Q1 2022 KVH Industries Inc Earnings Call

May 10, 2022

Good day and welcome to the T V. H industries incorporated Q1, 'twenty to 'twenty two earnings Conference call Today's conference is being recorded.

This time I would like to turn the conference over to Roger to vote. Please go ahead Sir.

Thank you operator, good morning, everyone and thank you for joining us today for our kids niche industry first quarter results, which are included in the earnings release, we published this morning.

On the call as the company's interim Chief Executive Officer, Brett Brian .

Before we dive into 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, 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 feel free to submit questions to IR at <unk> 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.

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 in our SEC filings specifically those under the heading risk factors in our 2021 Form 10-K, which was filed on March 11.

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 first quarter I'll turn the call over to Brad.

Thank you Roger and good morning, everyone.

I am happy to report that we recorded several positives that I want to share.

Total revenue for the quarter was $41 1 million Thats, a 3% decrease from the first quarter of last year. When we shipped a large tax Nab order. However, if we exclude <unk> ourselves our results show growth in our core businesses.

Excluding <unk> sales, we had year over year increase in revenue driven by double digit growth in our core strategic businesses.

Maritime agile plans and a nurse and navigation.

Consolidated gross margins in airtime margins were both up versus Q1 of last year, while our net loss for Q1 was $4 $7 million or 25 cents. A share. This included a significant portion of restructuring costs without the restructuring charge, we achieved an adjusted EBITDA of $1 nine.

Yeah.

And $800000 increase over the first quarter of 2021.

Okay.

As with most companies supply chain issues continue to impede shipments of some of our products that contributed to a $25 million.

Backlog across our mobile connectivity and inertial navigation businesses.

Overall sales into our core strategic markets are strong and we continue to see demand in these markets.

This is encouraging and we have confidence that we will continue to do well here.

Our expense model was our most significant challenge both in the short term and the long term.

Let us where our restructuring in early March the effort included a reevaluation of our operating expenses to align with our expected revenue.

It also meant that we need to make the difficult decision, which resulted in reduced personnel.

This was one of the most challenging and personal decisions, we as a nation.

Yeah.

We are committed to evaluating our product prices on an ongoing basis.

Just as necessary as a result of that commitment we increased prices on some of our products and services in January .

That is why effective may 1st we made incremental price increases just flipped to a select group of products in response to increased cost of goods.

By focusing on areas, where we are industry leaders, we are well positioned for success in the long term.

It is that long term vision that has guided us to refine our strategic goals for 2022, we.

We will drive profitability and shareholder value by focusing on our core businesses and by continuing to stay disciplined in our new product initiatives.

Part of the plan also included divesting ourselves of assets is going to lie that don't align with our core business.

Yeah.

As an example, we finalized the sale of our retail radio business two weeks ago.

This resulted in a $25 million and budgeted cash benefit for Q2.

Other strategies include acceleration and buildup of new subscribers to the agile plans. We're also targeting higher ARPA leisure customers and expanding our base in industry, where autonomy is a significant value add.

Yes.

Our employees worldwide are critical to achieving these goals we are committed to limiting disruptions following the restructuring.

I recently met in person.

We're virtually with our employees in every region for Middletown, Rhode Island.

Athens, Greece and Singapore.

Listen and.

And I have received feedback it is crucial to keeping our core strong steps we have taken include.

Realigned reporting structures to gain efficiencies amongst teams new opportunities for star performers to shine.

And we were sharing weekly updates on our internal and external successes on highlighting progress on new product development efforts.

Okay.

While it was on the road and my primary focus was to emphasize our commitment to our employees and to our customers and service providers around the world.

<unk> reinforce whatever brand stands for quality innovation and dedication to superior service.

It is important that we understand this is a transition period for <unk>.

Full benefits of the restructuring that you're not making impact until the third quarter third quart. However, I believe that <unk> is on firm footing for growth and long term value I'm confident in what we do and I know we have a bright future ahead.

I'd like to touch on a few updates in our core markets to show, where we stand and how we plan to move forward.

And our moat and our mobile connectivity business, our quarterly airtime revenue increased $2 $7 million or $24 million, that's a 12% increase versus Q1 of 2021 new.

New customer shipments of VSAT terminals were up 5%.

Total mobile connectivity revenue was up more than $2 $6 million versus Q1 last year.

We achieved this growth even as we saw a 1% decrease in our total active subscriber base.

During the shutdown of our legacy satellite network as anticipated some of the remaining legacy subscribers at year end are migrating to our HTS systems due in part to the spring refill season for leisure boaters.

Even with a slight decline in subscribers our efforts are paying dividends, our airtime margins are increasing due to the elimination of the expense of our legacy network and we.

We're serving more customers on our HTS network.

I'd also like to recognize and applaud the first anniversary of our award winning Tracfone 30 terminal.

<unk> ended its first year as a most successful VSAT product in company history with <unk> accounted for almost as much hardware revenue is there.

Best selling Tracfone B seven HTS, that's impressive and an incredible achievement.

[laughter].

In the commercial market revenue driven by our agile plans increased roughly 10% sequentially from Q4, 2021, and 48% from Q1 2021.

Looking at track vision satellite systems in Q1, the limited availability of select components impacted shipments our purchasing team with diligent and dedicated to build and ship. However, we did enter Q2 with a $3 $6 million backlog.

Moving forward, our priority is to increase efforts and make components available for higher value higher margin systems.

We're also expanding the scope of our commercial marine business. There is significant demand for our recently approved servicing India and South America, we are working with our regional airtime service partners to support commercial fishing.

