Q2 2022 KVH Industries Inc Earnings Call
Okay.
Hello, My name is Lisa and I will be your conference operator today.
At this time I would like to welcome everyone to the Kb H Industries reports second quarter 2022 results conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question Press Star one again.
Thank you I would now like to turn the call over to Mr. Roger Cable. Please go ahead Sir.
Thank you Lisa good afternoon, everyone and thank you for joining us today for KPH Industries' second quarter results, which are included in the earnings release, we published within the past hour.
Joining me on the call are the company's Chief Executive Officer, Brent Berlin, and Chief Technology Officer, Bob Taylor before.
Before we dive in a couple of quick announcements first if you will.
A copy of the earnings release it is available on our website at Www Dot J V H Dot com.
Investors page, which can be found by clicking on about a V. H then investors and then scroll down to the recent news section.
Also available from our Investor Relations team, if you would like to listen to a recording of today's call. It will be available on our website.
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 risks assumptions and uncertainties that may cause our actual results to differ materially from those expressed in these statements. We encourage you to review the cautionary statements made in our earnings release and in our SEC filings specifically those.
Under the heading risk factors in our 2021 Form 10-K, which was filed with the SEC on March 11th.
The company's SEC filings are also available on the company's website in the investors section under financial information then under SEC filings, we undertake no obligation to update or revise any forward looking statements. We will also discuss certain non-GAAP financial measures and youll find definitions of these <unk>.
<unk> in our earnings release as well as reconciliations of these non-GAAP measures to comparable GAAP measures.
Now to walk you through the highlights of our second quarter as well as an important recent development I will turn the call over to Brent.
Thank you Roger and good evening everyone.
I'm pleased to share positive results regarding our second quarter and plans for the future.
<unk> was a transition period for us the first full quarter since our restructuring in March.
We finalized our leadership and operational reorganization Ricky.
<unk> recorded the remaining material expenses from the restructuring.
<unk> launched a wide array of new initiatives that reflect our commitment to the future by strengthening our core business through subscriber growth and innovative new products, improving efficiencies for our employees and generating increased value for our shareholders.
Significant progress in many areas.
Stable and engaged workforce with limited turnover.
And we've introduced new connectivity products that offer unique solutions to Mariners.
Financially our.
Our revenue was $41 $8 million down from $43 $4 million in Q2 last year supply chain challenges led directly to the year over year decline.
We recorded a loss of $1 4 million through the second quarter. This is a significant improvement over last year. When we recorded a loss of $5 7 million.
Our adjusted EBITDA was $4 1 million the highest in five years based on these results and progress in our mobile connectivity business we entered the.
In the third quarter with a robust foundation.
A sustained and growing company.
Earlier today, we announced the sale of our inertial sensor and tactical navigation business to EMCORE. This is an all cash deal for $55 million includes the Tinley Park factory and all nurses navigation intellectual property and.
In addition, employers offered employment to all current inertial navigation employees.
We are very proud of our innovations in progress after purchasing this business in 1997, However, mobile connectivity has always been our primary business and key driver for revenue growth.
Our commitment and investment in this market is our top priority.
Our new technology, and expanding demand for mobile connectivity presents the opportunity for growth and scale.
We will carefully evaluate the best use of the proceeds from the sale to support that growth.
Now I'd like to share some of the reasons. We're so excited about the future of our mobile connectivity business.
Core revenue and connectivity was $34 6 million up from $33 $8 million year over year.
June was our highest ever.
For airtime revenue.
And we also continue to benefit from the shutdown of our legacy <unk> network and the migration of some remaining customers to our HTS network.
Network operating expenses were down.
And our airtime revenue increased to $25 8 million.
And having associated outstanding gross margin of 43%.
Great, losing some subscribers are base grew.
1% versus two two last year.
We'd like to offer some additional context regarding.
Our number of subscribers.
