Q1 2023 KVH Industries Inc. Earnings Call

Good day and thank you for standing by welcome to the Q1 2023 Kv H, Inc earnings Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will then you're an automated message advising your hand is raised to withdraw your question. Please press star one.

One again.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Roger Keeble. Please go ahead.

Thank you Gigi good afternoon, everyone and thank you for joining us today for our caveats Industries' first quarter results, which are included in the earnings release, we published earlier this afternoon.

Joining me on the call are the company's Chief Executive Officer, Brent Berlin, and Chief Operating Officer, Bob Bay Lark, Brent is actually calling in from Singapore, which is why we're having to call at this time of day instead of our usual morning timeframe.

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 will be available on our website. If you are listening via the web feel free to submit questions to IR at <unk> Dot Com <unk>.

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.

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 2022 Form 10-K, which was filed on March 16, the company's other SEC filings are available direct.

<unk> 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 Brent.

Thank you Roger.

Good afternoon, everyone as Roger mentioned I'm, joining the call today with you from Singapore.

One of our competitive advantages is this is this excuse me is the strength of our partner network, which includes marine electronic dealers and distributors along with our airtime service providers, we sell our hardware and airtime, while managing installations and technical support to regionally.

Much of our success stems from the health and commitment of that partner network.

Illustrating this is a recent competitive win by one of our airtime service providers, which is now converting 70 vessel fleet from a competing L band.

Service to our global HTS network.

Over the last few months have been on the road road, a lot with our partners and customers worldwide in March I met with their premium EMEA dealers during a multi day event imagery during.

During my current trip the.

The current my current trip has brought me to our Asia Pacific headquarters in Singapore, After which I will travel to Manila, Hong Kong, Osaka, and Tokyo, Amit with our most predominant partners and customers to reinforce our relationships evaluate opportunities to expand global sales.

Moving onto our financial results Q1 was solid with revenue of $33 7 million, Although we recorded an operating loss of roughly half a million dollars.

Given the seasonality of various income and expense items. This was in line with our expectations and our guidance for the year is unchanged. Our airtime revenue was up 13% year over year to $27 million with airtime gross margin of 42%. We also increased our total subscriber base to more than 7000.

Our balance sheet is strong with quarter with quarter end cash of $69 million and no debt. We are maintaining the solid financial foundation that we have worked hard to build over the last 12 months.

Yeah.

Airtime remains the primary driver of our growth.

And we are laser focused on this expanding airtime sales was a significant part of my conversations with our EMEA service providers last month.

And then I will be having with our service providers during my Asia Pac trip.

<unk> measure on total subscribers remained steady at approximately <unk> hundred dollars per month, we are now seeing opportunities to build their archive with airtime upgrade and value added services.

And that's why we've rolled out incentives for customers to upgrade to a larger airtime packages.

It's also the reason we are opening up our airtime and global HTS network to non kv HCN tenants for the first time. This new initiative enables us to convert VSAT antennas made by companies such as Italian column to work with PVH is VSAT airtime without hardware changes. This approach makes it quick convenient and easy.

Z for new subscribers to transfer their services to our network.

Program also.

Offers benefits at the OEM level as both builders can install virtually any antenna on a leisure yacht, our new commercial bid.

Build and we can support it with airtime once the customer case delivery.

Our goals for this program are to drive new airtime revenue.

From all of our current markets expand our airtime subscriber base with revenue and.

And revenue with no hardware cost take full advantage of our existing services and hardware infrastructure and to convert competitive assistance to gain market share.

As an example, we're already halfway through converting more than 40 Super yacht with high value airtime packages, we've completed training for our global.

Sales partners and are receiving inquiries from commercial fleets some of which currently deploy a mixed solution of caveats and competing antennas.

We're also leveraging our existing hybrid technology had counter new Leo systems entering the market.

Every tracking system includes integrated Wi Fi and <unk> cellular capability.

<unk> is emerging as an increasingly valuable and versatile solution for maritime applications from a speed perspective, it can be a SaaS as one gigabit per second at four to 10 times faster than your typical maximum speed offered by Leo solutions, while the actual data rates will vary based on the distance to the cell tower.

Excuse me cell towers, we've observed tracking assistance, reaching download speeds of 350 Megabits per second.

With the underlying with underlying costs that are competitive to sterling.

Our <unk> service is now available in more than 50 countries.

While our <unk> LTE service is available in more than 150 at the same time, our analysis indicate that our customers' vessels typically spend 60% to 70% of their time within the range itself self service.

Which can be as far as 20 miles offshore when using our track net terminals.