Shifting and river.

River transport in several countries.

Okay.

The leisure market also remains strong with seasonal demand for our satellite communications and TV products.

We're also pleased to see the continued demand for <unk> elite, which is our unlimited streaming service service subscriptions in the Caribbean and Bahamas remains solid in Q1.

And our seasonal Mediterranean service launched at the start of April and bookings are gaining momentum seasonal surface along the eastern seaboard of the United States and Canada. Just went live a few days ago and we're looking forward to serving more of the customers. There this year.

Turning to our inertial navigation, we did not see the unusually large talking to ourselves that we did in Q1 of last year <unk> sales declined from $4 5 million in Q1 of 2021 to $700000 in Q1 of 2020.

This is a prime example of the inconsistency of our military navigation business.

Why we no longer include on contracted tack in AD revenue in our guidance. However sales of our OEM inertial navigation systems increased 13% in Q1 compared to same quarter last year here again supply chain issues impacted shipments and.

As a result, we began Q2 with roughly $20 million in backlog for our inertial sensors.

The good news demand remained steady in many of our traditional applications, including remote weapon stations and commercial products as well as platform stabilization systems.

Seeing growing momentum in applications for autonomy.

And which autonomy is critical and now represents 30% of RNG are still sensors revenue autonomous trucking is a very exciting industry and we're working closely with several leading developers. Currently we are involved in a comprehensive testing of our photonic chip based fiber optic gyro and a number of autonomous trucking platforms.

Our product is being put up against competing technologies and I'm thrilled to report they were seeing very positive results.

We entered Q1 with an array of challenges we came out of the quarter, having taken decisive steps to align our operations with our areas of strength in revenues. Our goal is to grow the business and make adjustments that will guide us to long term success and profitability.

Look forward to the quarter and the year ahead.

That I will turn it over to Roger.

Thanks Brent.

As Brent mentioned earlier, our first quarter revenue came in at $41 1 million compared to $42 3 million recorded in the first quarter of last year.

Sprint also discussed.

Now and that we had a very large order for the product last year. The sale of the attack now total sales are talking to have in Q1 of last year were $5 3 million.

And as you mentioned this product line is very lumpy and this past quarter was quite light with as you said 700000 of revenue as a result of dropped from last year of the $4 five.

And also as you can see a drop in the total revenue year over year and also you can see that collectively as Bert mentioned, we had year over year growth and collectively in our other businesses. Our consolidated gross profit margin was 37% for the first quarter of both this year and last.

That is a particularly good result, as last year benefited from the high margin <unk> sale and this year did not.

Revenue from our mobile connectivity segment increased $2 6 million with a gross margin of 39% up four percentage points revenue from our inertial navigation segment decreased $3 $8 million year over year with gross margin decreasing 12 percentage points to 32%.

Tack NAV falls within inertial NAV and was the driver for this decline.

Service revenue for the first quarter was $26 7 million, an increase of $2 9 million or 12% from $23 9 million in the first quarter of last year by segment service revenue in mobile connectivity increased by three point or $1 million or 13%.

This increase was primarily due to re $2 7 million increase in mini VSAT broadband airtime revenue.

As Brent noted airtime revenue grew to 24.01 billion or approximately 12% over the first quarter of last year. Despite a 1% decrease in accurate subscribers as a result of the shutdown of our legacy network on December 31 2021.

Total subscribers, which includes those who have temporarily suspended was up 1% to explain that difference a bit suspended subscribers are typically recreational customers who aren't using their boats during the colder months.

While we refer to them as suspended they still have access to voice services for which they pay by the minute. In addition suspended agile customers pay a modest monthly fee for the equipment that caveats on their vessels.

Airtime gross margin was 41%, which is up seven percentage points from a year ago. This increase is due to a combination of factors primarily the shutdown of our legacy network, but also a number of one time benefits going forward, we continue to target airtime margin in the high Thirty's.

Product revenue for the first quarter was $14 4 million, a decrease of $4 1 million or 22% from $18 4 million in the first quarter of the prior year.

By segment mobile connectivity decreased by zero point $3 million or 5%, primarily due to a decrease in satellite TV product sales. This decline was partially due to supply chain issues, which prevented us from manufacturing as much as we could have shipped.

Inertial navigation product revenue decreased approximately $3 7 million or 32% again this was driven by the drop in <unk> sales.

For our other inertial NAV products combined fog in OEM revenues increased by zero point $8 million or 13%.

And revenue for our inertial NAV service business was down by zero point $1 million.

Operating expenses for the quarter were $20 1 million or 0.8 million up from the first quarter of last year. However, both this year and last year, we had a significant amount of nonrecurring expenses in the first quarter.

Last year, we had zero point $9 million in legal costs related to a shareholder matter and this year, we had a total of $2 $3 million related to a reduction enforce and CEO retirement and.

As such on a recurring basis. This quarter was zero point $6 million less than the first quarter of last year given.

Given the timing of the recent changes the full impact of these changes won't be seen until Q3, and we expect the full year operating expenses to be between five and $6 million less than 2021 on a recurring basis.

At the operating income level the changes in revenue margins and operating expenses resulted in a loss from operations of $4 7 million, which was up $1 1 million compared with $3 $6 million loss reported in the first quarter of 2021.

Our mobile connectivity segment generated an operating profit of $1 3 million compared with an operating loss of <unk> 4 million last year, while our inertial navigation segment had an operating loss of <unk> 5 million for the quarter compared with an operating profit of $2 1 million last year.

