Q4 2022 KVH Industries Inc Earnings Call

Speaker 2: And.

Speaker 3: Hello and welcome to the CODA4 year 2022 earnings conference call. My name is Caroline and I'll be your coordinator for today's event. Please note this call is being recorded and for the duration of the call your lines will be on listen only mode.

Speaker 3: However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your questions. If you require assistance at any point, please press star 0 and you will be connected to an operator. I will now hand over the call to your host, Mr Roger Cubel, to begin today's conference. Thank you.

Speaker 4: Thank you, Caroline. Good morning, everyone, and thank you for joining us today for KVH Industries' fourth quarter results, which are included in the earnings release we published this morning. Joining me on the call are the company's Chief Executive Officer, Brent Bruin, and Chief Operating Officer, Bob Vailog. Before we dive in, a couple of quick announcements.

Speaker 4: First, if you would like a copy of the earnings release, it is available on our website and from our Investor Relations team.

Speaker 4: If you would 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 kvh.com.

Speaker 4: Further, this conference call will contain certain forward-looking statements that are subject to numerous assumptions and uncertainties that may cause our actual results to differ materially from those expressed in these statements.

Speaker 4: We undertake no obligation to update or revise any of these statements. We will also discuss adjusted EBITDA, a non-GAAP financial measure. You'll find a definition of this measure in our press release as well as a reconciliation to comparable GAAP numbers. We encourage you to review the cautionary statements made in our SEC filings and our

Speaker 4: specifically those under the heading risk factors in our third quarter Form 10Q filed on December 6, 2022 and our 2022 Form 10K, 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. For more information, visit www.fema.gov

Speaker 4: Now to walk you through the highlights of our fourth quarter, I'll turn the call over to Brent.

Speaker 4: Thank you, Roger. Good morning, everyone.

Speaker 4: I've got to tell you, I'm tremendously excited to be with you today and to discuss our remarkable turnaround and our plans going forward. In March of 2022, we set out to reshape VH. To do so, we knew we needed to pursue several goals. First, to bring our operating expenses in line with revenue.

Speaker 4: Second, to focus the company on their core businesses.

Speaker 4: Three, grow her subscriber base and airtime revenue. And fourth, to put her company on the road to sustained and increasing profitability.

Speaker 4: I'm extremely pleased to inform you that we have delivered on every one of those goals. In the fourth quarter, we achieved our first operating profit in more than six years. We divested our NURSAL navigation and radio businesses earlier this year.

Speaker 4: We focus all of our efforts on mobile connectivity and value-added services, including a successful launch of our unique hybrid connectivity solution and three new services that meet vital customer needs and enhance their experience. Our fourth quarter revenue was $36 million, a 2% increase in our revenue.

Speaker 4: mobile connectivity and value-added services, including the successful launch of our unique hybrid connectivity solution and three new services that meet vital customer needs and enhance their experience. Our fourth quarter revenue was $36 million, a 2% increase year over year.

Speaker 4: And our operating income for the quarter was $600,000 versus an operating loss of $3.9 million in the fourth quarter of 2021. As I mentioned a few moments ago, that's our first operating profit in more than six years. Additionally, our adjusted EBITDA was $4.3 million.

Speaker 4: versus $700,000 in the fourth quarter of 2021. Our airtime revenue for the quarter increased 12% to $26.8 million with an associated gross profit margin of 43.5%. We also continue to add rates and royalties for next quarter.

Speaker 4: Air Type subscribers, ending 2022 with roughly 6,900 users on our network.

Speaker 4: We continued our expansion into India, an exciting new market for us. We're currently shipping our legacy TracFone V7 HDS systems into India, but will shift to our new TracNet H-Series when we receive regulatory approvals.

Speaker 4: We're also thrilled by the recent recognition of TrackNet's innovative design, superior performance and critical user benefits. We recently received the Safety4C Communications Award, while the editors of Cruising World, Yachting, Boating and Saltwater Fishermen.

Speaker 4: named TrackNet the Editor's Choice in their Best Marine Electronics Award. We appreciate this recognition from industry leaders and the positive feedback and demand from our channel partners and customers.

Speaker 4: We're launching a significant new initiative that will enable us to convert VSAT antennas and is made by companies like Intellion and Cobble to work on our VSAT network.

Speaker 4: We will now be able to do this with no hardware changes, making conversions quick, convenient, and easy. We're currently in the process of transitioning approximately 15 new superyacht customers from a network integrator. These new vessels, all of which use third-party antennas, can potentially add $1.5 million in annual airtime revenue without any hardware changes.

Speaker 4: Additionally, we are receiving requests from a number of our airtime service providers to begin converting terminals onboard several commercial vessels. We look forward to expanding this program in the coming months.

Speaker 4: In an industry with a growing list of competitors, airtime services can't be our sole driver for growth. We offer far more than a simple data pipe. Our value-added services are a vital differentiator in the market as we provide full feature, end-to-end solutions. These supply- joyful solutions will be part of our active innovation initiative. Please Arshad. Fear not.