These vessels include recreational boaters and commercial ships moving up and down the coast.

However, as a much lower percentage of our tracking of customers, we're activating our <unk> services, we like that.

Excuse me, however, a much lower percentage of tracking that customers are activating the <unk> LTE service and we'd like to see as a result, we are missing out on the advantages of our intelligent hybrid design. That's why we've launched a new <unk> LTE auto activation program.

With two or three months of data when the VSAT service for any track that terminal is activated we also activate our global Sim card our intelligent hybrid channel switching will then automatically manage the connectivity using the VSAT <unk> and Wi Fi.

This new program offers customers a risk free introduction to our unique hybrid solution, which we believe will lead to more sellers subscriptions.

The superior user experience.

Next we are taking steps to boost the accessibility and demand for our track net H 92.

<unk> hundred 90 is our first can you then only one meter system and offers many advantages.

Later than competing one meter antenna.

Which makes installations faster easier and less costly. It also includes our integrated hybrid technology and offers significant airtime gains and cost efficiencies.

We're taking advantage of those efficiencies to reduce airtime costs to customers, while enhancing the user experience by lifting any data limits.

The data limits on data rates unlimited use plan together with the reduction.

And the price of the terminal we believe these steps can potentially increase each 19th claimants.

Through sales and agile plan subscriptions generate higher monthly <unk> and lower airtime costs.

And finally, we are now shipping starling terminals Sterling is the best efforts network without the service level agreements and commitments on speed and value added services our customers expect.

Yes.

That's why we believe the Sterling systems will work best when deployed in a hybrid configuration with her terminals to optimize availability and support our customers enterprise grade requirements. We are only selling sterling terminals in tandem with new <unk> systems or as an add on for existing track net in Tracfone.

Criminals.

I'll start length is generating a lot of buzz in the market they arent the only.

Non geosynchronous orbit solution in the market.

As I've discussed in the past, we have flexibility to work with multiple Lille and Neil networks should we choose to offer.

Maritime alternative to Sterling.

At this time, we are in a later stage, where we are in later stage negotiations with another and GSO operator.

We hope to wrap up these discussions in the coming weeks and make an announcement by the start of the summer.

Yes.

So wrapping up I believe we're in a favorable position for the start of the year.

There may be challenges ahead, we remain confident in our ability to deliver our strategic objectives.

The objectives for the year, which are to expand our suite of value added services.

To gain scale through organic growth and to pursue airtime subscribers through new hardware agnostic approaches. In addition, we have a clearly defined development path for several new products that will include new airtime revenue streams, which we anticipate releasing later this year or it started 2024 finally, we continuously.

Evaluate other avenues for growth and investment.

All of these actions are being taken to achieve healthy growth and sustained profitability.

Now I'll turn it over to Roger for the financial details.

Thanks, Brent first I would like to note that unless specifically stated otherwise my comments with respect to Q1 of last year related to our continuing operations, which exclude the results of our inertial navigation business, which was sold on August nine with that as Brent mentioned earlier, our first quarter revenue came in at 30.

$3 7 million, increasing zero point $5 million from the $33 2 million recorded in the first quarter of 2022.

Our gross profit margin was 37% for the first quarter of this year as compared with 38% in the first quarter of last year.

So service revenue for the first quarter was $28 7 million, an increase of $2 2 million or 8% from $26 6 million in the first quarter of 2022. This increase was primarily due to a 3.0 million dollar increase in VSAT airtime revenue, primarily offset by a <unk> 8 million decrease.

And 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 $27.01 million or approximately 13% over the first quarter of 2022 and total subscribers surpassed seven.

As a reminder, total subscribers include those who are temporarily suspended their primary airtime service, but continue to pay a minimum maintenance fees as well as equipment fees for agile plan subscribers.

Airtime gross margin was 42.0%, which is up slightly from 41, 2% last year. We are very pleased with those results. However, we are not changing our target for airtime margins to be in the high threes.

Product revenue for the first quarter was $4 9 million a decrease of $1 6 million or 25% from the first quarter of last year. This decrease in product sales was primarily due to a $1 $5 million decrease in VSAT product sales. The decline in VSAT sales was a result of several factors higher proportion.

Of total shipments when as agile plans not sold units also in Q1 of last year, we sold almost 90 units to customers who return following the shutdown of our legacy network and finally, we did see a reduction in the underlying market demand in the leisure segment.

Product gross margin for the first quarter was negative by approximately $300000. This was primarily due to two factors the first being a write down of inventory by approximately 600000, and the second being approximately 300000 of purchase price there.