Located loss was $5 6 million compared to last year's $5 3 million.

These losses include the nonrecurring operating expenses, just mentioned and after adjusting for those our consolidated operating loss was zero point $3 million less than last year.

For the first quarter, our net loss was $4 7 million compared with a net loss of 4.0 million recorded in the same quarter last year.

non-GAAP basis, which excludes amortization of intangibles stock based compensation and other nonrecurring costs, such as unusual nonoperating fees foreign exchange transaction gains and losses employee termination costs and CEO separation related tax effect and changes in our valuation allowance and other tax adjustments.

After all those adjustments we had a net loss of one 4 million compared with a net loss of <unk> 9 million last year.

For the first quarter was a net loss of 25 per share compared with a net loss of 22 per share in the same period last year and non-GAAP EPS loss for the first quarter was five cents per share the same as last year.

Our adjusted EBITDA for the quarter was a positive $1 nine compared with a positive $1 1 million in the first quarter of last year.

<unk> is particularly noteworthy given that this year's results did not have the benefit of a large tech net sales at last year's did.

For a complete reconciliation of our non-GAAP measures. Please refer to the earnings release that was published earlier this morning.

Net cash used in operations was $3 5 million compared to 5.0 million provided by operations in the first quarter of last year.

Capital expenditures for the quarter were $4 4 million and for the full year, we expect capital expenditures will be in the range of 18 to 21 million. The majority of which is driven by agile client shipments.

Cash provided by financing activities was 0.1 million, resulting in an ending cash balance of $16 7 million as of March 31.

I'd just like to clarify.

Brent made earlier about the sale of the radio business. It may not have been clear.

He was coming across the net proceeds from that were $2 5 million.

Looking ahead as we said in our earnings release, we continue to expect consolidated annual revenue growth between two 5% and adjusted EBITDA to be between $11 million and $15 million, assuming that supply chain issues don't worsen. In addition, we are still targeting positive operating income for the second half of the year.

This concludes our prepared remarks, and I will now turn the call over to the operator to open the line for the Q&A portion of this morning's call operator.

Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

Once that once again this is not one to ask a question.

So we will take our first question from Prentiss from Raymond James.

Thanks, Good morning, everyone.

Can you hear me, Okay, Iraq, how are you.

Yeah, Hey, Rick how are you John .

Hey, a couple of questions. One thanks for that clarification on the radio business I had written 25 instead of two five.

That was in this state.

A statement on my part I'm glad that Roger Corbett.

I was like well.

Your balance sheet in very good shape.

As you guys look at maybe other noncore asset sales is there anything that you need or want out there. If you look at like a Swat analysis of the strengths weaknesses opportunities and threats out there is there stuff that you'd like to add that she'd be protocol.

And what might those type things.

But we're always evaluating how to best position, our products and services in the market.

And how we can increase shareholder value along with that.

Current juncture as you know over the years, we acquired vertex and then had an immediate and then video tail came and went and nearly three year business actually came from from headland media.

If something comes up it from an opportunistic standpoint that we think can add value and provide incremental value added services will consider it but there's nothing in particular that we're focused on at the current moment.

One of the things that there's a lot of talk about it Leo constellations going out, but that's something that internally, we are sort of keeping up with that.

We have the ability to sort of develop what we'll need to do that internally, but I don't think there's any need to sort of go out and do anything around that but that's obviously something that as you think about what are the needs that we have going forward with.

Potential ability to operate out of Leo network is certainly one of the things that we're tracking them staying up on.

So that'd be kind of like maybe some antenna design or some things to make sure you were able to acquire <unk>.

Yes exactly.

Great that makes it makes good sense.

Obviously, a lot of concern about interest rates inflation and supply chain lot more also concerned about will be tip into a recession.

And what part of the World might turn into a recessionary environment can you update us like you've been around this business a long time update us a little bit about how the business has performed in past recessionary cycles that you've seen around the world.

But the nice thing about our business in particular.

Airtime business its a recurring revenue model.

And with that recurring revenue, we have seen year on year revenue and typically growth.

And I don't know if there's a direct correlation to recessionary periods, because we haven't really experienced a lot other than briefly with COVID-19.

Since we've had that service up and going and which we actually saw an increase because of some of the impacts of the chrome and needed to be onboard the vessels.

Prior to that the most significant impact was back in 2008 2009, when we had just launched the service.

And where the impact we saw there was.

Is truly on the leisure side of the business in particular, the RV business RV business actually included completely so I don't anticipate activity.

Cliff can impact too.

To any of our recurring revenue, but as far as sales into leisure marine and hardware in particular, those could be impacted and that's what we have seen in the past.

Okay.

And one of the things that looked attractive to the quarter and so we were expecting maybe a little more pressure on equipment margins given supply chain, maybe having to source from different areas.

Plus it's also a little bit.

The picture and help us understand a little bit about where you see kind of equipment margins going forward.

Well as.

As far as the margins and what we experience we definitely had our challenges in regard to supply chain and we didn't need to source some components at a higher price.

We had.

We have in the past and responded in particular there.

With our TV products.

The price increase here.

Which brings me to what you talked about in my script, where we're continuing to see some pricing pressure.

We're not necessarily giving direct guidance on what that pressure would be but it is definitely concerns will move forward into the year and I think Roger had some stuff that I was just going to say that you know from a peer or if you look at what do we have to pay in terms of higher prices.

Sure.

Their Q1 wasn't as big of an impact I actually some digging into this last couple of days Q1 wasn't as big of an impact as I thought it was going to be but we are still going to see an impact in Q2, and it's hard to say after that but we are definitely not out of the woods on this yet.