At the end of Q2 last year, we supported roughly 6300 airtime subscribers 1600 of those subscribers who are on our legacy Arclight network 4700 subscribers relied upon our more affordable higher margin HTS network.
By the end of the second quarter. This year, we expanded our HTS network subscriber base by roughly 40% due to our successful migration efforts. We ended the second quarter with more than 6600, <unk> HTS network subscribers. These.
These numbers are a key metric and we will continue we will continue to report our airtime revenue and subscriber population on a quarterly basis.
Elsewhere in our mobile connectivity business.
PVH elite unlimited streaming service for Super yachts remains strong and we're thriving in the Caribbean Mediterranean and Eastern North America and.
Additionally, agile plans continue to be the critical engine or a commercial maritime growth.
In early July we introduced our track net family of antennas and the <unk> hybrid networks.
These remarkable solutions continue our trend of disrupting the maritime market. These new solutions set the standard for integration convenience speed and affordability, where commercial and leisure boaters alike, PVH, one and attract net track next terminals offer a solution that we believe is unique.
In the industry.
The new hybrid network and product line that offers global VSAT shareholder service and shore based Wi Fi integrated into a single antenna.
<unk> design helps maximize speeds and minimized costs at the dock on your way in offshore.
Each track net terminal is far more efficient due to our modem and dome design and solid dating three communication devices into one dome.
Other than requiring the purchase installation and networking of three separate communication devices is a game changer in the market.
Tracking that also requires only a single cable for installation and use as much as 50% later and competing terminals.
Also rolled out new airtime plans that offer more data per dollar for our customers and higher margins for us.
We extended the popular high speed unlimited use airtime model introduced with our Tracfone 32, all of our new track net terminals, including the 37 centimeter track net each 30, the 60 centimeter, aged 60, and one meter <unk> 90.
Our new one meter track net 890 <unk>.
<unk> tremendous efficiency gains reflected an even more affordable airtime plans.
First new track net systems shipped in mid July and we're about to kick off an aggressive marketing campaign with this with the start of the commercial and leisure boot trade show season.
On the satellite side of the on the satellite television side of our business. We continue to see strong demand and unit shipments. However, the mixing in the second quarter fewer smaller smaller systems.
The supply chain challenges slowing the production for our higher value TV systems.
As a result, we entered we entered the third quarter with a backlog of $3 5 million for our mobile TV products.
Our second quarter results demonstrated that we're on the right path.
We renewed our strategic focus taken decisive steps to reset or operations and are introducing a new innovative communication products that our customers expect from PVH.
We anticipate that the global supply change in economic environment will continue to be challenging, but we continue to address these challenges on a daily basis to minimize impact we are committed to growth innovation and delivering outstanding products and services to our customers and long term value to our shareholders.
That I will turn the call over to Roger for the financial details.
Brent <unk>.
As Brent mentioned earlier, our second quarter revenue came in at $41 8 million compared to $43 4 million recorded in the second quarter of 2021.
Our consolidated gross profit margin was 37% for the second quarter as compared with 35% in the second quarter of last year revenue from our mobile connectivity segment increased <unk> 8 million with a gross margin of 41% up seven percentage points revenue from our inertial navigation segment.
Creased $2 $3 million year over year with gross margin decreasing 24 percentage points to 16%.
Service revenue for the second quarter was $28 3 million, an increase of $2 2 million or 8% from $26 1 million in the second quarter of last year by segment service revenue in mobile connectivity increased by $2 2 million or 9%. This.
This increase was primarily due to a $2 7 million increase in mini VSAT broadband airtime revenue as Brent noted airtime revenue grew to approximately $25 8 million or approximately 12% over the second quarter of last year. Despite a 1% decrease in active subscribers as a result.
The shutdown of our legacy network on December 31, 2021.
Total subscribers, which includes those who are temporarily suspended was up 1% as a reminder, suspended subscribers are typically recreational customers who aren't using their boats during the colder months, while we refer to them as suspended they all still have access to voice services for which they pay by the minute.