Speaker 4: We recently launched three new services. Our enterprise-grade managed firewall for enhanced cybersecurity and network management, all powered by industry-leading Fortinet.

Speaker 4: our new cloud email solution which offers flexibility and security for fleets and crew, and expanded crew internet services for our TrackNet H-series terminals. This is the start of our strategic focus on value-added services.

Speaker 4: We plan to add new services through in-house development and partnerships.

Speaker 4: These additions are an opportunity to upsell our existing customers and increase the appeal for new sales. Doing so will enable us to retain and grow our subscriber base by making KVH airtime services even more integral to the operations and success of our customers. We recognize, however, that our actions are not taking place in a vacuum.

Speaker 4: but they also face challenges in regards to performance and coverage.

Speaker 4: and the fact that they are data pipes with none of the vital features and services that seafarers use every day. Those challenges can be solved by a hybrid solution using our TrackNet terminals. TrackNet offers a fully integrated hybrid hub designed for companion systems. The combination of our terminals with integrated VSAT, 5G, Wi-Fi, together with new LEO and LEO services, can be solved by using our TrackNet terminals.

Speaker 4: will enable us to offer robust, affordable, multi-channel, multi-orbit hybrid solutions.

Speaker 4: That's why we are now beginning to resell Starlink high performance marine terminals as a companion to our TrackNet and TrackPhone systems.

Speaker 4: We're only selling these terminals in tandem with new TrackNet sales or for existing TrackNet and TrackPhone systems.

Speaker 4: Subscribers must have an active KVH-VSAT data plan to access our advanced intelligent hybrid switching, while Starlink service activation will be handled directly by Starlink.

Speaker 4: We anticipate adding new Leo and Mio partners as these services launch with a hybrid approach will deliver benefits above and beyond what NGSO services offer on their own. These benefits include committed information rates for guaranteed data speeds, service level agreements for reliable performance.

Speaker 4: sophisticated end-user network management tools, multiple channels and satellites to overcome blockage and signal loss, and our expanding suite of value-added services.

Speaker 4: We believe that the future of onboard connectivity will not be a single solution or service. The future is multichannel and multi-orbit, and we are well positioned to deliver that.

Speaker 4: increase our subscriber base, and build long-term value for our shareholders.

Speaker 4: Among these are to expand our suite of value-added services, to gain scale through organic growth, and to pursue airtime subscriber growth through new hardware agnostic approaches.

Speaker 4: All of these support our overarching vision of obtaining sustained revenue growth and consistent profitability through innovation, a commitment to superior service, and a focus on strategic and wise investments.

Speaker 4: So to wrap it up, 2022 was a challenging year for us, but one in which we made exciting, future-focused progress. We've achieved tremendous success in turning the company around financially, launching new products and services that will drive subscriber and revenue growth, and putting KVH on the road to sustained profitability.

Speaker 4: I'm immensely proud of our global team, their efforts, and their commitment that has delivered on the promises we made to our investors last March. I'm excited about our prospects for the future.

Speaker 4: And now I'll turn the call over to Roger for the financial details.

Speaker 4: Thanks, Brent. First, I would like to note that unless specifically stated otherwise, my comments relate to our continuing operations, which exclude the results of our inertial navigation business, which was sold on August 9th of last year.

Speaker 4: With that, as Brent mentioned earlier, our fourth quarter revenue came in at 36.0 million, increasing 0.7 million from the 35.3 million recorded in the fourth quarter of 2021. Our gross profit margin was 35% for the fourth quarter as compared with 33% in the fourth quarter of the prior year.

Speaker 4: Service revenue for the fourth quarter was $28.8 million, an increase of $1.8 million, or 7% from $27.0 million in the fourth quarter of 2021.

Speaker 4: This increase was primarily due to a $3.0 million increase in Mini-Vsat broadband airtime revenue, primarily offset by a $1.2 million decrease in our content service sales, which was largely due to the sale of our radio business in April of last year.

Speaker 4: As Brent noted, airtime revenue grew to $26.8 million or approximately 12% over the fourth quarter of 2021, and total subscribers reached almost $6,900. As a reminder, total subscribers include those who have temporarily suspended their primary airtime service but continue to pay minimum fees.

Speaker 4: Airtime gross revenue gross margin was 43.5%, which is up nine percentage points from the prior year. This increase is due to a combination of factors, primarily the growth in our subscriber base and the shutdown of our legacy network at the end of 2021. We are very pleased with these results. However, as I mentioned on our last call, we are not going to be able to get to the end of 2021.

Speaker 4: we expect that going forward our target for airtime margins will be in the high 30s.

Speaker 4: Product revenue for the fourth quarter was $7.2 million, a decrease of $1.1 million or 13% from the $8.2 million in the fourth quarter of the prior year. This decrease in product sales was due to a $1.6 million decrease in VSAT product sales offset by a $0.5 million increase in TV receive-only product sales.

Speaker 4: The decline in VSAT sales was primarily due to the high level of unit sales in the prior year to customers migrating to our HTS network. We sold almost 300 units to these customers in Q4 of 2021.

