KVH Industries, Inc.

Good day. Welcome to the KVH Industries, Inc. Q3 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Roger Keeble. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us today for KVH Industries' third quarter results, which are included in the earnings release we published this morning. Joining me on the call are the company's Chief Operating Officer, Brent Bruin, and CEO, Martin Kitzvan-Hanigan. Before we dive in, a couple of quick announcements. First, if you would like a copy of the earnings release, it is available on our website from our investor relations team. If you would like to listen to a recording of today's call, it will be available on our website. If you are listening via the web, feel free to submit questions to ir at kvh.com. Finally, 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 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 in our SEC filings specifically those under the heading Risk Factors in our 2020 Form 10-K, which was filed on March 3rd, and our Form 10-Q, which is expected to be filed 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 third quarter, I'll turn the call over to Martin.

Thanks, Roger. Good morning, everyone. Thank you for joining us today. We achieved another strong quarter, reflecting our success in implementing our strategic initiatives. Total revenues increased by 5% in the third quarter to $43 million from $41.1 million in the third quarter of 2020. And our non-GAAP adjusted EBITDA for the quarter was $1.5 million compared to $3.4 in the third quarter last year. Contributing to these results were a 13% increase in airtime revenue, record Q3 VSAT shipments in our mobile connectivity business, and continuing careful management of operating expenses. Like many companies, we feel the effects of ongoing supply chain disruptions and the increased cost of goods. These global issues slow deliveries of our products in both mobile connectivity and inertial navigation. While we could have shipped more if it not for these constraints, we're able to shift the bulk of these orders into Q4. Demand continues to be strong and outpace production capacity. Our team here did an outstanding job of adapting to the supply chain challenges, our engineers identified alternative technical approaches, and our procurement and logistical teams worked hard to track down necessary parts to get them to our factories, and managed to get products shipped to customers around the globe. We did see increased costs related to purchasing hard-to-get chips, and of course, incoming freight was higher. In response, we've begun to raise prices on select products and services in Q4, and we expect to implement additional price increases on January 1st in 2022. So despite these challenges, our lead times have remained reasonable for our customers, and we're able to ship out a record number of VSAT units in Q3. Now let's look at the details of our segments. Starting with mobile connectivity, Q3 is historically a slower quarter in the mobile connectivity market due to seasonality. Nevertheless, VSAT unit shipments were up 53% compared to the third quarter of 2020 and set a new record for any third quarter. This increase was spurred in part by demand for our new ultra-compact track phone V30 in both the leisure and commercial maritime markets. In fact, sales of our smallest VSAT systems were up more than 100% over last year. Unit shipments are an excellent indicator of future airtime revenues, as virtually every one of those units will become an airtime subscriber, typically during the next quarter. Our Q3 VSAT airtime revenue was $24.6 million, an increase of $2.9 million, or 13%, compared to Q3 last year. We also increased our active subscriber base by 12%. Revenue for Agile plans, our connectivity as a service program for the commercial maritime sector, was up more than 54% compared to the third quarter of 2020. Agile plan subscribers now represent 47% of our total mini VSAT broadband subscriber base. We continue to make excellent progress on our initiative to migrate customers from our legacy network to our HTS network. As you know, we have a longstanding plan to shut down our original ArcLight network on January 1, 2022, and then operate only our HTS global VSAT network for primary service. We project a total cost savings of around $12 million next year and a net savings of roughly $5 to $6 million in annual airtime expenses, depending on how many customers move over. For those customers moving to HDS, we will, of course, be adding bandwidth to the HDS network. We've always assumed that not all Arclight subscribers would migrate exactly by year end, and we expect that by January 1st, the customers who do not migrate will represent much less than 10% of airtime revenue. And we anticipate that a majority of those customers will be leisure vessels, which are seasonally suspended and are inactive during the off-season. We expect at least half of those customers to take action when they prepare their boats in the spring. In the leisure marine market, the industry continues to enjoy high levels of leisure boat sales, and some manufacturer backlogs for new boats now extend into 2023 and 2024. Analysts project the global recreational boat market will grow from $16.4 billion in 2021 to $23 billion in 2027. And we're well-positioned to take advantage of this growth thanks to our industry-leading products known for their outstanding performance, quality, and value. We appreciate the show of confidence by members of the National Marine Electronics Association who recognize three of our products, our TrackVision UHD7, our new TrackPhone V30, and our TrackPhone LTE marine cellular system, all with 2021 Product of Excellence Awards. This marks the 24th consecutive year we've received this award for one of our TrackVision satellite DV systems, 19 years in a row for our TrackPhone satellite communication systems, and the third consecutive year for our cellular system. From a leisure marine services perspective, we saw the highest level of demand for our KVH Elite unlimited streaming service since we launched it in 2019. Earlier this year, we expanded coverage to include the eastern seaboard of the U.S. and Canada and joining the Caribbean and the Mediterranean. We also increased our service speeds and adjusted pricing in Q3 and appear to have found a sweet spot for yacht owners. Demand increased, and we've actually sold out weekly subscriptions in two of these regions. This premium service has an ARPU of around $7,000 a month. As we head into winter, subscriptions in the Caribbean are expected to be very strong. In the commercial market, macro industry trends are uniformly positive. Port call arrivals in Q3 were up 12% year over year. The Baltic Dry Index is up 125%. Oil is up over $80 a barrel. Shipping confidence is at the highest level ever recorded. And container ship charter rates are at an unprecedented $200,000 per day. During the quarter, we continue to build our position within leading commercial fleets around the world. Breeza Schiffhardt