In addition, agile customers, who suspend also pay a modest monthly fee for the equipment that caveat, which owns that is on their vessels.
Airtime gross margin was 43%, which is up eight percentage points from a year ago. This increase is due to a combination of factors.
Primarily driven by the shutdown of the legacy network.
Product revenue for the second quarter was $13 6 million, a decrease of $3 7 million or 21% from $17 3 million in the second quarter of the prior year.
By segment mobile connectivity decreased by $1 4 million or 18%, primarily due to a decrease in VSAT product sales. This decline was partially due to the large number of units shipped last year the customers migrating from our legacy network to our new HTS network.
However, we also saw some softening in demand compared to the very high shipments to new customers that we saw last year.
Inertial navigation product revenue decreased approximately $2 3 million or 25%. This was driven by $1 1 million drop in fog sales, which was entirely due to supply chain constraints as well as a $1 $2 million decline in Tac Knapp and other products.
Operating expenses for the quarter were $17 6 million down $3 5 million from the second quarter of last year. However, both this year and last we had a significant amount of nonrecurring expenses in the second quarter.
Last year, we had a $2 7 million increase in legal costs related to our proxy contest and this year. We had a total of $1 1 million related to a reduction in force and the searches for a new CEO and board members as such even on a recurring basis. This quarter was $1 9 million less than the second quarter of last year.
At the operating income level the changes in revenue margins and operating expenses resulted in a loss from operations of $2 3 million, which was an improvement of $3 5 million compared with a $5 $8 million loss recorded in the second quarter of 2021.
This loss includes the $1 1 million in nonrecurring Opex I, just mentioned as well as a $1 6 million reserve for inventory as such if you adjust for all of those recurring items or nonrecurring items, you'll find that we would've had a profitable quarter.
And that was without any large tack naff sales looking at our individual segments. Our mobile connectivity segment generated an operating profit of $4 5 million compared with an operating profit of zero point $6 million last year, while our inertial navigation segment had an operating loss of $1 3 million for the quarter.
Which included the $1 6 million inventory reserve versus an operating profit of <unk> $6 million last year, our unallocated loss was $5 6 million compared to last years seven 1 million.
For the second quarter, our net loss was $1 4 million compared with a net loss of $5 7 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 non operating fees foreign exchange transaction gains and losses employee termination costs, the CEO separation related tax effects and changes in our valuation allowance and other.
Tax adjustments after those adjustments, we had net income of <unk> 8 million compared with a net loss of <unk> 8 million last year.
For the second quarter with a net loss of eight <unk> per share compared with a net loss of 31 per share in the same period last year non-GAAP EPS for the second quarter was <unk> <unk> per share compared to a non-GAAP EPS loss of <unk> <unk> per share last year.
Our non-GAAP adjusted EBITDA for the quarter was a positive $4 1 million compared with a positive $1 5 million in the second 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.
Net cash provided by operations was zero point $3 million compared to 0.2 million used in operations in the second quarter of last year capital expenditures for the quarter were $3 6 million cash proceeds from the sale of the radio business was $2 4 million and cash provided by financing activities was 84000.
Resulting in an ending cash balance of $16 million looking ahead and with our focus on mobile connectivity, we expect mobile connectivity revenue growth between 6% and 9% on a pro forma adjusted basis adjusted for the sale of the radio business and adjusted EBITDA for the company to be between $11 million and $15 million assuming that.
Supply chain issues don't worsen.
Even after the sale of the inertial navigation business, we are still expecting a significantly reduced operating loss for the second half of the year and continued progress towards profitability with the upper range of our expectation being a breakeven scenario.
This concludes our prepared remarks, I will now turn the call over to the operator to open the line for the Q&A portion of the call.
Lisa.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Ric Prentiss with Raymond James.
Good afternoon, everyone.
Hi.
You guys have been busy.
Yes, you can say that again.
Hey.
Thank you a couple of things I think I've got some at the very end there if we think about selling.
