Q2 2023 KVH Industries Inc Earnings Call

Good day and thank you for standing by welcome to the T V H the cage, the aviation industry second quarter earnings call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question answer session to ask a question. During the session you will need to press star one one on your telephone you would then be here an automated message advising that your industry to withdraw your question. Please press star one again please.

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

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

Joining me on the call are the company's Chief Executive Officer, Bryan Bryan and Chief operating Officer, Bob Bailey.

Before we dive in a couple of quick announcements first if you'd like a copy of the earnings release is available on our website and from our Investor Relations team.

If you'd like to listen to a recording of today's call. It will be available on our website. If you are listening via the web feel free to submit questions to IR at <unk> Dot com.

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 file.

The 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 16th and Form 10-Q, which we plan to file later today.

The company's other SEC filings are available directly from the Investor information section of our website now to walk you through the highlights of our second quarter I'll turn the call over to Brent.

Thanks, Roger Good morning, everyone. Thank you for joining us today.

For starters, we are relatively pleased with our Q2 results in particular with our growth and our airtime revenue.

However, our TV and leisure VSAT antenna shipments fell short of expectations, which resulted in a quarterly revenue of $34 2 million down roughly 1% from the same period last year.

On a positive note operating income was $300000 a substantial improvement from the $1 million loss recorded in the second quarter of 2022.

To dig a bit deeper into the key service metrics airtime revenue was up 4% year over year to $26 $9 million with an associated gross margin of 44%. We also increased our total subscriber base to more than 1000.

Excuse me, we increased our total subscriber base to more than 7140 subs our balance sheet is solid with a quarter end cash balance of $71 million.

Up $2 million.

Sequentially and know that while I believe that the resource levels are appropriately aligned with the current size of our business.

And that we are in and that we possess the talent to grow we continue to adapt to changing market dynamics and heightened competition I'll touch on that shortly.

In May we launched our open up program, which enables vessels with non PVA and tenants to join our global VSAT network and take advantage of our suite of value added services with open net we also created a new service revenue stream that is not reliant on hardware sales or shipments in the three months since we introduced open.

We've built a robust pipeline for open net migrations across the leisure and commercial markets. Each of these migrations will take market share from our competitors in an environment, where demand for Standalone VSAT installations is increasingly competitive.

With the <unk>.

Collaboration of our service partners, we continued to successfully convert existing Inmarsat Fleetbroadband systems to <unk> terminals and service. In addition, we see a steady demand for our subscription content offerings driven by the need for crew welfare services.

Additionally, we are in the process of refining our airtime pricing with the goal of simplifying our offerings and making our plans more attractive.

This initiative is one way we are taking advantage of the additional capacity we have secured following our successful contract extension with Intelsat.

The caveats Intelsat partnership is mutually beneficial for both companies as our subscribers represent the majority of the users on the Intelsat Flex Maritime HTS network.

The extension secures the backbone of our multi orbit multi channel global network for the coming years.

As I've discussed in the past, we enjoy the flexibility to work with multiple lower than low.

No.

With multiple lower and medium Earth orbit networks, we continue to offer Sterling terminals as a companion system to our track net and Tracfone products. We are also in late stage negotiations with multiple Leo operators with the goal of adding terminals and airtime from one or more of them.

Worldwide hybrid network, we hope to wrap these discussion is up in the near future.

We are however, experiencing competitive headwinds driven by new Leo services, a transition to streaming content, rather than satellite TV and leisure market and a corresponding reduction in satellite TV and leisure and VSAT terminal sales, given the changing market and competitive environment.

<unk>, we are tempering our guidance for the full year.

We now anticipate revenue of 133 million to $139 million with continued growth in our services revenue and subscribers along with an adjusted EBITDA between 12 and $15 million.

While these adjustments reflect reflect reflect our response to the changing market. We've made good progress on the strategic objectives, we set at the start of the year.

Which 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.

On a separate note I want to report that our board of Directors has concluded its review of strategic alternatives. We presently intend to continue to operate as a standalone company. We are not actively considering any material transactions at the moment.

But we plan to continue our usual practice of reviewing opportunities as they may arise.

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

Brent first I would like to note that unless specifically stated otherwise my comments with respect to Q2 of last year related to our continuing operations, which exclude the results of our inertial navigation business, which was sold one year ago today.

With that as Brent mentioned earlier, our second quarter revenue came in at $34 $2 million down zero point $4 million from the $34 6 million recorded in the second quarter of 2022.