Speaker 4: Operating expenses for the quarter were 12 million, down 3.6 million or 23 percent from the fourth quarter of 2021. While the 12 million for Q4 would seem to imply a run rate of 48 million exiting the year, there were a few unusual favorable items such that a normalized run rate would be more like 13 million.

Speaker 4: I should also note that year-over-year comparisons are difficult as the sale of the inertial navigation business required us to make estimates on the allocation of prior expenses that were shared between the two businesses. Even with that taken into account, the actions we took in March and September have led to a very significant savings and have reset OPEX to an appropriate level. At the operating income level, these changes in revenue, margins, and operating expenses resulted in a profit from operations of approximately $6.4 million.

Speaker 4: million compared to prior year's net loss of $2.7 million.

Speaker 4: EPS for the fourth quarter was a net profit of 3 cents per share, compared with a net loss of 15 cents per share in 2021. You will note that we are no longer reporting non-GAAP income or EPS, as we have come to believe that it is a less reliable metric given all the subjective assumptions required to measure it.

Speaker 4: Our adjusted EBITDA for the quarter was a positive 4.3 million compared with a positive 0.7 million in the fourth quarter of 2021.

Speaker 4: For a complete reconciliation of adjusted EBITDA, please refer to the earnings release that was published earlier this morning.

Speaker 4: Net cash provided by operations was $10.4 million. However, I need to caveat that by adding that changes in working capital provided $5 to $7 million of that due to an unusual increase in accounts payable at year end. About the change in working capitalgame receiving

Speaker 4: cash from ops would have still been over $4.6 million. Capital expenditures for the quarter were $3.4 million, so even without the benefit from working capital, our operational cash flow, including CapEx, was positive by over $1 million.

Speaker 4: Cash used in investing activities other than CapEx was $0.5 million and cash provided by financing activities was $0.1 million resulting in an ending cash balance of approximately $76 million.

Speaker 4: We expect that to come down in the first quarter as our accounts payable returns to a normal level.

Speaker 4: Before wrapping up 2022, I'd like to take a moment to reflect on what has been accomplished. In 2021, the company had an operating loss of $20 million, which followed a $23 million loss the prior year. When we announced the restructuring and new strategic direction in March of 2022, we set a goal of breaking even in the second half of the year for operating profit, assuming that supply chain problems didn't persist.

Speaker 4: Unfortunately, they did. However, despite that, we only came up $400,000 short and returned an operating profit in Q4 without any big windfall.

Speaker 4: Well, as I said earlier, we can't be content with just breaking even. I hope you agree that this was a pretty amazing turnaround and it was all due to the hard work by a dedicated leadership team and amazing employees.

Speaker 4: 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. Caroline, please proceed with Q&A.

Speaker 3: As a reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We will take the first question from line Chris. The line is open now. Please go ahead. The line is open now. Please signal by pressing star 1 on your telephone keypad.

Speaker 5: Thank you. Congratulations guys and impressive EBITDA guidance for the year going ahead. Just you know maybe Roger if you can can talk through obviously we know the revenue assumptions but are there additional cost cutting actions or have you just found that the you know the run rate on the OpEx has been

Speaker 4: response to a question, I said we were expecting like, you know, five to six million. It's actually turned out to be more like, you know, up closer to 10 million. So that's been good. We don't see any sort of restructuring going forward. Obviously, we reserve the right to make changes in the business just as any normal business would.

Speaker 4: with respect to cost, but in terms of structuring the business, we feel like we're now in a very good position. We did some work, some changes in September after we sold the Nersil Nav, but now we feel like we're in a good position. We've got the right team in place, and we're going to move forward with the initiatives that Brent talked about. with regard to cost and the other departments that really have to actual fund that.

Speaker 5: Gotcha. And so maybe just shifting gears over to a little bit more high level and excuse me, I'm at the satellite show now. And, you know, there's probably the biggest one of the bigger topics here has been Starlink and their enterprise rollout.

Speaker 5: And obviously they have a very aggressive model that they're working with partners. Not a lot of ways for them to give profitability to channel. As you look out and guide the expectations for next year, does that startling to the degree we see broader adoption impact your overall

Speaker 4: We're being a bit conservative as far as airtime margins, as Roger alluded to. The main reason for the margin conservativeness is in anticipation that we might have a bit of erosion, but we're hopeful that we can avoid it.

Speaker 5: Gotcha. So the other big trend, or I think the largest announcement here was Amazon coming out with their new antennas, electronically steel flat panel antennas, and they're implying costs in hundreds of dollars, whereas typically with VSAT terminals, we're talking

Speaker 5: you know, five figures, right, to purchase those, you know, where do you see the technology evolution on the antenna side going, you know, in the future? And it's both, you know, in terms of pricing and type of units used, but in the maritime market, you know, where you guys

Speaker 5: live and work every day, can a flat panel antenna actually deal with the maritime environment given ships move around a lot and there's a lot of roll off with those flat panel antennas or is it they're simply cheap enough that you're going to blanket six or seven of these all over the ship so you've always got a look angle.