In.
Business.
Sounds like not much EBITDA effect, if I remember right previous 'twenty two guidance was for $11 million to $15 million for the total company and you're still assuming about $11 million to $15 million just with the mobile connectivity and corporate is that the right way to think about it correct now just recall that that for the full year. It does include seven months of <unk>.
Inertial navigation in it.
Okay.
<unk> had some good uptick in the airtime business.
33% profit margins.
Alright is there.
Is there a way to kind of pull apart and say how much in 2021 actual did the inertial business contribute to adjusted EBITDA as a ballpark frame of reference of what that number was.
If you have another question, let me look for that while you're if you got something else and I'll come back to that.
We've got plenty.
The inertial NAV business.
Is that where the autonomous vehicle segment.
Segment was as well so when you say the IP is going over with that is that whole piece of the business then going over to EMCORE, yes, yes, that's correct.
Okay.
And what are you expecting the after tax gain to be under $55 million sale or is there some way to get to sort of what the basis was to understand what's your your net proceeds would be on the sale.
I think we need to do a bit of calculations, but we do have a fair amount of it.
Credits roll forward as far as trying to get at the tax implications given that the net operating loss carryforwards that we have there is research credits that we have and there is also a foreign tax credits that we have.
So we think that at the federal level.
We haven't gone through it we haven't filed yet, but we think at the federal level the tax impact is going to be very minimal.
Okay.
And then there'll be some state.
It could be something that the state, but we're not expecting that to be huge either.
Getting back to your question.
As we look at sort of gross margin for inertial NAV first half was around $3 7 million EBIT.
EBITDA.
If you take out the expenses that other expenses that are directly related I'm not adding back depreciation.
<unk>, which I don't think there is a huge item for inertial NAV that is probably in the three to four range.
Okay.
It's helpful.
<unk>.
When you think about.
Use of those proceeds which were down pretty.
Pretty significantly or at least closer to 55.
You mentioned strategic alternatives as well as possibility of return to shareholders. What are you thinking that might be interesting from a strategic alternative standpoint, because you've got I think you said $16 million cash on the balance sheet, maybe you're bringing 50, plus so youre going to have closer to almost $70 million of cash on the balance sheet, which is maybe $3 50.
A share, but how should we think about what you might want to be looking at to use that cash for.
Yes, right now we're going through an assessment with our board of directors and advisors and we are determining what we think will be the best path forward, we're not in a position to provide more details at this time.
Okay understand that.
Something you think that youll be able to lay out is that a is that a one quarter processes at a one year process I mean, how should we think about timeframe is when.
When you guys will figure out what you want to do with it versus when you are able to communicate to the street, what you'd like to be able to do with it.
I would think that.
I don't know if its a one quarter process will be less than a year. That's for sure so probably more in the.
Towards the fourth quarter.
Great I'll come back in if I have some more questions I'll yield the floor now.
Okay.
Your next question comes from the line of Ryan <unk> with Needham <unk> Company.
Yes, thanks for the questions.
The navigation.
Business sale, how should we think about the impact on Opex there.
Roger.
I think that.
Inertial navigation.
From a back office standpoint sort of not as complicated as the mobile connectivity business.
There are a number of people who are transitioning over with the sale. They are primarily on the sales and the R&D side.
There is someone from finance and someone in marketing is going over.
But the majority of the folks are here.
Our staying who are in the sort of the G&A function.
For the majority.
And so.
I think that's something that.
I don't have any guidance that I can sort of provide us specifically on that but I think <unk> comment our my comments around what our EBITDA targets are we're confident that we're still have a good year.
Okay great.
And on the kind of how should we think about the subscriber trends you talked about 6% to 9% growth on.
On.
Airtime revenue.
Is that mostly foot are there any geographic kind of areas youre looking at growth there are different kind of strategic initiatives as you double down in this area that you can expand your reach.
As far as growth, we're pretty evenly distributed from the commercial maritime perspective between the EMEA and Americas.