Operating expenses for the quarter were $12 9 million as I mentioned on the last call. This is the approximate run rate that we expected to start the year at $12 9 million at $5 7 million less than the first quarter of 2022, but a year over year comparison is difficult due to the restructuring charges. We took in Q1 of last year.

As well as the complexity of isolating the impact of selling the inertial navigation business.

At the operating income level. These changes in revenue margins and operating expenses resulted in a loss from operations of approximately $500000 given the seasonality of various income and expense items. This is just about where we would expect it to be when we started the year going forward, we expect to be profitable at the operating income level each quarter.

Our bottom line net loss from continuing operation was $12000 basically breakeven compared to last year's net loss of $4 3 million.

EPS for the first quarter was a net loss of less than <unk> <unk> per share compared with a net loss of 23 per share in the same period of 2022.

Our adjusted EBITDA for the quarter was a positive $3 3 million compared with a positive $1 8 million last year for a complete reconciliation of adjusted EBITDA. Please refer to the earnings release that was published earlier this afternoon.

Net cash used by operations was $6 3 million. However, as I noted on the last call. We had an unusual increase in accounts payable at year end, which is now reversed the total change in operating assets and liabilities, including returning to a normal level used $10 9 million of cash as such without that change.

Cash provided by operations would have been approximately $4 million capital expenditures for the quarter were $2 1 million. So our operational cash flow assuming normalized working capital was positive by almost $2 million.

Adjusted EBITDA less Capex was also positive by over $1 million.

Cash used in investing activities other than Capex and marketable securities was virtually zero and cash provided by financing activities was 0.3 million, resulting in an ending cash balance of approximately $69 million.

Looking forward to the remainder of the year, we continue to expect full year revenue between 145 and $155 million and adjusted EBITDA between 17 and $23 million. So no change to our guidance.

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 Gigi.

Thank you.

Minder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again please.

Please standby, while we compile the Q&A roster.

One moment for our first question.

Our first question comes from the line of Caleb Henry from Quilty space.

Okay.

Hey, guys a couple of questions from me.

Mentioned this new visa program, where multiple different terminal providers be able to use the aviation network.

Maybe I missed it but did you give a program start date for that when does that begin.

It started loosely.

This year or the <unk>.

First quarter, whereas officially was launched as of May one.

Okay.

The H 90 terminal that you announced.

<unk> ku band or dedicated the Ku band is that.

Orbitz specific or is that able to work with satellite and that we're just trying multiple different orbits.

Corvid specifics non geosynchronous it's to visa.

But just ku band only and the reason why we call that Ku band Geo and the reason why we call it out as Ku band only that we historically, we've provided a terminal by the name of the <unk> 11, which was both Ku band and C band is Ku band only an inch.

And it's similar to.

In the Ku approach to competing competing systems from Cobham, and Italian but it also has the integrated.

<unk> gene as well as.

In Court Wi Fi.

The buildings, yes.

Yes, it's operating on our standard Flex network that all of the other terminals operate on so it has access to the entire constellation.

Okay.

You add your and GSO capacity, which you mentioned being pretty close to it.

Is that something that you anticipate will replace the starlink offering or is it something that you will offer in tandem.

It will be offered as an alternative for.

<unk> is an alternative.

Right right Okay.

And then my last question you.

You mentioned the L band customer or.

And maritime customer that was using L band that is now switching to your network.

I think listening to kind of the two vein elven provided is usually they talk about their customer base being sort of protected unusually they add.

Higher throughput services like <unk>.

In addition to L band, not usually replacing it. So I'm just curious if you're if you agree with that if you disagree with that or if youre seeing a shift where more and more vessels are starting to ditch L band in favor of.

Our higher throughput services.

Well.

To be very specific when we talk about L band two providers were talking about iridium or inmarsat.

Iridium.

With their service offering that choose.

To a large degree from our perspective anyway as backup.

In regards to <unk> broadband is been a number of conversions over the years, both our system as well as the competitive system.

Mark that system.

You had another conversion.

L band.

Okay.

Okay. Those are all my questions. Thank you.

Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.

At this time I am showing no further questions I would now like to turn the conference back over to Roger Keevil for closing remarks.

Well. Thank you all for joining us I appreciate it I know that we don't normally do these afternoon East Coast U S time, but I appreciate everybody who was able to join in the meantime.

And I think thats it.

<unk>.

Thank you all for joining and we'll talk to everyone again.

When we announce Q2.

This concludes today's conference call. Thank you for participating you may now disconnect.

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