Speaker 6: correctly.

Speaker 7: summarize the situation. If you have one, you probably have a lot of roll-off. If you have space where you have multiple and you can switch from one to the other, you could probably mitigate that quite a bit. But I'll pass it to Bob to talk about it. The solution we're behind right now is hybrid integration of those panels into our systems.

Speaker 7: part of the reason behind that is you can probably do multiple antennas on a vessel, right, but you're really talking about it a minimum, you know, like five panels to cover your pitch and roll, but it's really not just your pitch and roll, there's limitations in geographic coverage and there's limitations with

Speaker 7: So you're always going to be in a situation where for a commercial or for a high reliability application, you're going to want to make sure you have connectivity. So we're going to continue to integrate those panels into the solutions that we have already, and we're pretty comfortable that's going to provide the best, most reliable solution. Great.

Speaker 5: When you think about the macro environment here with COVID ending in China, shipping is picking up, where are you seeing strength in demand signals on the maritime side? In terms of the leisure market, where you've had a global very?

Speaker 5: of the enterprise where clearly operational performance matters, you know, targeting the, the consumer market might be more successful for something like a Starlink or a Kuiper service.

Speaker 4: Well, I would say, Dan, to answer your last question, I would say that's the market that is most exposed from our perspective to moving over to some of the new services. You had a question to begin with as to where we see new market opportunity. As I alluded to, India is a huge market.

Speaker 4: they've just recently enabled KU band V-set into that market where it's been an L-band market for a number of years and as we move on talking about L-band there's still a tremendous number of L-band terminals out there that are still transitioning to better communication systems.

Speaker 4: Is there another question here? You had, that was a very long sentence. No, it was.

Speaker 5: I'll do them in shorter questions but maybe just the final follow on there on India. You know a question of if there is sufficient capacity because ISRO historically the sole capacity provider I know there's been you know a lot of challenge for operators to actually get KU capacity to provide services in that market.

Speaker 4: Yeah, through our partnership with Inselset, we're completely buttoned up as far as capacity is concerned.

Speaker 5: Gotcha. And is there a prospect for new capacity coming online in the future that you can actually drive some incremental growth in that market?

Speaker 4: There is going to be new capacity coming online, whether it comes from Intel or others. You see how many satellites are under construction and whether it's geo or ngso. I don't think capacity is a concern.

Speaker 4: online whether it comes from Intel or others you see how many satellites are under construction and whether it's geo or NGSO so I don't think capacity is a concern. Okay.

Speaker 3: Great. Thank you for all the feedback. You're welcome. Thanks. Thank you. We will take the next question from Ryan Cones from Needham. The line is open now. Please go ahead.

Speaker 8: Thanks. Real quick clarification, we talked about that 5 to 6 million becoming 10 million. That was the EBIT data from the cost adjustments you made.

Speaker 4: No, it was the savings, the reduction in OPX, which is a little...

Speaker 4: You know that comment I made early on or last year rather early last year was when we still had inertial nav so we've we've had even with the Yeah, so it's off that office run rate. Yeah

Speaker 4: comment I made early on or last year rather early last year was when we still had inertial nav so we've we've had even with the yeah so it's off that office run right pop back yeah thanks and then you know

Speaker 8: Now, if you dumb this down for me a little bit on the kind of value proposition of Starlink versus your VSAT product, is Starlink a lower cost per bit? Does it provide additional coverage? Can you kind of clarify how it fits in the value prop there for the Starlink partnership? What's gotten into Starlink'sold mission? That figures it out? I connected to Patty and Tony and starlink had not yet been Iowa-side....

Oh, yeah, I mean it's a lower cost per bit, a bit lower latency, but you can have dropouts and packet loss and jitters to a combined service with what we already offer, an integrated service with our geo, you know, LTE slash 5G and Wi-Fi combined with that will give you a robust service and...

I talked about some of our other back-end tools, CIR SLAs and everything, that all comes together and it's coming through the VSAT component of our offering. You want to add to that? Yeah, I mean, it's kind of if you follow the concept behind our H-Series products, right? We're delivering VSAT services with those products.

And when available, we're latching onto 5G or LTE services, because that'll give the end user a little better throughput and performance. And when available from there, we'll also bridge over to available Marina Wi-Fis.

really, if you think about this concept, you know, if you have a Starlink available, you know, and it's working in the marina, why not use it? Why not give the user that opportunity? And the real value that we have, or that we add to this, is that we're actively, the way we actively monitor, switch, and make all of this happen seamlessly.

so that no one has to think about it, no one has to worry about switching connections or what's available. We just make sure that the end user's experience is the best it can possibly be.

Got it. So, and that's really helpful. And so, you also handled the Starlink subscription and Starlink billing as part of the whole package? No. No, I will not. As Emma remarked, the activation for the Starlink terminal will be handled between the end user and Starlink directly. Okay. All right.

