KVH Industries, Inc.

and welcome to the KVH Industries Inc. Q4YE 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I'll turn the conference over to Brent Bruin, CFO. Please go ahead.

Thank you, Operator. Good morning, everyone. Thanks for joining us today to discuss KVH Industries' fourth quarter and full-year results, which are included in the earnings release we published this morning. With me on this call is Martin Kitzvan-Hanigan, the company's Chief Executive Officer. The earnings release is available at on our website and through our investor relations department. If you would like to listen to a recording of today's call, you can access a webcast replay on our website. If you're listening via the web, feel free to submit questions to ir at kvh.com. This conference call will contain certain forward-looking statements that are subject to many 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 forward-looking statements. We will also discuss certain non-GAAP financial measures, and you'll find definitions of these measures in our press release, as well as reconciliations of these non-GAAP measures to comparable GAAP measures. We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading risk factors in our third quarter, Form 10-2, filed on October 29, 2020, and our 2020 Form 10-K, which we expect to file tomorrow. The company's other SEC filings are available directly from the Investor Information section of our website. At this time, I'd like to turn the call over to Martin. Martin?

Thanks, Brent. Good morning, everyone, and thank you for joining us today. Let's get started. Like many businesses around the world, we continue to face challenges from the pandemic in Q4. However, we ended 2020 on a very positive note and we have a number of reasons to be optimistic about the future. We built on our strong third quarter and reported fourth quarter revenue of $44.1 million, an increase of $1.7 million or 4% versus the fourth quarter of last year. We also increased our fourth quarter adjusted EBITDA to $3.5 million, up from $700,000 in the prior year. For the full year, we increased revenue to $158.7 million, up almost a million dollars from last year, and reported total adjusted EBITDA of 3.1 million, and that's a $7 million improvement compared to the fiscal 2019. I'm really proud of our team's continued ability to deliver for our shareholders and customers despite the challenging environment. Our core business remains strong. In Q4 of 2020, we delivered one of the most robust fourth quarter results from continuing operations in the past five years. We recorded very strong TACNAF revenues, record BSAT unit bookings, and record BSAT shipments. From an operations perspective, we continued our cost containment efforts in Q4, achieving OPEX well below the prior year and our budget. While restrictions on travel and trade shows posed challenges for sales visits and pipeline development, it has also reduced our travel and marketing costs. As these restrictions begin to ease, we expect to see expense reductions normalize in the second half of the year. So against the backdrop of economic uncertainty, we're pleased with our overall financial results for the year and with the positive momentum we carried into the first quarter of 2021. Our strategy of diversification and focusing on innovative products and services really paid off in 2020 and has positioned us well for the future. Now let's look at some of the details in our core markets. In our mobile connectivity segment, VSAT revenue increased $1.2 million to $20.3 million, a year-over-year increase of 6%, while our VSAT subscribers increased 4% versus Q4 the previous year. Year-over-year, our airtime margins were up almost four points to 34.2% compared to Q4 of 2019. Our Agile Plans program continues to be a key revenue driver as customers recognize the benefits of an innovative, all-inclusive model. Agile Plans revenues increased 53% compared to Q4 of the previous year. We also record strong sales of our Agile Plans regional service, which employs our smallest VSAT, the 37-centimeter track zone V3 HTS. Agile Plans Regional offers connectivity as a service for smaller commercial vessels, such as fishing and coastal cargo and workboats. We announced this new service in February of 2020, just a few weeks before the pandemic-related shutdown sick effect, which really impacted the launch. However, interest in this product began to pick up in the second half of the year, and in the fourth quarter, Agile Plan's regionals helped drive strong results outside the U.S. in largely untapped markets, including Vietnam, Indonesia, and Africa. As a result, Q4 V3 HTS shipments were up 175% compared to last year. Overall, Agile plans represent 73% of our commercial shipments in the quarter and is now 38% of our total VSAT subscriber base. Several beneficial industry trends should aid our mobile connectivity sales efforts. Oil prices are rising and daily port calls for commercial vessels appear to have stabilized. The commercial shipping market is doing quite well. Container rates and the Baltic Dry Index have both more than doubled in the last year. In the leisure market, the National Marine Manufacturers Association reports that U.S. boat sales were at a 13-year high in 2020. On the other hand, the cruise ship market remains suppressed, and within our immediate business, the Newslink service for cruise ships continues to be heavily impacted. Fortunately, this is a small part of our business, but it did represent a million-dollar decline in 2020 compared to 2019. We launched our legacy Mini-BSAT broadband network in 2007, and after four years, we're shutting it down at the end of this year. The majority of our customers are already on our new HGS network, which we launched a few years ago. We're planning to migrate the remainder of our legacy customers to the HGS network by the end of the year. From a customer perspective, the new network is faster, cheaper, and has much better global coverage. From our perspective, we have better margins on the HGS network and consolidating customers onto one network will reduce our operating expenses as well. We've been converting customers for the last few years, and we intend to complete the effort this year. The significant investment and effort required to facilitate this migration will impact our results in 2021, but upon completion, the migration will represent a net reduction of $4 to $5 million in annual network operating costs starting next year. We expect that many of these customers will be switching over to our popular Agile plan service. Moving on to KBH Watch and our new IoT connectivity as a service offering, we're excited by our progress in recent months. We're focused on rapidly building a broad foundation of watch solution partners, which we anticipate will provide a pipeline of revenue opportunities. These partners are already proposing KBH Watch as a component of their own maritime IoT and maritime service solutions to several large fleets. You've likely seen the announcements beginning in December as we've established relationships with a range of firms, including IoT service providers such as Greenstein, IoT platform integrators like TMS Maritime, OEMs like Kongsberg, and multi-card service providers like Kilo Marine. We've established a formal working process which each of these partners We work with them to define and develop a solution that integrates KBH Watch with their systems. We provide training for their