of March we believe that could disrupt the commercial and leisure communications market and.
So far it has lived up to that expectation for <unk> is the most successful new VSAT product introduction and our history and set records for the highest.
Number of orders and shipments during the first 3 months of launch.
During Q2.
And so expanded our cellular product line for boats with the launch of the Tracfone LTE 1 global we introduced the original LTE for the U S market. However, the need for LTE is the.
And the need for LTE is worldwide.
And it is increasingly a part of commercial quotes while demand for LTE. Among lessor boats is expanding both as a backup for existing satellite communications for its a primary communications for smaller boats the.
<unk> Global features a dual high gain array antenna array modem GPS and Wi Fi all inside a single zone.
Plus single cable installation and with a $99 a month introductory aeroplan airtime plan.
Really equips boaters yachts, and commercial Mariners and more than 150 countries with internet access as far as 20 miles offshore.
Lesser customers are also enjoying enhanced services through our popular caveats elite.
But its streaming service for yards.
Previously only available in the Caribbean and the med.
And we expanded the service along the entire eastern Seaboard, and the U S and Canada. During Q2, we're also doubling the download speeds of 40 Megabits per second for superior experience.
These moves increase the appeal of the service and.
Improve our competitive position and illustrate the strong collaboration we have with Intelsat, our partner and our global HTS network.
We're now 6 months away from operating solely on our HTS network as.
As we've discussed previously we will be discontinuing our legacy VSAT network as of January 1.2022.
And our migration efforts are accelerating as we move commercial and leisure customers from the legacy network to the more advanced HTS network.
And the next 2 quarters will ramp our investment in migration incentives and installations.
At the same time, the number of legacy network subscribers is declining.
Resulting and corresponding correspondingly lower margins for for this legacy network starting in January we expect to shed roughly $12 million and annual legacy network operating expenses, while we add back and incremental capacity on the HTS network. This will result in improved profitability.
It is very important for us to focus on this migration effort over the next few quarters. So that we have a smooth transition and January and don't lose significant airtime revenue and 2022.
Looking now at our Maritime Iot business, we continue to actively and watch solution partners to our ecosystem with multi card service.
Providers and Iot service companies like stratum 5 among the early beta partners.
We also anticipate announcing the first batch of OEM partners and the coming quarters. These Oems are starting to roll out their own digital platforms, each of which can offer their customers to benefit from the dedicated Iot connectivity offered by <unk>.
<unk> watch.
During the second quarter, we completed a successful trial of our remote expert intervention application with a major classification society.
This proved the concept of caveats watch and its high speed on demand connectivity and.
As an enabler of new functions, such as remote inspections were.
We're seeing interest and a wide range of use cases for a remote expert and intervention and have orders for new trials covering various watch solution partner applications vessels and geographies.
After the successful trials, we expect to convert our first partners and direct customers and to paid subscribers with revenue for <unk> growing later this year.
We had additional subscribers.
Our new foundational component of watch a new foundational component of watch will be launched and the second half of this year completing our trio of core functionality.
Moving onto our inertial navigation business. It was a strong quarter for our initial products fiber optic gyro.
<unk> product sales increased $1.5 million or 23% and the second quarter of 2021 compared to the second quarter last year for.
For <unk> net product sales increased by $5 million and Q2 versus Q2 of 2020, despite completing the shipments of the large tech net order in Q1.
And at the same time, we reinforced our foundation for future sales with slightly over $24 million and backlog entering Q3, nearly $13 million of that is expected to ship and the second half of this year.
From a strategic perspective, our photonic integrated chip technology is now broadly integrated across our.
Portfolio, we introduced our P series and inertial measurement units in April and recently completed the design validation and testing of the Pik within our final standard products.
Our newest photonic Chip Assembly machine is now operational and our Tinley Park, Illinois factory. This unit is twice as fast.
Our product predecessor, resulting and cycle time more than doubling and more than doubling our pic gyro production capacity.
As I mentioned earlier these steps are leading to the initial cost reductions that we expected from the Pic technology.
With the photonic chips and new accelerometers as the base, we're now moving forward.
And with the development of our next generation modular inertial systems. We believe that these new products will offer a wide range of unique benefits for our customers and open new applications and markets for us.
So to wrap up I believe the results for the last several quarters validate our strategic direction. Despite the ongoing uncertainties caused.
And we're.
And we're delivering strong growth built on a foundation of diverse markets innovative technology and a growing pipeline of opportunities.