in Germany recently signed Agile plans to deliver connectivity and crew welfare content to their fleet of cargo ships, bulk carriers, and container ships, as well as for their more than 2,000 seafarers. Greek ship manager A.M. Nokimos is rolling out Agile plans to its fleet in collaboration with our service partner in the region. And we've also added some important customers in Asia, and our service revenue is now almost perfectly split between the Americas, EMEA, and AsiaPAC. And finally, on the commercial front, it was great to see content revenue up versus Q3 last year as our cruise ship customers steadily resume operations. This is an important turning point in our media business, which is an extremely high-margin business and a great contributor to our mobile connectivity margins. Our maritime IoT business continues to develop as we steadily expand our partner and application ecosystem, most recently announcing that Netfasa has joined as a watch solution partner. Netfasa's focus is container tracking, an application of particular value right now as container rates are soaring and the shipping industry seeks to straighten out the global supply and logistical challenges. KBH Watch is being designed into partner solutions and is actively included in proposals by our partners. These efforts are the foundation of our future success as we're essentially creating and serving an entirely new market space in the maritime industry. The big news in our IoT business is yesterday's introduction of Cloud Connect, the third component of our KVH Watch suite of maritime IoT solutions. Initially, we offered Flow for basic 24-7 machine-to-machine connectivity and for real-time IoT applications, and remote expert intervention, which connects experts onshore to engineers onboard in real-time on video. Now we're offering Cloud Connect, an edge-to-cloud IoT connectivity solution with advanced edge computing that enables the integration of maritime applications and digital services for smart shipping. Cloud Connect addresses the complexity of acquiring data from hundreds of onboard sensors with a comprehensive package containing data source definitions, data mapping, and associated dashboards. An onboard cloud edge connect edge server aggregates and processes data from the vessel sensors and provides a hybrid cloud architecture that enables edge and cloud-based data storage along with API-based data access for analysis, cloud-based data reporting, and dynamic visualizations. Now, Cloud Connect can support a broad selection of stakeholders in the maritime industry. For example, vessel owners and operators can see equipment data in real time, such as noon reports, monitoring reporting, and verification reports to check their compliance with the Energy Efficiency Ship Index, for example. Equipment manufacturers, like engine manufacturers, can monitor their onboard equipment to support service contracts and warranties. And multi-cart service providers can use the data to provide remote service and repair. And vessel performance optimization companies can rapidly deploy digital services by pulling live data from the cloud to reduce fuel consumption throughout a fleet. KBH's Blueprint software normalizes data channel names to one global standard for ease of integration. We believe that Cloud Connect is the most advanced, versatile, and robust maritime IoT connectivity technology an analytics solution available in the maritime industry. Cloud Connect uses a dedicated KVH watch terminal, so multiple subscribers can enjoy enhanced security, compliance with IMO cybersecurity guidelines, and priority transmissions, since they're not reliant upon the ship owners to share a sliver of the vessel's connectivity. Cloud Connect has been undergoing live testing on several prospective customer vessels for months now and will be available on November 30th. The power of Cloud Connect is its ability to turn data into economic benefit for a fleet of vessels, and we're very excited to bring it to market as the maritime IoT segment continues to develop. And moving on to our inertial navigation business, within the Fog product line, we definitely had supply chain challenges which limited deliveries in Q3. Fiber optic gyro and OEM product sales decreased half a million dollars or 6% in the third quarter, compared to Q3 of last year. The demand for fog products continues to be quite strong, and we now have a total backlog of $22 million for our inertial navigation business. Within the market, there's an increasing interest in autonomous robotics and platforms, including autonomous trucking. The long-haul trucking industry faces a severe crunch regarding drivers, with an estimated shortage of 80,000 drivers. As a result, we're seeing accelerated demand from autonomous trucking companies. We've achieved some recent design wins with some of the leading autonomous truck developers and leading autonomous platform companies. KVH has been selected as the primary inertial sensor due to its superior performance. RMUs are being integrated into sensor fusion solutions that include LiDAR and radar as well. We expect to be able to announce the companies we're working with in the autonomous trucking space in the coming months. Our success in autonomous vehicle market is starting to become an important part of the fog business. In fact, we expect over 20% of our fog revenues to come from autonomous vehicle platforms next year. In addition to vehicles, the autonomous everything industry is expected to grow with a CAGR of 31%, and KVH has products that meet the needs of many of these new applications. Elsewhere in our inertial business, we recently received a $7.9 million fiber optic gyro order for remote weapon stations built by Escobano in Spain. As you may recall, remote weapon stations have long been a pillar of our inertial business thanks to our system's ability to accurately measure vehicle motion and withstand the shock of gunfire while helping keep the weapon precisely aimed at the target. We have a solid pipeline of TACNAV opportunities as well, In fact, we're expecting an important production order from a U.S. customer during the fourth quarter of this year. So, to wrap up, we achieved record VSAT shipments and solid year-over-year growth, even in the face of disruptions to the global supply chain. While we expect these to continue for some time, we're still successfully delivering on our strategic priorities, delivering strong growth, building backlog in our key markets, and establishing a firm foothold in exciting new markets and applications. Ship deliveries and other components remain a concern for Q4 and could limit our overall growth rate in the short term. However, as we've previously indicated, our mid-range targets of low double-digit growth for revenue and mid-teens percentages for adjusted EBITDA margins are on track. We continue to believe that our financial outlook will translate into substantial shareholder value. Now, I'd like to turn the call back to Roger for a more detailed look at the numbers. Roger?