Okay. That's what we were thinking to we thought we were so maybe it was a little delayed impact as far as all of those costs coming into it but we should see some of some pressure.

Yeah.

The quote you find out if you know the actual impact when it hits the financials, there's kind of a little bit delayed from when you set a first find out about it. So we know that there's going to be a bigger impact in Q2 than there was in Q1.

Got you, Okay, and then last one for me any update on the CEO search it was about 60 days ago, a little bit more when we chatted on the yearend results.

The initial thoughts was maybe the CEO search would take 60 to 90 days or is that still looking like the processor.

Update on the on the search both internal other surgical as well as external.

The board of directors has gone and still continuing the search process.

I can't say for certain what the end data on that is I'm hopeful that will take place so much soon.

And they are continuing the process and we're working with them an outside recruiting firm.

Yes, both external and internal candidates.

Okay I appreciate it I would say well.

Alright, thanks, Thanks, Rick.

And our next question is coming from Chris Quilty Quilty analytics.

Thanks, guys I was hoping you could perhaps give us.

A macro overview of what you're seeing in the shipping market.

Some countervailing trends in terms of higher fuel costs and continuing.

Intermodal containers getting stacked up.

Overall do you see the situation getting better or worse for your customers on the commercial side.

And what does that imply you know as you look out through the balance of the year, maybe on a on a quarterly basis do you expect any large movements in terms of customer uptake.

Well as far as I think there was a couple of questions in there, Chris but as far as the impact with what's going on within the industry, both from a fuel consumption and needing to transport product.

Definitely a maritime industry issue.

But as far as communications those companies still require a communications even.

Luckily stripping as we backed up a certain courts as far as fuel pricing, that's actually benefiting some of our customers, although it's hurting us at the gas pump.

And you see some of the.

The earnings that are being released from companies in the energy sector, they're all very positive.

From their perspective, which means they have more money to spend on communications.

Hum.

What percent now I think you've given in the past is the energy sector in terms of your subscriber base.

I'd have to go through a reassessment and I don't think it's probably changed as a percentage very much but I believe that and I'll double check. After this call that the number of vessels that are associated with the energy sector is in the 15% to 18% range.

Got you and would you.

I think we'll confirm that.

No that's good.

As an order of magnitude.

Are there any particular commercial sectors, where your.

Most constructive on and can you. This is a separate question can you give us a quick update on if there is any on television each watch.

Yeah well.

And when you look at energy its tankers and it's basically the movement in supply vessels were not necessarily on rigs. So it's everything that revolves around the energy sector with the exception of rigs can be it can be it can be supply vessels tankers museum fuel et cetera in regard to caveats watch.

We have the service, we're going to integrate it with our core products. So of your TV each customer you would be able to subscribe to PVH watchful through note expert intervention as well as flow and cloud connect will also integrate but that won't be integrating probably until 2023 time frame.

Yeah.

Okay, and you had indicated.

I think in the last call that you had several new products that you expect to launch this year, including the integration of PVH watch when should we expect that and presumably any of the R&D cost associated with that are baked into your forecast.

We'll release more information in regard to.

Those types of initiatives and too cute.

Great and shifting gears autonomous trucking I think in the past you had mentioned.

I think it was maybe a dozen or more potential customers when might we expect to see.

So material movement and those customers do you have a sense of when.

Some of these programs might actually get adopted and move forward in a meaningful way.

Well I.

I think it's <unk>.

In comparison to like a driverless car. It's relatively soon I don't think we'll see a significant uptick this year.

I think as we get into next year in the latter part of next year, we can see some movement.

Great and I know tack NAV is not in the forecast but.

Existing programs that you're tracking all remain on track or any delays that you see.

Well, there's a significant number of programs out there and so as you would expect there are some that are growing a little ahead of what we expected some real behind overall.

First business and so because of everything that's going on in Europe , We're actually saying instead of I would say an uptick in versus what our expectations were.

Yeah last year end of last year.

In any of those that have the potential to come to light in the next 12 well yeah.

Yes.

Okay, a little bit of good news.

That's it for me thanks, guys well.

[laughter], Thanks, Chris No you're right.

Yeah.

And we will take the next question.

I am Coon from Needham.

Thanks for the question want to ask about the supply chain again.

Roger if you can kind of parse out of your impacts there between the transient.

Cost impacts of Expedites versus the permanent types of price changes that probably drove your price increases.

Maybe give more color there would be helpful.

Yeah. So you know we've had as you said, we've had sort of like you know freight costs, where we're getting.

Getting things done at the last now you have to ship them and then we've also got product costs.

This is the big question is how long this is going to last and.

Is any of this stuff permanent or is this and this is kind of like the huge question. We've got out there. So I don't have an answer on how long it's going to laugh.

Again, the impact in Q1 weren't as bad as I had sort of expected based on what I had sort of heard around things, but we think it is going to.

It'll be a more of an issue in Q2 from a cost perspective.

But you know.

It's kind of a daily battle on the parts front about trying to you know chips and boards that those chips go into.

It's just it's the big unknown for this year for us as it is probably for a bunch of them.

Yes, So would you say like in the quarter in the books here, but it was closer to kind of 50 50 in terms of the cost impact to the company.

When you say 50 50 of what I'm, sorry between kind of 50, 50, <unk> cost and price increases from the source.