In Asia Pacific.
<unk>, probably a little bit more heavily loaded in Asia Pac.
And then we also have a pretty robust leisure marine business. We're.
We're seeing good uptick in <unk> with the HTS network and hence why we saw the year over year revenue growth without the true subscriber growth, we know that where we anticipate seeing more of a synced up between subscriber growth and airtime growth now that we're all we have all of our subscribers on one network.
Got it alright, thanks for your questions.
Your next question comes from the line of Taylor <unk> with Quilty analytics.
Hi, guys two.
Two questions from me first the supply chain has come up on I think the past few calls.
I'm wondering if there are any steps that are being take care of them, perhaps could be taken to kind of get.
Our handle on her control those costs I realize it probably out of your control, but is there anything that you guys are trying to do to kind of tame those costs or issues.
Well, we do a variety of things I mean, we one of the things. We do is we obviously you know we look at redesigning around some of these things so to the extent that products.
Unavailable.
We look at what our alternatives are for.
Particularly and this is kind of a chip related there are certain chips that become unavailable, but there are other chips that will work, but we have to sort of redesign.
We build the software to make that work. So we look at those things.
We're kind of doing probably a lot of things same thing a lot of people are doing we're looking at alternate sources of supply.
But its still its just tough and I think you're probably hearing this from a lot of companies were in a similar boat and also we're not we're not a huge buyer for from a lot of your suppliers. So that makes it it makes it tough to sort of when things are tight in these kind of situations getting any kind of preferential treatment, it's tough when youre not you.
You are not.
Fortune 500, Fortune 50 company.
Okay.
Yes, I understand and then just a question on <unk>.
Future of your satellite network.
<unk> subscribers moving over at say the HTS network.
Are there plans to add additional capacity to that anytime in the near term or any other additional infrastructure.
And then especially.
Given the Rollouts of <unk>.
And GSO constellations, and Leo and MEO.
How are you thinking about having.
Multi orbit capacity as part of your network.
Well first and foremost we add capacity on a regular basis as it's required.
So that's something that we have a very good footprint and robust footprint and we just go deeper as we need it as far as number of subscribers anticipating any particular area.
As demonstrated through the.
Through the launch of our HTS network, we're somewhat network agnostic to a degree although it takes some effort to change networks that we've gone from our legacy networks, which is on Arclight and now we are operating our HTS network.
And we're having good success there, we're keeping our eyes wide open in regard to the in GSO.
Havent Havent made any definitive plans of what our next move is what we're we're assessing with different opportunities are in the market and as we go forward into the future.
We will be sure to be on the forefront of any changes in the market in order to make in order to remain competitive.
Okay, and then just one more question actually if I can add on there's been a fair deal of consolidation and rumor of consolidation amongst the big satellite operators.
Then inmarsat Eutelsat, one web and possibly Intelsat and Ses.
What if any impact does this consolidation have or what does it mean for PVH.
Right now we're paying attention to everything that's going on in the market.
As demonstrated with our most recent results.
We're remaining very competitive, but we need to say we need to figure out what's the best path forward is and how to maximize shareholder value. So right now we feel that some of the moves we made in particular of divesting inertial navigation business and looking for strategic alternatives on a go forward basis, which as I said.
Rick We can't go into a lot of details on is we are going through an assessment process.
Okay.
Sure.
Okay. Those are all my questions. Thank you very much.
Okay. Your next question comes from the line of Ric Prentiss with Raymond James.
Hey fairly come back in with a couple of extra is.
I think Roger you mentioned mobile connectivity revenue growth, 6% to 9% pro forma for <unk>.
Adjusting for the radio.
So was that about zero point $6 million in revenue a quarter, then we should kind of take out for <unk> and I think the sale was was at the very beginning April sort of radio radio radio was about $2.3 million a year in revenue.
Yes, so I didn't hear his number but roughly 600000 a quarter.
Yes.