sales teams, establish joint marketing agreements, and deploy trial programs with their customers. The KBH Watch systems are already deployed for trials and training, and we anticipate that the number of deployed systems will steadily grow. So what's driving this acceleration in interest? There's been a move towards digitalization and the connected vessel in maritime. And the pandemic is accelerating this trend. The port restrictions drove home the importance and the need for remote services such as equipment access, surveys, and support. There's also a rapidly expanding ecosystem of IoT service providers who currently have no access to connectivity outside the range of cellular service or limited access due to major constraints of bandwidth imposed by the ship operator. Our watch solution partners have told us that including KVH watch is a competitive differentiator for them, thanks to the global secure connectivity that's separate from the IT systems. The ability to support multiple tenants on the single watch terminal and the simplicity of our integrated connectivity as a service model. In our view, the cybersecurity will be a primary driver going forward. At the start of the year, new commercial maritime guidelines known as IMO 2021 went into effect. A vital aspect of this is the separation of IT and OT networks and data. One of our watch solution partners reports that a major oil company fleet to which they're proposing watch now mandated that vessel performance optimization systems not be connected to the onboard network. We believe the KTH watch is an ideal solution to meet all of these requirements. It delivers 24-7 data flow even when the vessel is in open ocean and affords offers affordable remote expert intervention and high-quality video on demand. Plus, it provides a dedicated air-gapped IoT connectivity without touching the ship's IT network. We think these drivers, the strong interest we're seeing, and the expanding array of potential applications are all validating the assumptions we made when we initially proposed to offer this first VSAT-based dedicated IoT connectivity solution. So we're optimistic that KVH Watch will follow a trajectory very similar in many ways to the Agile plans, which started slowly in the first year and then began to compound rapidly. Our watch solution partners play a critical role in our ability to attract new customers to watch, which is why the partnerships we've announced over the past few months are so exciting. While the commercial market bids can take some time, we believe that the IoT connectivity has the potential to be a significant contributor to revenue and earnings in the coming years. Moving on to our inertial navigation business, TACNAF military product sales increased by 3.7 million to 7.2 million in Q4, a more than 100% increase over last year, driven by shipments of the TACNAF fog order we announced last July. Standalone fiber optic gyro sales were down 1.3 million, or 17%, compared to the fourth quarter of 2019, but that doesn't include the fogs that were used as part of our own TACNAF systems. However, we entered 2021 with a very strong backlog for both TACNAF and FOG. At the end of Q4, we also achieved our goal of engineering our photonic integrated chip or PIC technology into the remainder of our core FOG product line. Going forward, our IMUs and our standalone FOGs will all have the PIC inside. As we ramp production, we're adding a second precision assembly system, which will come online in Q2. That will enable us to produce sufficient quantities of assemblies of PIC and fiber arrays to replace our standard product systems. We'll be somewhat constrained by chips and assembly equipment in Q1, which we expect to be released by the beginning of Q2. In the meantime, we continue to see healthy demand for our FOG products. We anticipate strong year-over-year growth in our FOG business this year. We're excited about the momentum and the future market opportunity for our PIC-based products from the position of an established, proven technology provider for autonomous platforms. Our PIC technology enables us to provide a broader range of FOG performance for different applications and enables FOG performance at men's pricing and scalable mass production in the future. We're currently working with customers and prospects who represent a wide range of short- and long-term opportunities, including autonomous trucking and shuttles, mining and industrial, robots as well as drones, defense applications, and, of course, advanced driver assistance systems, or ADAS. As a supplier for these new technologies, the growth of this business will depend in part on how rapidly these technologies are adopted in the market. As the self-driving market continues to evolve, autonomous vehicle providers are realizing the importance of fogs as part of the sensor fusion solution to deliver the precision needed to complement LIDAR when MEMS gyros can't. ADAS applications for our inertial systems represent a large and growing market, but so do platforms like long-haul trucking, mining, and construction, where we anticipate nearer-term sales opportunities. We're also working closely with drone developers. The consumer drone market doesn't require inertial systems with the precision that we offer. However, our FOGs provide the performance, reliability, and form factors suitable for military, security, and commercial drones. And we anticipate that those markets will provide important revenue opportunities as they grow. It each brings almost 15 years of experience as an autonomous navigation technology provider to these growing markets. In 2005, our systems were used in the original DARPA Grand Challenge with self-driving vehicles. Our initial products were first integrated into the U.S. commercial self-driving car prototypes in 2012. KBH fogs and inertial systems have been deployed in various robotic systems over the past decade, including the winner and 10 other competitors in the 2015 DARPA Robotics Challenge. And most recently, we began delivering vital navigation and positioning data for autonomous trucks and other platforms that are being tested on the road now. Our existing fog systems already meet the performance requirement for these applications. Our PIC-based systems are now rolling out to deliver additional reliability and cost savings at scale. So, in summary, in 2020, we navigated the pandemic safely, successfully developed key new technology, and positioned the company well in each of our markets. We had better than expected results in Q4, and Q1 is off to a very good start as we entered the year with around $20 million in backlog. Our airtime business continues to gain market share as we grow revenues and subscribers. We carry the momentum into 2021 with robust net new activations in January and February, and we have exciting new products in the pipeline that will be launched in the next few months. We're very encouraged by the initial response to our Watch IoT initiative and the opportunities the autonomous market continue to grow. Consolidating our airtime customers under a single global network will improve customer experience and reduce our operating costs by year end. We believe that these efforts will fuel our growth in 2021 and beyond. And we're confident that the progress that we're making now will deliver sustainable long-term value to our shareholders and other stakeholders. And now I'd like to turn the call back to Brent to go over some of the numbers. Brent?