And with a strong inertial NAV background double digit growth and our subscription VSAT business and new products driving record product shipments and record unit growth we're optimistic that.
And by credit path does little to deliver long term shareholder value.
And now I'd like to turn the call back to Roger for a more detailed look at the numbers Roger.
Thanks, Martin as Martin mentioned earlier, our second quarter revenue came in at $43.4 million compared to $36.9 million recorded and the second quarter of.
2020.
Our consolidated gross profit margin was up slightly to 35, 4% revenue from our mobile connectivity segment increased $4.6 million with a gross margin of 34% lower by less than 1 percentage point revenue from our inertial navigation segment increased $1.9 million year over.
Per year with gross margin, increasing over 2 percentage points to 39%.
Product revenue for the second quarter was $17.3 million and increase of $3.3 million or 24% from $13.9 million and the second quarter of last year by.
By segment, our mobile connectivity product revenue increased by $1.3.
Our 20%, while our inertial navigation product revenue increased by $2 million, even or 27%.
The increase and the modal mobile connectivity product sales was primarily due to a zero point $8 million increase in TV and <unk> product sales within our inertial navigation segment tack net sales increased by zero.
And $5 million this quarter compared to last year's second quarter, while our fog revenues increased by $1.5 million.
Service revenue for the second quarter was $26.1 million and increase of $3.1 million or 14% from $23 million and the second quarter of last year by.
By segment service revenue from mobile.
<unk> increased by $3.2 million or 14%.
This increase was primarily due to a $2.9 million increase and mini VSAT broadband airtime revenue.
As Martin noted airtime revenue grew to $23.1 million or approximately 14% over the second quarter of last year and and related gross margin.
And was 35%.
And our inertial navigation segment service revenue was down by 0.1 million.
Operating expenses for the quarter were $21.1 million up for 7 million from the second quarter of last year.
But more than half of that increase was due to higher professional fees, primarily primarily relating.
The board governance matters of the remaining increase the majority was compensation related as we restore and salary and benefit cuts that were made in Q2 of last year to mitigate the impact of the COVID-19 downturn.
At the operating income level, these changes and revenue margins and operating expenses resulted in a loss from operations of $5.8 million.
Which was $2.4 million more than the $3.4 million loss required and the second quarter of 2020 without the professional fees I just mentioned our operating loss would have been lower than last year's.
Our mobile connectivity segment generated an operating profit of <unk> 6 million for the second quarter of both this year and last year at the same time.
And our inertial navigation segment also had an operating profit of <unk> 6 million for the quarter compared with operating profit and zero point $2 million last year.
And I and all unallocated loss was $7 million compared to the previous years for $2 million.
Our net loss was $5.7 million for the second quarter compared with a net loss of $3.
And recorded and the same quarter last year, and a non-GAAP basis, which excludes amortization of intangibles stock based compensation and other nonrecurring costs such as unusual non operating fees foreign exchange transaction gains and losses related tax effects and changes and our valuation allowance and other adjustments after.
After those adjustments our net loss was <unk> 8 million compared with a net loss of $1.6 million last year EPS for the second quarter was a net loss of 31 per share compared with a net loss of <unk> 20 per share and the same period last year.
Non-GAAP EPS loss for the second quarter was <unk> <unk> per share compared to a non-GAAP EPS loss of 90.
6 months per share last year.
Our adjusted EBITDA for the quarter was a positive $1.5 million compared with breakeven and in the second quarter of last year for a complete reconciliation of our non-GAAP measures. Please refer to the earnings release published earlier. This morning are.
Our total backlog at the end of the second quarter was $26.4 million.
And of which approximately $14.8 million is scheduled to be delivered during 2021 backlog for our inertial navigation products and services at the end of June was approximately $24 for $1 million of which approximately $12.7 million and is scheduled to be delivered during 2021 and includes about $11 million for fog products alone.
Net cash.
<unk> operations was 0.2 million compared to 0.1 million provided by operations and the second quarter of last year cash.
Flow from operating activities remains positive for the year to date and over the last 12 months capital expenditures were $5.5 million and cash provided by financing activities was 0.8 million, resulting.
Use and the cash balance of approximately $34.4 million.
For 2021, and we expect our capital expenditures to be in the range of 18 to 21 million. The majority of which is driven by agile planned shipments with respect to the remainder of the year.
Maintaining our revenue and adjusted EBITDA growth outlook for the full year.
And in the first half of the year was very strong and exceeded our expectations and we expect to see continued revenue growth and the second half. However, due to a number of factors, we expect adjusted EBITDA to moderate and the back half of the year compared to the FERC staff.