Well I wouldn't say transit answer the price increases could be transient as well I mean, there's a couple of things going on out there they're sort of underlying real you know inflation, which tends not to go away and then there you know the fact that you're trying to buy the last hundred shifts that exist in the world of a particular price and suddenly.

You know the quoted 10 acts of what it what it used to be a year ago. So.

Well, that's a product cost I wouldn't necessarily view that as permanent because at some point, we think supply will catch up or.

Calpers will stop forwarding and those things are kind of go back to some kind of normal maybe a little bit higher than they were before but not.

The 10 acts of what they were before.

Yeah.

Got it.

Alright, and then.

Shifting gears, maybe kind of.

Where you are in the process of evaluating different product divestitures, you still at the beginning of that process or kind of entering the middle of that process.

Right now the radio business was a good business, a very solid business and one that was most non core as far as our remaining businesses.

No particular business to standalone, such as that but we're actually focused on but we may look at different product lines and services within our product line.

Got it helpful. Thanks.

Okay.

And having no further questions.

I would like to turn the conference back to us.

Speakers for any additional or closing remarks.

No I think that's all operator, thank you I appreciate everyone's participation on the call and.

We're going to keep working hard to drive towards being profitable.

Great. Thanks, very much everyone have a good day.

This concludes today's call. Thank you for your participation you may now disconnect.

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Good day and welcome to the PVH Industries incorporated Q1 2022 earnings Conference call. Today's conference is being recorded at this time.

I would like to turn the conference over to Roger to vote.

Please go ahead Sir.

Thank you operator, good morning, everyone and thank you for joining us today for <unk> Industries' first quarter results, which are included in the earnings release, we published this morning.

Joining me on the call is the Companys interim Chief Executive Officer, Brett Brian .

If you are listening via the web feel free to submit questions to IR at PVH Dot com.

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 in our SEC filings specifically those under the heading risk factors in our 2021 Form 10-K, which was filed on March 11 the.

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 first quarter I'll turn the call over to Brad.

You Roger and good morning, everyone.

I'm happy to report that we recorded several positives that I want to share.

Total revenue for the quarter was $41 $1 million, that's a 3% decrease from the first quarter of last year. When we shipped a large <unk> order. However, if we exclude <unk> sales our results show growth in our core businesses.

Excluding <unk> sales, we had year over year increase in revenue driven by double digit growth in our core strategic businesses.

Airtime agile plans and a nurse will navigation.

Consolidated gross margins in airtime margins were both up.

Versus Q1 of last year, and while our net loss for Q1 was $4 $7 million or 25 cents. A share. This includes a significant portion of restructuring costs without the restructuring charge, we achieved an adjusted EBITDA of $1 $9 million and 800.

<unk> thousand dollar increase over the first quarter of 2021.

Okay.

As with most companies supply chain issues continue to impede shipments of some of our products that contributed to a $25 million.

Backlog across our mobile connectivity and inertial navigation businesses.

Overall sales into our core strategic markets are strong and we continue to see demand in these markets.

This is encouraging and have confidence that we will continue to do well here.

Our expense model was our most significant challenge both in the short term and the long term.

Let us where our restructuring in early March the effort included a reevaluation of our operating expenses to align with our expected revenue.

It also meant that we need to make a difficult decision, which resulted in reduced personnel.

This was one of the most challenging and personal decisions we had to make.

Yes.

We are committed to evaluating our product prices on an ongoing basis.

Just as necessary as a result of that commitment we increased prices on some of our products and services in January .

That is why effective may 1st we made incremental price increases just select to a select group of products in response to increased cost of goods.

By focusing on areas, where we're industry leaders, we are well positioned for success in the long term.

It is that long term vision that has guided us to refine our strategic goals for 2022, we.

We will drive profitability and shareholder value by focusing on our core businesses and by continuing to stay disciplined in our new product initiatives.

Part of the plan also included divesting ourselves of that asset is going to lie that don't align with our core business.

Yeah.

As an example, we finalized the sale of our retail radio business two weeks ago. This.

This resulted in a $25 million and budgeted cash benefit for Q2.

Yes.

Our employees worldwide are critical to achieving these goals we are committed to limiting disruptions following the restructuring.

I recently met in person.

We're virtually with our employees in every region from Middletown, Rhode Island.

To add things, Greece, and Singapore <unk>.

I have listened.

And I have received feedback that is crucial to keeping our core strong steps we have taken include.

Realigned reporting structures to gain efficiencies amongst teams new opportunities for star performers to shine.

And we were sharing weekly updates on our internal and external successes on highlighting progress on new product development efforts.

While it was on the road and my primary focus was to emphasize our commitment to our employees and to our customers and service providers around the world I continually reinforce whatever brand stands for quality innovation and dedication to superior service.

Yes.

It is important that we understand this is a transition period for <unk>.

The benefits of the restructuring that you're not making impact until the third quarter third quart. However, I believe the caveat is on firm footing for growth and long term value I am confident in what we do and I know we have a bright future ahead.

Sure.

I'd like to touch on a few updates on our core markets to show, where we stand and how we plan to move forward.

And our moat and our mobile connectivity business, our quarterly airtime revenue increased $2 7 million to $24 million, that's a 12% increase versus Q1 of 2021 new.

New customer shipments, our VSAT terminals were up 5%.

Total mobile connectivity revenue was up more than $2 $6 million versus Q1 last year.

We achieved this growth even as we saw a 1% decrease in our total active subscriber base.

During the shutdown of our legacy satellite network as anticipated some of the remaining legacy subscribers at year end are migrating to our HTS system is due in part to the spring refill season for leisure boaters.