Yeah, Okay. Good and then I appreciate the metrics on subscribers sounds like Youre going to continue to report that.
No good deed goes unpunished.
Or are you going to be able to help us understand how many of those subscribers are agile customers. So we can kind of monitor whats going on in that front.
No I don't have the number readily available.
But.
Okay.
It is a first okay.
As a percentage I mean agile as a percentage is.
Total subscribers at the end of Q2 was.
A bit over 50%.
Okay and last year that similar kind of percent number.
As of a year ago. It was it was less than it was less than 50%.
Okay.
And following on the previous question, how should we think about R&D spending because obviously.
The alert side had a lot of R&D, but there is some obviously that needs to continue probably on mobile connectivity as you develop the new products and new services, how should we think about that kind of correct run rate that you want to spend whether it's a dollar value or revenue or percent of revenue value.
The remaining business.
Well I think we want to look at what are the projects that are going to create value for shareholders and I think as we look forward one of the questions that came up was.
And and GSO strategy, and that's something we've got to think about.
And what's the right way so in terms of.
<unk>.
What we.
How big the R&D is going to be what we need to do something we need to sort of understand what the future. What we think the future holds but as far as a run rate perspective, the R&D that we report.
And we break that out separately.
And that was part of our restructuring that we pulled it down a bit we wouldnt anticipate pulling it down further what we would anticipate keeping that in place.
But with the inertial navigation, we do have a bit over an hour of our engineering team, which went with that business. When we report mobile connectivity individually youll see R&D number.
I don't know if we have that readily available.
And this is all happening so fast.
A certain number of employees.
No that makes sense and obviously the deal closed signed and closed today.
Following on the question then on Ngos what services are your customers asking for that you think require low latency biocide call last night, there was a debate on how much low latency services actually needed do you need to own the network for it but what kind of services are you anticipating that needs low.
Latency that your customers might want just so we can kind of keep our ears open.
Yes.
Your your two way video chatting right and that's really about.
The biggest thing that I'm hearing a lot of people are getting teams for example, zoom on board vessels.
Ladies he does have a bit of an impact on that but still not that much what are we talking 700 milliseconds such blue chip.
Okay.
Absolutely.
The average person would really.
It makes it a display.
I think a lot with GSO comes down to cost per bit delivered right and if they can do it at a cheaper rate and higher speeds.
<unk> side, it's more of the focus from our perspective.
And final one for me you guys have been in the satellite space a long time.
What do you attribute finally, the log jam, maybe clearing and getting several mergers consolidations combinations together what do you think is driving that and how do you see that affecting just the industry at large rather than just caveat H.
That's a good question I can almost hear that you've studied the industry pretty closely yourself for XO, where do you think the answer is.
[laughter] will.
We will take that one offline, but I think clearly it depends which transaction you look at some people have cash cow. So people need cash. Some people are trying to figure out how to pivot their business to get to growth.
And some people will like we see with kind of the pay TV business. It's a declining business. How do you how do you manage that how do you take out costs and how do you get positioned for growth is probably a lot of what people are trying to figure out yeah. I think if you look at the pay TV business you look at the traditional FSS operators and their media businesses.
Come down quite a bit SCS, just reported a 7% decline in your media business and a 2% increase in your network business, which obviously that means a contraction in revenue and I think that might be something that's pushing them. If they have a decreasing revenue.
Year over year basis, they might need to create.
Create some more synergies and maybe thats, what's stimulating some of the merger talks.
With that I'll, just say finally good.
You can see the logjam finally happening where people realize that.
It's a high cost business you got to make sure have earn your returns.
Great.
Alright I appreciate it.
Alright. Thanks.
And at this time there are no further questions.
Okay.
Okay. Thank you operator, thank you all.
Have a good evening.
Okay.
This concludes today's conference you may now disconnect.
Okay.
[music].
Yeah.
[music].
Yes.
[music].
Yeah.
[music].
Yes.
[music].