This concludes our prepared remarks, and I will now turn the call over to the operator to open the line for.
Year and a portion of this morning's call Simon.
Thank you very much Sir ladies and gentlemen, if you would like to ask a quick question over the phone at this time, please signal and by pressing star 1 and your telephone keypad. Please note of using a speaker phone just to make sure. Your mute function is turned off to allow to sigma reach our equipment.
And once again it's.
For Q and wanted to ask a question and we'll pause for just a brief moment to give everyone an opportunity to signal for questions.
We now move to our first question over to fall, which comes from Rick Prentiss from Raymond James. Please go ahead. Your line is open.
Hey, good morning, guys.
Hey, Rick.
Hey couple of questions.
1 we get a lot of questions and from talks about supply chain.
And you talk to us a little about what you're seeing and your supply chain and also how COVID-19 re openings are occurring or are there any closings as we look at the Delta Barry and out.
Out there.
Sure on the supply chain side Q2 was extremely challenging so as we you know.
And ramp production for a new product, which is the <unk> 30, and we had a record demand and shipments and it was very challenging to get the material that we needed.
It seemed like every day there was a different.
Crisis, but our team was able to do a great job and we're able to ship everything that we needed to get out.
It continues to be a challenge I think that over the next 6 months is probably not going to improve so I think that's sort of and ongoing risk factor.
And it, especially as demand is increasing but right now there are no.
Showstoppers, where we have any specific parts that we know we can get.
But it is a daily crisis.
As far as the second part of your question in terms of closings you know we haven't seen any any any.
The new closed.
Those things, but you know the push out of it.
And the our media business, which as you know hotels in Europe and cruise ships that I think is going to be slower than we had anticipated we kind of thought July 1 initially.
Initially would be a sort of recovery day for for that business.
Okay.
And as we look at.
I appreciate the comments on the revenue growth obviously good EBIT.
Adjusted EBITDA for the first half of the year shall.
And we think about this migration issue really whats going to weigh on the second half 1 and how should we think about the magnitude and pacing of incentives and installing and people to get them moved off of the legacy onto the new CIS.
Yes, so some of the equipment, it's a pretty easy upgrade and it requires a new a new modem basically.
And.
And other equipment is sold 10.13 years old and it just needs to be.
Replaced and.
Some of those customers are are moving directly to agile plans and some are buying the new product.
And then the 30.
So we had you know.
Very good unit purchases this quarter as well.
So the migrations are a combination of incentives.
Equipment subsidies.
And move to agile so.
I think it will be similar to what we saw.
And like the 2 but it will be accelerating in Q3 and Q4 so.
Thats.
We already saw the impact of those some of those migration costs and in the Q2 results. We just reported.
Okay.
Some of that show up and cost of product as far as higher cost of product or how should we expect it to flow through the income.
And I'll, let Roger and Youre going to see yes, you'll see it like that and the things that Martin mentioned in terms of and.
Incentives the other thing.
And the Arclight network needs to stay lit until the end of the year and dip.
In theory, 1 way to think about it as if we had migrated everybody already.
We would still be paying for.
For arc line, well, we would already have turned them up on the HTS net.
S networks. So we do have that issue. So I think that that's going to be you know we're going to see we expect to see it at a lower margin here in the second half as we sort of transition and we get everybody and not.
Everybody, but and then as possible off all of the Arclight network onto the new HTS network, but still have.
Savings associated with the Arclight.
Right, so those migration cost and up in the hardware margins typically so youll see that the hardware margins.
Or not as strong as they would be without the migrations.
And I think we saw some of that and this quarter it seemed to us yes.
Yes, yes, yes.
Okay.
And then last 1 for me how is visibility as you look into 'twenty, 2 and now that we're sitting here days away from August of 'twenty 1.
Well you know as as.
More and more of our business is subscription based and recurring the visibility gets better every quarter. So we feel pretty good about the airtime.
Costs continue to grow and.
The churn rate on the HTS network is much lower than on the legacy network.
And agile plans churn is lower than than both of them. So we feel pretty good about that.
The the fog business is growing and we've got a huge backlog now.
Business as Roger mentioned was $24 million and we are starting to get good visibility on the on the fog side of the business as well probably the only part of the business that doesn't have great visibility as the 1 we always talk about which is Tac NAV, which is purely military and.
Those orders tend to be binary so the visibility.
On those outside of what's in backlog.