You don't want that slight decline in subscribers. Our efforts are paying dividends, our airtime margins are increasing due to the elimination of the expense of our legacy network and we.

We're serving more customers on our HTS network.

I'd also like to recognize and applaud the first anniversary of our award winning Tracfone 30 terminal.

<unk> ended its first year as a most successful VSAT product in company history.

<unk> accounted for almost as much hardware revenue.

Best selling Tracfone seven HTS, that's impressive and an incredible achievement.

Yeah.

In the commercial market revenue driven by our agile plans increase roughly 10% sequentially from Q4, 2021, and 48% from Q1 2021.

Moving forward, our priority is to increase efforts and make components available for higher value higher margin systems.

Yes.

Shifting and river.

On River transport in several countries.

Okay.

The leisure market also remains strong with seasonal demand for our satellite communications and TV products.

We're also pleased to see the continued demand for <unk> elite, which is our unlimited streaming service service subscriptions in the Caribbean and Bahamas remains solid in Q1.

And our seasonal Mediterranean service launched at the start of April and bookings are gaining momentum seasonal service along the eastern seaboard of the United States and Canada. Just went live a few days ago and we're looking forward to serving more of the customers. There this year.

Turning to our inertial navigation, we did not see the unusually large talking to ourselves that we did in Q1 of last year <unk> sales declined from $4 $5 million in Q1 of 2021 to $700000 in Q1 in 2022.

This is a prime example of the.

<unk> of our military navigation business and why we no longer include on contracted tack net revenue in our guidance. However sales are OEM inertial navigation systems increased 13% in Q1 compared to same quarter last year here again supply chain issues impacted shipments.

As a result, we began Q2 with roughly $20 million in backlog for our inertial sensors.

The good news demand remained steady in many of our traditional applications, including remote weapon stations and commercial products as well as platform stabilization systems.

Seeing growing momentum in applications for autonomy.

And which autonomy is critical and now represent 30% of our nurses sensors revenue autonomous trucking is a very exciting industry and we're working closely with several leading developers currently we are involved in and comprehensive testing of our photonic chip based fiber optic gyros and a number of autonomous trucking platforms.

<unk> is being put up against competing technologies and I'm thrilled to report they were seeing very positive results.

We entered Q1 with an array of challenges we came out of the quarter, having taken decisive steps to align our operations with our areas of strength and revenues. Our goal is to grow the business and make adjustments that will guide us to long term success and profitability.

Look forward to the quarter and the year ahead, and with that I'll turn it over to Roger.

Thanks Brent.

As Brent mentioned earlier, our first quarter revenue came in at $41 1 million compared to $42 3 million recorded in the first quarter of last year.

Sprint also discussed.

Now and that we had a very large order for the product last year the.

Sales of attacking a total sales of <unk> in Q1 of last year were $5 3 million and as you mentioned this product line is very lumpy.

This past quarter was quite light with as you said 700000 of revenue as a result of dropped from last year of the $4 five.

And also as you can see a drop in total revenue year over year and also you can see that collectively as Brent mentioned, we had year over year growth and collectively in our other businesses. Our consolidated gross profit margin was 37% for the first quarter of both this year and last.

It's a particularly good result, as last year benefited from the high margin tack net sale and this year did not.

Revenue from our mobile connectivity segment increased $2 6 million with a gross margin of 39% up four percentage points revenue from our inertial navigation segment decreased $3 8 million year over year with gross margin decreasing 12 percentage points to 32%.

TAC NAV falls within inertial NAV and was the driver for this decline.

This increase was primarily due to re $2 7 million increase in mini VSAT broadband airtime revenue.

Brent noted airtime revenue grew to 24.01 billion or approximately 12% over the first quarter of last year.

A 1% decrease in active subscribers as a result of the shutdown of our legacy network on December 31 2021.

Total subscribers, which includes those who have temporarily suspended with.

Up 1%.

To explain that difference a bit suspended subscribers are typically recreational customers who aren't using their boats during the colder months.

Product revenue for the first quarter was $14 4 million, a decrease of $4 1 million or 22% from $18 4 million in the first quarter of the prior year.

By segment mobile connectivity decreased by <unk> 3 million or 5%, primarily due to a decrease in satellite TV product sales. This decline was partially due to supply chain issues, which prevented us from manufacturing as much as we could have shipped.

The inertial navigation product revenue decreased approximately $3 7 million or 32% again this was driven by the drop in <unk> sales.

For our other inertial NAV products combined fog in OEM revenues increased by <unk> 8 million or 13%.

And revenue for our inertial NAV service business was down by 0.1 million.

Last year, we had zero point $9 million in legal costs related to a shareholder matter and this year, we had a total of $2 $3 million related to a reduction enforce and CEO retirement.

Such on a recurring basis. This quarter was 0.6 million less than the first quarter of last year given.

Given the timing of the recent changes to full impact of these changes won't be seen until Q3, and we expect the full year operating expenses to be between five and $6 million less than 2021 on a recurring basis.

At the operating income level the changes in revenue margins and operating expenses resulted in a loss from operations of $4 7 million, which was up $1 1 million compared with the $3 6 million loss reported in the first quarter of 2021.

Allocated loss was $5 6 million compared to last year's $5 3 million.

These losses include the nonrecurring operating expenses, just mentioned and after adjusting for those our consolidated operating loss was <unk> 3 million less than last year.

For the first quarter, our net loss was $4 7 million compared with a net loss of 4.0 million recorded in the same quarter last year on a non-GAAP basis, which excludes amortization of intangibles stock based compensation and other nonrecurring costs, such as unusual nonoperating fees foreign exchange transaction.