Got it, that's helpful. And you talked about some development partners as well in terms of bringing new products to market. Can you kind of clarify what sort of applications that's going to what kind of market segments that will help you in? Well, Marine Corps is evaluated services to make the onboard operations more efficient.

We can't really go into a lot of details at this point in time, but we will in due course. I mean, it's probably sufficient to say, you know, we're looking at people, you know, we've mentioned Fortinet a few times, security, firewalling, you know, that's what they do best, and they do it on large-scale commercial networks. So we want to look for appliances, applications, and value.

there's a lot of cases where, you know, some of that stuff just needs to be adapted.

Sure, that's kind of enterprise cattle introduction. That's really helpful. That's all the questions I had. Congrats on the operating profits. Really great work, guys. Thanks so much. Thanks, Ryan. Thanks again.

Thank you. There's no further question at this time.

Okay, all right, well thank you operator, thank you everyone. Given there are no questions, I appreciate everyone joining the call who is on.

Thank you and have a good day.

Thank you and have a good day. Thank you. Thanks everyone.

Thank you for joining today's call. You may now disconnect.

Oh.

Thanks for watching!

Goodbye.

Hello and welcome to the CODA4 year 2022 earnings conference call. My name is Caroline and I'll be your coordinator for today's event.

Please note this call is being recorded and for the duration of the call your lines will be on listen only mode. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your questions. If you require assistance at any point, please press star 0 and you will be connected to an operator. I will now hand over the call to your host, Mr. Roger Cubel, to begin today's conference. Thank you. Thank you, Caroline. Good morning, everyone, and thank you for joining us today for KVH Industries' fourth quarter.

free to submit questions to IR at kvh.com. Further, this conference call will contain certain forward-looking statements that are subject to numerous assumptions and uncertainties that may cause our actual results to differ materially from those expressed in these statements.

We undertake no obligation to update or revise any of these statements. We will also discuss adjusted EBITDA, a non-GAAP financial measure. You'll find a definition of this measure in our press release as well as a reconciliation to comparable GAAP numbers.

We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading risk factors, in our third quarter Form 10Q filed on December 6, 2022 and our 2022 Form 10K, 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 fourth quarter, I'll turn the call over to Brent. Thank you, Roger. Good morning, everyone.

I've got to tell you, I'm tremendously excited to be with you today and to discuss our remarkable turnaround and our plans going forward. In March of 2022, we set out to reshape VH. To do so, we knew we needed to pursue several goals. First, to bring our operating expenses in line with revenue. Second, to focus the company on our core businesses.

Three, grow our subscriber base and airtime revenue. And fourth, to put our company on the road to sustained and increasing profitability.

I'm extremely pleased to inform you that we have delivered on every one of those goals. In the fourth quarter, we achieved our first operating profit in more than six years. We divested our NURSE for Navigation and radio businesses earlier this year. We focused all of our efforts on mobile connectivity and value-added services.

including a successful launch of our unique hybrid connectivity solution and three new services that meet vital customer needs and enhance their experience.

Our fourth quarter revenue was $36 million, a 2% increase in

year over year, and our operating income for the quarter was $600,000 versus an operating loss of $3.9 million in the fourth quarter of 2021. As I mentioned a few moments ago, that's our first operating profit in more than six years. Additionally, our adjusted EBITDA was $4.3 million versus $700,000 in the fourth quarter of 2021. Our airtime revenue for the quarter increased 12%.

but will shift to our new TrackNet H-Series when we receive regulatory approvals.

We're also thrilled by the recent recognition of TrackNet's innovative design, superior performance and critical user benefits. We recently received the Safety4Sea Communications Award while the editors of Cruising World, Yachting, Boating and Saltwater Fishermen named TrackNet the editor's choice in their best marine electronics design.

the editors, excuse me, named TrackNet the Editor's Choice in their Best Marine Electronics Award. We appreciate this recognition from industry leaders and the positive feedback and demand from our channel partners and customers.

We're launching a significant new initiative that will enable us to convert VSAT antennas made by companies like Intellion and Cobble to work on our VSAT network.

We will now be able to do this with no hardware changes, making conversions quick, convenient, and easy. We're currently in the process of transitioning approximately 15 new superyacht customers from a network integrator. These new vessels, all of which use third-party antennas, can potentially add $1.5 million in annual airtime revenue without any hardware changes. Additionally, we are receiving requests from a number of our airtime service providers.

to begin converting terminals onboard several commercial vessels. We look forward to expanding this program in the coming months. In an industry with a growing list of competitors, airtime services can't be our sole driver for growth. We offer far more than a simple data pipe. Our value-added services are a vital differentiator in the market as we provide full feature end-to-end solutions.

We recently launched three new services. Our Enterprise Grade Managed Firewall for enhanced cybersecurity and network management, all powered by industry leader Fortinet. Our new Cloud Email Solution, which offers flexibility and security for fleets and crew, and expanded crew internet services for our TrackNet H-Series terminals.