Our gross profit margin was 35% for the second quarter of this year as compared with 41% in the second quarter of last year service revenue for the second quarter was $28 7 million, an increase of <unk> 8 million or 3% from $27 9 million in the second quarter of 2022. This increase was primarily due.

To a $1 1 million increase in VSAT airtime revenue, primarily offset by a <unk> $2 million decrease in our content service sales, which was largely due to the sale of our radio business in April of last year.

Airtime revenue grew to $26 9 million or approximately 4% over the second quarter of 2022 airtime gross margin was 44, 2% up from 42, 9% last year.

Product revenue for the second quarter was $5 4 million, a decrease of $1 2 million or 18% from the second quarter of last year. This decrease in product revenue was primarily due to a $1 $8 million decrease in TV receive only products somewhat offset by an increase in VSAT revenue and sales of Starlink and <unk>.

<unk>, which we just began offering in the second quarter.

As Brian indicated the transition to premium video content, rather than receiving through satellite TV has had a significant impact on our sales of TV receive only antennas.

From discussions we've had with other providers. It appears that this is affecting the entire industry not just <unk>.

Product gross margin for the second quarter was negative by approximately $1 2 million. This was due to a number of factors that caused manufacturing costs to exceed standard costs, including lower overhead absorption due to lower unit volumes realization of purchase price variances from higher component costs and a re class from Q1 between products and <unk>.

Services. This continues to be an area of intense focus and we are evaluating alternatives for improvement.

Operating expenses for the quarter were $11 7 million this quarter benefited from a number of onetime reserve adjustments and we continue to expect a normal quarterly run rate to be between $12 five and $13 million.

At the operating income level. These changes in revenue margins and operating expenses resulted in a profit from operations of approximately $300000 compared to last year's loss of about $1 million or bottom line net income from continuing operations was 925000 and EPS for the second quarter was a net profit of <unk> <unk> per share.

Share compared with a net loss of <unk> <unk> per share in the same period of 2022.

Our adjusted EBITDA for the quarter was a positive $4 2 million compared with positive $3 $2 million last year 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 $3 6 million versus approximately 300000 last year capital expenditures for the quarter were $2 6 million and adjusted EBITDA less Capex was positive by over $1 5 million cash provided by financing activities was $1 3 million, resulting in an increase in cash.

There are approximately $2 3 million and an ending cash balance of approximately $71 million.

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

At this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for you.

Name to be announced.

Your question. Please press star one again, please standby, while we compile the Q&A roster.

Our first question comes from Ryan <unk> of <unk>.

Needham <unk> co. Please go ahead.

Good morning.

It sounds like the Starlink capacity is really disrupting the market here.

Can you speak about kind of the differentiation.

Products and maybe.

Their go to market sales model is different from yours.

Thank you.

Yes.

In regard to Starlink they.

And they do offer a high speed low latency service they do not offer cir committed information range.

So when the service works it works incredibly well, but with our service we offer our committed information rate.

As well as 24, seven Cowen Tech support field service to repair your units and number of value added services, which we go through cyber security.

So what we're offering is more than just connectivity.

And.

As we talked about the companion plant it works very well quite frankly in combination with Starlink and Thats why were focused on the companion plan.

In regard to go to market.

We've continued.

With our our historic go to market strategy, which includes both direct sales and shine through service providers in regard to most of the market.

They are <unk> they are using a number of our competitors to sell their airtime. So im not sure that their go to market strategy differs all that much from what we're doing.

Our selling through resellers and majority a significant portion of our sales are through resellers as well.

Got it.

With the disruption going on do you have the ability to go back.

To your partner then with the cost of bandwidth coming down too.

Sure.

Cost of capacity.

Yes.

Liberty to talk about our cost of capacity, but we did just enter into a contract extension with Intelsat, we're bringing down quite a bit more capacity and as I alluded to in my prepared remarks, we are seeing.

Our airtime plans.

So as Youre gesture airtime plans.

Obviously, we're hoping to reverse kind of share loss and such there.

Is that going to much of a gross margin impact going forward.

Your first statement is accurate we were talking about maintaining our subscriber base and continue to grow it and we do anticipate.

And we haven't necessarily sitting on this call, but we anticipate a slight contraction in our airtime margins.

Two the high thirties for airtime, where this quarter and last quarter were 40% plus.

I think you've talked about that before so high high high thirties.

Contraction alright.

And with regard to the different.

First the segments or verticals you sell into.

Hi.

Are there challenges in one particular area or another whether it's leisure or commercial fishing et cetera.