Gains and losses employee termination cost and CEO separation related tax effects from changes in our valuation allowance and other tax adjustments. After all those adjustments we had a net loss of one 4 million compared with a net loss of <unk> 9 million last year.

Our adjusted EBITDA for the quarter was a positive $1 nine compared with a positive $1 1 million in the first quarter of last year.

<unk> is particularly noteworthy given that this year's results did not have the benefit of a large tech net sales at last year's did.

For a complete reconciliation of our non-GAAP measures. Please refer to the earnings release that was published earlier this morning.

Net cash used in operations was $3 5 million compared to 5.0 million provided by operations in the first quarter of last year.

Cash provided by financing activities was zero point $1 million, resulting in an ending cash balance of $16 7 million as at March 31.

I'd just like to clarify.

Comments made earlier about the sale of the radio business. It may not have been clear.

He was coming across the net proceeds from that or two 5 million.

This concludes our prepared remarks, and I will now turn the call over to the operator to open the line for the Q&A portion of this morning's call.

Operator.

Thank you, Sir ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

Once that once again this is Todd wants to ask a question.

So we will take our first question from Amit Prentiss from Raymond James.

Thanks, Good morning, everyone.

Can you hear me, Okay, Hey, Rick how are you.

Yeah, Hey, Rick how are you doing.

Very well thanks.

Couple of questions. One thanks for that clarification on the radio business I had written and $25 in the $2 five and that was a miss.

A statement on my part I'm glad that Roger Corbett.

Yeah, I was like well.

I see your balance sheets in very good shape.

And what might those type things be.

But we're always evaluating how to best position, our products and services in the market.

And how we can increase shareholder value along with that.

Current juncture as you know over the years, we acquired vertex and that had an immediate and then video Cal came and went and now the Trillium business actually came from from headland media.

If something comes up it from an opportunistic standpoint that we think can add value and provide incremental value added services, we will consider it but there's nothing in particular that we're focused on at the current moment.

One of the things that there's a lot of talk about it Leo constellations going out, but thats something that internally, we are sort of keeping up with that.

We have the ability to sort of develop what we'll need to do that internally, but I think there is any need to sort of go out and do anything around that but that's obviously something that as you think about what are the needs that we have going forward.

Potential ability to operate out of Leo network is certainly one of the things that we're tracking them staying up on.

That would be kind of like maybe some antenna design or some things to make sure you were able to acquire <unk>.

Yes exactly.

Great that makes it makes good sense.

Obviously, a lot of concern about interest rates inflation supply chain lot more also concerned about will be tip into a recession.

And what part of the world's might turn into a recessionary environment can you update us and <unk> been around this business a long time update us a little bit about how the business has performed in past recessionary cycles that you've seen around the world.

Well the nice thing about our business in particular.

Airtime business its a recurring revenue model.

And with that recurring revenue, we've seen year on year revenue and typically growth.

And I don't know if there's a direct correlation to recessionary periods, because we haven't really experienced a lot other than briefly with COVID-19.

Since we've had that service something going in which we actually saw an increase because of some of the impacts of the chrome and needed to be onboard the vessels.

Prior to that the most significant impact was back in 2008 2009, and we had just launched the service.

And where the impact we saw there was truly an on the leisure side of the business in particular, the RV business in the RV business actually included completely so I don't anticipate.

I wouldn't anticipate a significant impact too.

To any of our recurring revenue, but as far as sales into leisure marine and hardware in particular, those could be impacted and that's what we have seen in the past.

Okay.

And then one of the things that.

Attractive to the quarter and so we were expecting maybe a little more pressure on equipment margins given supply chain, maybe having to source from different areas.

Plus it's also a little bit with the picture and help us understand a little bit about where you see kind of equivalent margins going forward.

But as far as the margins and what we experience we definitely had our challenges in regards to supply chain and we didn't need to source some components at a higher price and we had that we have in the past.

And we responded in particular there.

Our TV products.

With the price increase here in May which is what you talked about within my script, where we're continuing to see some pricing pressure.

We're not necessarily giving direct guidance on what that pressure would be but it is definitely concerns will move forward into the year and I think Roger had some stuff that yeah. I was just going to say that you know from a peer or if you look at what do we have to pay in terms of higher prices.

Q1 wasn't as big of an impact I actually some digging into this last couple of days Q1 wasn't as big of an impact as I thought it was going to be but we are still going to see an impact in Q2, and it's hard to say after that but we are definitely not out of the woods on this yet.

Okay. Yes. So we are thinking to we thought we were so maybe it was a little delayed impact as far as all of those costs coming into it but we should see some of some pressure.

Thank you.

You get the quotes and find out if you know the actual impact when it hits the financials, there's kind of a little bit delay from when you set a first find out about it. So we know that there's going to be a bigger impact in Q2 than there was in Q1.

Got you, Okay, and then last one for me any update on the CEO search it was about 60 days ago little bit more when we chatted on the yearend results.

The initial thoughts was maybe the CEO search would take 60 to 90 days or is that still looking like the processor.

Just an update on the on the search both internal obviously was external.

The board of Directors has gone is still continuing the search process.

I can't say for certain what the end data on that is I'm hopeful that will take place somewhat soon.

And they're continuing to process and they're working with an outside recruiting firm to assess both external and internal candidates.

Okay I appreciate it well, let's say well.

Alright, thanks, Thanks, Rick.

And our next question is coming from Chris Quilty Quilty analytics.