This is only the start of our strategic focus on value-added services. We plan to add new services through in-house development and partnerships. These additions are an opportunity to upsell our existing customers and increase the appeal for new sales. Doing so will enable us to retain and grow our subscriber base by making KVH airtime services available.

even more integral to the operations and success of our customers.

We recognize, however, that our actions are not taking place in a vacuum. Non-geostationary orbit, or NGSO services like Starlink, OneWeb, Empower, and others are already beginning to deliver service or are on the horizon. They offer benefits such as higher speeds and lower latency.

to commercial and leisure mariners. But they also face challenges in regards to performance and coverage.

and the fact that they are data pipes with none of the vital features and services that seafarers use every day. Those challenges can be solved by a hybrid solution using our TrackNet terminals. TrackNet offers a fully integrated hybrid hub designed for companion systems. The combination of our terminals with integrated VSAT, 5G, Wi-Fi, together with new Leo-meo services, and a new

will enable us to offer robust, affordable, multi-channel, multi-orbit hybrid solutions. That's why we are now beginning to resell Starlink high-performance marine terminals as a companion to our TrackNet and TrackPhone systems.

We're only selling these terminals in tandem with new TrackNet sales or for existing TrackNet and TrackPhone systems. Subscribers must have an active KVH V-SAT data plan to access our advanced, intelligent, hybrid switching while Starlink service activation will be handled directly by Starlink.

We anticipate adding new Leo and Mio partners as these services launch with a hybrid approach will deliver benefits above and beyond what NGSO services offer on their own. These benefits include committed information rates for guaranteed data speeds, service level agreements for reliable performance.

sophisticated end-user network management tools, multiple channels and satellites to overcome blockage and signal loss, and our expanding suite of value-added services.

We believe that the future of onboard connectivity will not be a single solution or service. The future is multi-channel and multi-orbit, and we are well positioned to deliver that. Looking ahead to 2023, we have set aggressive goals to drive growth, increase our subscriber base, and build long-term value for our shareholders.

Among these are to expand our suite of value-added services, to gain scale through organic growth, and to pursue airtime subscriber growth through new hardware agnostic approaches.

All of these support our overarching vision of obtaining sustained revenue growth and consistent profitability through innovation, a commitment to superior service, and a focus on strategic and wise investments.

So to wrap it up, 2022 was a challenging year for us, but one in which we made exciting, future-focused progress. We've achieved tremendous success in turning the company around financially, launched new products and services that will drive subscriber and revenue growth, and put KVH on the road to sustained profitability.

I am immensely proud of our global team, their efforts, and their commitment that has delivered on the promises we made to our investors last March.

proud of our global team, their efforts, and their commitment that has delivered on the promises we made to our investors last March. I'm excited about our prospects for the future.

And now I'll turn the call over to Roger for the financial details. Thanks, Brent. First, I would like to note that unless specifically stated otherwise, my comments relate to our continuing operations, which exclude the results of our inertial navigation business, which was sold on August 9th of last year.

With that, as Brent mentioned earlier, our fourth quarter revenue came in at 36.0 million, increasing 0.7 million from the 35.3 million recorded in the fourth quarter of 2021. Our gross profit margin was 35% for the fourth quarter as compared with 33% in the fourth quarter of the prior year.

Service revenue for the fourth quarter was $28.8 million, an increase of $1.8 million, or 7% from $27.0 million in the fourth quarter of 2021.

This increase was primarily due to a $3.0 million increase in Mini-Vsat broadband airtime revenue, primarily offset by a $1.2 million decrease in our content service sales, which was largely due to the sale of our radio business in April of last year.

As Brent noted, airtime revenue grew to $26.8 million or approximately 12% over the fourth quarter of 2021, and total subscribers reached almost $6,900. As a reminder, total subscribers include those who have temporarily suspended their primary airtime service but continue to pay minimum fees.

Airtime gross margin was 43.5%, which is up 9 percentage points from the prior year. This increase is due to a combination of factors, primarily the growth in our subscriber base and the shutdown of our legacy network at the end of 2021. We are very pleased with these results. However, as I mentioned on our last call, we are very pleased with the growth in our

we expect that going forward, our target for airtime margins will be in the high 30s. Product revenue for the fourth quarter was $7.2 million, a decrease of $1.1 million or 13% from the $8.2 million in the fourth quarter of the prior year. This decrease in product sales was due to a $1.6 million decrease in V-

almost 300 units to these customers in Q4 of 2021.

Operating expenses for the quarter were 12 million, down 3.6 million or 23 percent from the fourth quarter of 2021. While the 12 million for Q4 would seem to imply a run rate of 48 million exiting the year, there were a few unusual favorable items such that a normalized run rate would be more like 13 million. I should also note that year-over-year comparisons are difficult.

as the sale of the inertial navigation business required us to make estimates on the allocation of prior expenses that were shared between the two businesses.

Even with that taken into account, the actions we took in March and September have led to a very significant savings and have reset OPEX to an appropriate level.