It's not as good and then also as Martin had mentioned media Theres still kind of a question mark out there as to whether and when that's going to recover.
And people keep thing is going to happen and it keeps things seem to be delayed it's really hard to predict because nobody knows exactly what's going to happen with the pandemic.
Exactly.
Alright, well speeding, which day well guys I appreciate your time and we'll talk to you later, okay alright. Thanks Rick.
For now move onto our next question over the phone which comes from Chris Quilty from Quilty analytics. Please go ahead. Your line is open.
Okay.
Alright, Thanks, I know, it's sort of early on.
<unk> given that it just started shipping but do you have any early indications of whether those are competitive wins or totally new installs were open for <unk>.
Swaps.
And so far it seems like it's it's a new market. So these are most of the time, it's people who have.
Not <unk>.
<unk> said before or had a so a lot of it is new opportunity because it's a <unk>.
Smaller easier to install D C powered lower priced so there is definitely a new market.
And then there is also some upgrades for people, who previously had a VSAT.
And all the <unk> IP on the legacy network.
But we're pleased with how many are new.
<unk> opportunities, which is exactly what we're hoping for is to address a segment that was underserved.
And it sounds like a lot of your strength recently has been on the leisure side, what are you seeing and some of the other.
And he verticals.
No actually the most of the strength has been and commercial so 70% to 80% of our our sales are and the commercial markets today.
So we continue to be strong and leisure.
The commercial market is really the growth driver.
Gotcha.
And E V <unk> are they going both commercial and leisure.
Theyre going both and initially we we launched it as product sale first and the leisure market and then we've added it as and agile plans component and so we're seeing more of that and.
Fishing markets and international.
And needle.
And fisheries those types of those types of applications, we don't see <unk> as a replacement for the <unk> 7 and non commercial ships.
They also need <unk>.
Enterprise functions like the comm box and server and.
And other features which are part of the day 7.
Our Nash understand shifting over to the <unk> service you seem to have had a lot of announcements and the last 6 months, where or how do you feel about.
And where you are on your growth plan for that service.
It's going slower than we expected in terms of actual <unk>.
Scriber.
Fibers, but it's going faster than we expected in terms of.
What I called design wins and partners so what we've done.
Found is that this is sort of similar to our fog business where you.
You get you win the bid you get designed in but you don't get revenue until your customer.
<unk> product ships, so what we're seeing is that as our customers.
No.
Bring their products to market and we're a part of that that's what's generating the subscriber growth and the revenue growth and the second half of this year.
Great.
Speaking of bogs.
Can you give us an update on where you are in terms of the cost savings and it sounds like youre, bringing on new capacity, so probably no big pick up here.
At least the current quarter, but where do you think margins can go on that product line as you transition over.
Well I'll, let Roger speak.
The specific margins, but just.
I'd like to describe where the cost savings is coming from so 1 of the 1 of the big benefits of this new photonic chip is that it doesn't require the specialty fiber or unique components that the old gyros did so 1 of the big cost savers as to the ability for us to shut down our.
Production the day fiber production and that part of the facility.
<unk>, which has significant overhead items, so that'll be happening during the current quarter.
And thats going to drive a big chunk of savings on the overhead side. So we're already seeing the cost savings on the per unit basis.
And another big.
5% savings will come from from the actual overhead reduction by eliminating.
The entire departments and to Martin's point year to year, we're expecting to see a nice bump and the margin next year.
And yet.
And specific numbers, but we are definitely expecting to see a bump and the margin and then.
Some gradual improvement after that but yes, we definitely do expect to see some improvement.
And final question also pick related.
Do you or.
Have you engaged with any customers that are designing new products designing and pick.
Because there were some attribute to it.
Its size and performance net.
You're possibly seeing new market opportunities.
Yes, so we're getting.
Specific.
Customers, who want a smaller product.
Which we are developing which enables us and <unk>.
Smaller products like smaller.
And missiles and things like that.
So those products were expect to launch at the end of this year.
Very good thank you. Thanks.
Thanks, Chris.
We have no further questions queued at this time, but ladies and gentlemen.
Drones a reminder, its star 1 on your telephone keypad. If you do wish to ask a question on today's call.
Okay, operator for it.
No further questions, we will wrap up and will be available.
Available to speak to.
And the interested parties directly after this call. Thanks, everyone I appreciate everyone joining us.
Okay.
Ladies and gentlemen, this does conclude today's call. Thank you very much for your participation you may now disconnect.
Okay.
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