Okay.

Yes.

Leisure and light commercial had been the most impacted so we would view fishing is light commercial as far as water commercial your tankers your card carriers or carriers, we haven't seen as much.

And we don't.

We do not sell into the cruise market, either which I understand has been significantly impacted.

Okay.

That's one concern we do not have.

Got it.

And in terms of the.

The cruise market is served by other other players in the space.

Yeah, Hey, Mark Saad and guys like this.

Yeah, I mean, it's.

It's.

Inmarsat didn't have a significant focus here, but others do.

Okay, Great. That's all I had thanks, thanks for the questions.

Jim.

Thank you one moment for our next question. Please.

Your next question comes from Chris Quilty of Quilty space, you May <unk> you.

You May go ahead.

Thank you guys just wanted to follow up on the airtime plans and.

Maybe a little bit of direction on how you plan to implement that in other words. These are automatic changes, where youre going to push those down on the customers or do you wait for them to sort of price discover.

In other words.

You do the former we would see a pretty immediate impact on margins in Q3 and that seems to be what youre guiding to.

I wouldn't say you're going to see any significant impact on margins in <unk>.

H.

But is in regards to the airtime plans.

People will become more bandwidth thirsty so.

It's really a matter of providing more.

Speed.

While our consumption on a go forward basis to align with what are the end user is looking for.

So in other words, you are not really changing the pricing what youre doing is giving more bandwidth.

Which has a higher quality to you.

No.

It potentially could.

Sure.

But right now as I said, we just entered into a renegotiation and we're pulling down a bit more capacity from Intelsat So what's on.

I think we have it so that we can maintain.

A reasonable.

Gross profit level ill repeat once again.

We do anticipate slight contraction to the high Thirty's cited Tom.

Not significant.

Gotcha.

Switching over to the product side.

Obviously, it looks like the consumer products are taken a pretty hard hit.

What's the prognosis there I mean is this a recoverable situation, where you can either increments capabilities are lower cost.

Relative to our Starlink antenna, which is a pretty distant price gap.

Between the two.

Sort of legacy services you provide.

That's a very good question and something Thats.

The forefront of our minds and regard and as well as our daily.

Activities, we're in the process of assessing that with the overall impact is we're not necessarily at liberty to disclose what the outcome of that test is going to be since we're in the middle of it but we do understand that the market dynamics are changing and we.

We our plan is to adjust to those market dynamics.

In order to.

<unk> positioned ourselves as effectively as we can on a go forward basis in the market.

Got it.

Brian here, specifically on the product margins to be.

Expected them to be down, but that was way more down and you seem to indicate there were some one time issues in there in addition to just volume.

Should we think about product margins looking into the second half of the year.

Paul.

I can say that for the quarter. If you take out the one time items. It would have been kind of right around that breakeven and what's going to happen for the second quarter will be highly dependent on kind of where what happens with volume.

We're in a period right now of a lot of uncertainty we're seeing so.

<unk> kind of changes in the market.

A little hard to tell whether things are.

Whether there is some unusual occurrence going on where the things are going to change. So it's really tough to say right now I would say.

We wouldn't be expecting if or just.

You said, our midpoint estimate is around breakeven.

Okay.

Good.

And.

Just in terms of other product developments thing things like PVH want sure.

Some of the new pricing plans are there other development.

Coming in the second half of the year or other areas that you wanted to.

Investments.

When it comes to developing products in R&D, we keep it close to our vest, but we still have a very robust engineering department and R&D Department. So they stay busy on a daily basis and.

We very well could have some stuff coming out here and there.

Later in the year.

Got you and final question, which is another.

<unk> Starlink question.

I think one of the challenges at partnering with them is there is there is no margin.

For the service providers.

Obviously, it's all pass through where do you see that product deployment, because youre doing it as a bundle with your own system is it basically adding it to a lot of your existing customers or do you see.

New market opportunity created by that bundle, albeit most of you or your competitors now offer that bundle also.

Yes.

Basically.

For the most part of our current market focus isn't going to change, but definitely will open up.

If we went down that path completely other opportunities due to the speed that associated.

Associated with the service offering.

Gotcha, alright, well, thank you gentlemen.

Okay. Thanks, Chris Thanks.

Thank you.

I would now like to turn it over to the Chief Executive Officer, Brent Bruun for closing remarks.

Okay, well, thank you very much for joining us today and.

Julie enjoy today and the rest of the week.

Much.

Thanks, everyone. Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

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