At the operating income level, these changes in revenue, margins, and operating expenses resulted in a profit from operations of approximately $600,000. This was the first time since the third quarter of 2016 that KVH has had a quarterly operating profit. While this was a major accomplishment, we cannot be content with merely breaking even. Our task now is to grow profitability so that we earn an appropriate return on the capital we are using.

Our bottom line net income from continuing operations was 0.6 million compared to prior year's net loss of 2.7 million. EPS for the fourth quarter was a net profit of 3 cents per share compared with a net loss of 15 cents per share in 2021. You will note that we are no longer reporting non-GAAP income or EPS as we have come to believe that it is a less reliable metric given all the subjective assumptions required to measure it. Our adjusted EBITDA for the quarter was a positive 4.3 million.

compared with a positive 0.7 million in the fourth quarter of 2021. For a complete reconciliation of adjusted EBITDA, please refer to the earnings release that was published earlier this morning. Net cash provided by operations was 10.4 million. However, I need to caveat that by adding that changes in working capital provided 5 to 7 million of that.

due to an unusual increase in accounts payable at year end. Without the change in working capital, cash from ops would have still been over $4.6 million. Capital expenditures for the quarter were $3.4 million, so even without the benefit from working capital, our operational cash flow, including CapEx, was positive by over $1 million. Cash used in investing activities other than CapEx was $0.5 million and CapEx was $2.5 million.

which followed a $23 million loss the prior year. When we announced the restructuring in new strategic direction in March of 2022, we set a goal of breaking even in the second half of the year for operating profit, assuming that supply chain problems didn't persist. Unfortunately, they did. However, despite that, we only came up $400,000 short and we turned in operating profit in Q4 without any big windfall.

Well, as I said earlier, we can't be content with just breaking even. I hope you agree that this was a pretty amazing turnaround and it was all due to the hard work by a dedicated leadership team and amazing employees.

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. Sarah Line, please proceed with Q&A. Sure, thank you. As a reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We will take the first question from Line

I will now turn the call over to the operator to open the line for the Q&A portion of this morning's call. Caroline, please proceed with Q&A. Sure, thank you. As a reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We will take the first question from line Chris. The line is open now. Please go ahead.

Thank you. Congratulations guys and impressive EBITDA guidance for the year going ahead. Just you know maybe Roger if you can can talk through obviously we know the revenue assumptions but are there additional cost cutting actions or have you just found that the you know the run rate on the OpEx is has been better than expected.

if I understood correctly, you're still sort of guiding margins to the same level. Yeah, I think the, you know, we were pretty conservative when I gave the guidance back and I think it was, you know, back when we did the March announcement, I think it or maybe it was a response to a question. I said we were expecting like, you know, five to six million.

It's actually turned out to be more like, you know, up closer to 10 million. So that's been good. We don't see any sort of restructuring going forward. Obviously, we reserve the right to make changes in the business just as any normal business would with respect to cost. But in terms of sort of structuring the business, we feel like we're now in a very good position. You know, we did some work.

Some changes in September after we sold the Nersil Nav, but now we feel like we're in a good position. We've got the right team in place, and we're going to move forward with the initiatives that Brent talked about. Gotcha. So, maybe just shifting gears over to a little bit more high-level and...

Excuse me, I'm at the satellite show now and you know, there's probably the biggest one of the bigger topics here has been Starlink and their enterprise rollout. And obviously they have a very aggressive model that they're working with partners, not a lot of ways for them to give profitability to channel. You know, as you look out and guide the expectations for next year.

Does that Starlink to the degree we see broader adoption impact your overall reported margins? Or do you see ways to offset that with the bundled services that you offer associated with the Starlink service?

Hi, Chris. It's Brent. It's primarily the latter. It's the bundled service. It's the full feature set of services that we provide. We're being a bit conservative as far as airtime margins, as Roger alluded to. The main reason for the margin conservativeness is in anticipation that we might have a bit of erosion in the system.

implying costs in hundreds of dollars whereas typically with these at terminals we're talking you know five figures right to purchase those you know where do you see the technology evolution on the antenna side going you know in the future and it's both you know in terms of pricing and type of units used but

In the maritime market, you know, where you guys live and work every day, can a flat panel antenna, you know, actually deal with the maritime environment given, you know, ships move around a lot and there's a lot of roll off with those flat panel antennas or

Is it they're simply cheap enough that you're going to blanket six or seven of these all over the ship so you've always got to look angled? Is that a reasonable way or are there challenges, just from a wiring engineering perspective, that flat panels you think will be more of a marginal technology in the long term? I'll let Bob answer the detailed question, but I think you...

enough that you're going to blanket six or seven of these all over the ship so you've always got to look angled? I mean, is that a reasonable way or are there challenges, just from a wiring engineering perspective, that flat panels you think will be more of a marginal technology in the long term? I'll let Bob answer the detailed question, but I think you correctly answered the question

summarize the situation. If you have one, you probably have a lot of roll-off. If you have space where you can have multiple and you can switch from one to the other, you could probably mitigate that quite a bit. But I'll pass it to Bob to talk about it. The solution we're behind right now is hybrid integration of those panels into our systems.