Thanks, guys I was hoping you could perhaps give us a macro overview of what you're seeing in shipping market, obviously, some countervailing trends in terms of.

Fuel costs and continuing.

Intermodal containers getting stacked up.

Role do you see the situation getting better or worse for your customers on the commercial side and what does that imply you know as you look out through the balance of the year, maybe on a on a quarterly basis do you expect any.

Large movements in terms of customer uptake.

As far as I think there was a couple of questions in there, Chris but as far as the impact.

What's going on within the industry, both from a fuel consumption and needing to transport product.

It's definitely a maritime industry issue.

But as far as communications company still require a communications, even you know Google Doubleclick shipping to back up a certain courts as far as fuel pricing, that's actually benefiting some of our customers. Although it's hurting us at the gas pump and you see some of the.

The earnings that are being released from companies in the energy sector, they're all very positive.

From their perspective, which means they have more money to spend on communications.

Hum.

Percent now I think you've given in the past is the energy sector in terms of your subscriber base.

I'd have to go through a reassessment and I don't think its probably changes a percentage very much what I believe that and I'll double check. After this call that the number of vessels that are fishing in the energy sector is in the 15% to 18% range.

Gotcha and would you.

Okay.

We'll confirm that.

No that's good.

As an order of magnitude.

And are there any particular commercial sectors, where you're.

Most constructive on and can you. This is a separate question can you give us a quick update on if there is any on <unk> watch.

Yeah well.

And when you look at energy tankers, and basically the movement and supply vessels were not necessarily on rigs. So it's everything that revolves around the energy sector with the exception of rigs can be it can be it can be supply vessels tankers, moving fuel et cetera in regard to caveats watch.

We have the service, we're going to integrate it with our core products. So of your TV each customer will be able to subscribe to PVH watch both remote expert intervention as well as flow and cloud connect will also integrate with that won't be integrating probably until the 'twenty 'twenty three time frame.

Okay.

Okay, and you had indicated.

We will release more information in regards to.

Those types of initiatives in Q2.

Great and shifting gears autonomous trucking I think in the past you had mentioned.

I think it was maybe a dozen or more potential customers when might we expect to see.

So a material movement in those customers do you have a sense of when.

Some of these programs might actually get adopted and move forward in a meaningful way.

Well I.

I think it's in comparison to like a driverless car because it's relatively soon I don't think we'll see a significant.

Uptake this year.

As we get into next year in the latter part of next year, we can see some movement.

And I know tack NAV is not in the forecast but.

Yes.

Existing programs that you're tracking all remain on track or any delays that you see.

So there's a significant number of programs out there and so as you would expect there are some that are a little ahead of what we expected some little behind overall.

The defense business and so because of everything that's going on in Europe , We're actually seeing sort of I would say an uptick in versus what our expectations were.

Last year end of last year.

And any of those that have the potential to come to light in the next 12 well yeah.

Yes.

Okay, a little bit of good news.

Was it for me thanks, guys well.

Yeah.

Okay.

Yeah, no you're right.

Yeah.

And we will take the next question from <unk>.

Kuhn from Needham.

Thanks for the question wanted to ask about the supply chain again.

Roger if you can kind of parse out of your impacts there between the transient transient cost impacts of expedites versus the permanent types of price changes that probably drove your price increases.

Maybe give more color there would be helpful.

Yeah. So you know we had as you said, we've had sort of like freight costs, where we're getting.

Getting things done at the last now you have to ship them and we've also got product costs.

This is the big question is how long this is going to last and.

Is any of this stuff permanent or is this and this is kind of like the huge question. We've got out there. So I don't have an answer on how long it's going to last.

Again the impact.

Q1 weren't as bad as I had sort of expected based on you know what I had sort of heard around things, but we think it is going to.

B a more of an issue in Q2 from a cost perspective.

But you know.

It's kind of a daily battle on the parts front about trying to chips and boards that those chips go into.

It's just it's the big unknown for this year for US this is probably for a bunch of them.

Yes, So would you say like in the quarter in the books here, but it was closer to kind of 50 50 in terms of the cost impact to the company.

When you say 50, 50 of what oxide between kind of fish transient costs and price increases from the source.

Well I'm going to transfer you answer the price increases could be transient as well I mean, there is there.

There's a couple of things going on out there sort of underlying real inflation, which tends not to go away and then there you know the fact that youre trying to buy the last hundred ships that exist in the world of a particular price and suddenly you.

Quoted 10 X of what it what it used to be a year ago. So.

Well, that's a product cost I wouldn't necessarily view that as permanent because at some point, we think supply will catch up or.

Calpers will stop forwarding and those things are going to go back to some kind of normal maybe a little bit higher than they were before but not only the 10 acts of what they were before.

Yeah.

Got it.

Alright, and then.

Shifting gears, maybe kind of can.

Where you are in the process of evaluating.

Product divestitures, you still the beginning of that process or kind of entering the middle of that process.

Right now the radio business was a good business, a very solid business and one that was most noncore as far as our remaining businesses.

No particular business to Standalone, such exactly we're actually focused on but we may look at different product lines of services within our product line.

Got it helpful. Thanks.

Having no further questions.

I would like to turn the conference thanks to our speakers for any additional or closing remarks.

No I think that's all operator, thank you I appreciate everyone's participation on the call and.

We're going to keep working hard to drive towards being profitable.

Great. Thanks, very much everyone have a good day.

This concludes today's call. Thank you for your participation you may now disconnect.

Q1 2022 KVH Industries Inc Earnings Call

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