And part of the reason behind that is you can probably do multiple antennas on a vessel, right? But you are really talking about it a minimum, you know, like five panels to cover your pitch and roll. But it is really not just your pitch and roll. There is limitations in geographic coverage and there is limitations with blockage as well. So you are always going to be in a situation where for a commercial or for a high reliability application, you are going to want to make sure you have connectivity. So we are going to continue to integrate those panels into the solutions that we have already.

And we're pretty comfortable that's going to provide the best, most reliable solution. Great. And when you think about the, just sort of the macro environment here with COVID ending in China, shipping gates picking up, I mean, where are you seeing demand signals, strength in demand signals on the maritime side? And, you know, in terms of the leisure market, you know, where you've had a good position, again, to flat panels, I think certainly in the RV market, you've seen some challenge there.

but in the broader consumer market or consumer leisure, do you see, you know, there's a different metrics in terms of the enterprise where clearly operational performance matters, you know, targeting the consumer market might be more successful for something like a Starlink or a Kuiper service.

Well, I would say, Dan, to answer your last question, I would say that's the market that is most exposed from our perspective to moving over to some of the new services. You had a question to begin with as to where we see new market opportunity. As I alluded to, India is a huge market and they've just recently...

enabled KU band V set into that market where it's been an L band market for a number of years and And as we move on talking about L band There's still a tremendous number of L band terminals out there that are still transitioning to you know, better better communication systems You had a very long sentence.

you know a lot of challenge for operators to actually get KU capacity to provide services in that market. yeah

Yeah, through our partnership with Intelsat, we're completely buttoned up as far as capacity is concerned. Gotcha. And is there a prospect for new capacity coming online in the future that you can actually drive some incremental growth in that market? If it is going to be new capacity coming online, whether it comes from Intelsat or others.

you see how many satellites are under construction and whether it's geo or NGSO so I don't think capacity is a concern. Okay.

Great, and thank you for all the feedback. Thanks. Thank you. We will take the next question from Ryan Cones from Needham. The line is open now. Please go ahead. pepperidge. songs.

Thanks. Real quick clarification, we talked about that 5 to 6 million becoming 10 million. That was the EBITDA from the cost adjustments you made.

No, it was the savings, the reduction in OpEx, which is a little, you know, that comment I made early on, or last year rather, early last year, was when we still had inertial nav. So we've had, even with the... OpEx. Yeah. So it's OpEx. Is OpEx run right? OpEx. Yeah. Thanks. And then, you know...

If you dumb this down for me a little bit on the kind of value proposition of Starlink versus your your VSAT product is Starlink a lower cost per bit? Does it provide additional coverage? Can you kind of clarify how it fits in the value prop there for the Starlink partnership?

Oh yeah, I mean it's lower cost per bit, a bit lower latency, but you can have dropouts and packet loss and jitters, so a combined service with what we already offer, an integrated service with our LTE slash 5G, and Wi-Fi combined with that will give you a robust service and that's what we offer.

You know, I talked about some of our other back-end tools and CIR SLAs and everything, that all comes together and it's coming through the VSAT component of our offering. You want to add to that? Yeah, I mean, it's kind of, if you follow the concept behind our H-Series products, right, we're delivering VSAT services with those products, and when available, we're latching on to 5G or LTE services, because that'll give the end user a little better throughput and performance. And when available from there, we'll also bridge over to available Marina Wi-Fis.

And really, if you think about this concept, you know, if you have a Starlink available, you know, and it's working in the marina, why not use it? Why not give the user that opportunity? And the real value that we have, or that we add to this, is that we're actively, the way we actively monitor, switch, and make all of this happen seamlessly.

so that no one has to think about it, no one has to worry about switching connections or what's available. We just make sure that the end user's experience is the best it can possibly be. Got it. So that's really helpful. And so you also handled the Starlink subscription and Starlink billing? I know. As part of the whole package? No, not as a remark.

the activation for the Starlink terminal will be handled between the end user and Starlink directly. Okay, alright.

Got it, that's helpful. And you talked about some development partners as well in terms of bringing new products to market. Can you kind of clarify what sort of applications that's going to what kind of market segments that will help you in? And well, it's a marine project, it is value added services to make the onboard operations more efficient. And the first thing I'd say is you can make those happen. It's?TAIN.

We can't really go into a lot of details at this point in time, but we will in due course. I mean, it's probably sufficient to say, you know, we're looking at people, you know, we've mentioned Fortinet a few times, security, firewalling, you know, that's what they do best and they do it on large-scale commercial networks. So we want to look for appliances, applications, and value-adds that are really being developed for sort of a broader market and then bring them to the marine specialization of, you know, sort of exactly what we're delivering.

at this time. Okay, all right, well thank you, everyone. Given there are no questions, I appreciate everyone joining the call who is on.

time. Okay, all right, well thank you, Aubrey. Thank you, everyone. Given that there are no support, no questions, I appreciate everyone's joining the call who is on. And thank you, and have a good day.

Thanks everyone. Thank you for joining today's call. You may now disconnect.