KVH Industries, Inc.

Good day and welcome to the KVH Industries Incorporated Q1 2022 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Roger Kubel. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us today for KVH Industries first quarter results, which are included in the earnings release we published this morning. Joining me on the call is the company's interim chief executive officer, Brent Bruin. 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 and 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 made in our SEC filings, specifically those under the heading Risk Factors in our 2021 Form 10-K, which was filed on March 11th. 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 first quarter, I'll turn the call over to Brent. Thank you, Roger, and good morning, everyone. I'm happy to report that we recorded several positives that I want to share. Total revenue for the quarter was $41.1 million. That's a 3% decrease from the first quarter of last year when we shipped a large TACNAV order. However, if we exclude TACNAV sales, our results show growth in our core businesses. Excluding TACNAV sales, we had year over year increase in revenue, driven by double digit growth in our core strategic businesses. airtime, agile plans, and inertial navigation. Consolidated gross margins and airtime margins were both up versus Q1 of last year. And while our net loss for Q1 was $4.7 million, or 25 cents a share, this included a significant portion of restructuring costs. Without the restructuring charge, we achieved an adjusted EBITDA of $1.9 million, an $800,000 increase over the first quarter of 2021. As with most companies, supply chain issues continue to impede shipments of some of our products. That contributed to a $25 million backlog across our mobile connectivity and inertial navigation businesses. Overall, sales into our core strategic markets are strong, and we continue to see demand in these markets. This is encouraging, and I have confidence that we will continue to do well here. Our expense model was our most significant challenge. both in the short term and the long term. This led us to our restructuring in early March. The effort included a reevaluation of our operating expenses to align with our expected revenue. This has also meant that we needed to make a difficult decision, which resulted in reduced personnel. This was one of the most challenging and personal decisions we had to make. We are committed to evaluating our product prices on an ongoing basis and adjust as necessary. As a result of that commitment, we increased prices on some of our products and services in January. That is why, effective May 1st, we made incremental price increases to a select group of products in response to increased cost of goods. By focusing on areas where we are industry leaders, we are well positioned for success in the long term. It is that long-term vision that has guided us to refine our strategic goals for 2022. We will drive profitability and shareholder value by focusing on our core businesses and by continuing to stay disciplined in our new product initiatives. Part of the plan also included divesting ourselves of assets that don't align with our core business. As an example, we finalized the sale of our retail radio business two weeks ago. This resulted in a $25 million unbudgeted cash benefit for Q2. Other strategies include acceleration and buildup of new subscribers via Agile plans. We're also targeting higher ARPU leisure customers and expanding our base in industry where autonomy is a significant value add. Our employees worldwide are critical to achieving these goals. We are committed to limiting disruptions following the restructuring. I have recently met in person or virtually with our employees in every region, from Middletown, Rhode Island, to Athens, Greece, and Singapore. I have listened, and I have received feedback that is crucial to keeping our core strong. Steps we have taken include realign reporting structures to gain efficiencies amongst teams, new opportunities for star performers to shine, and we were sharing weekly updates on our internal and external successes and highlighting progress on new product development efforts. While I was on the road, my primary focus was to emphasize our commitment to our employees and to our customers and service providers around the world. I continually reinforced what our brand stands for, quality, innovation, and dedication to superior service. It is important that we understand this is a transition period for KVH. The full benefits of restructuring may not make an impact until the third quarter. However, I believe that KVH is on firm footing for growth and long-term value. I am confident in what we do, and I know we have a bright future ahead. I'd like to touch on a few updates in our core markets to show where we stand and how we plan to move forward. In our mobile connectivity business, our quarterly airtime revenue increased $2.7 million to $24 million. That's a 12% increase versus Q1 of 2021. New customer shipments of VSAT terminals were up 5%. And total mobile connectivity revenue was up more than $2.6 million versus Q1 last year. We achieved this growth even as we saw a 1% decrease in our total active subscriber base. This was due to the shutdown of our legacy satellite network. As anticipated, some of the remaining legacy cut subscribers at year end are migrating to our HTS systems due in part to the spring refit season for leisure boaters. Even with that slight decline in subscribers, our efforts are paying dividends. Our airtime margins are increasing due to the elimination of the expense of our legacy network. and we are serving more customers on our HTS network. I'd also like to recognize and applaud the first anniversary of our award-winning Tracfone V30 terminal. The V30 ended its first year as our most successful VSAT product in company history. The V30 accounted for almost as much hardware revenue as our best-selling Tracfone V7 HTS. That's impressive and an incredible achievement. In the commercial market, revenue driven by our Agile plans increased roughly 10% sequentially from Q4 2021 and 48% from Q1 2021. Looking at track vision satellite systems in Q1, the limited availability of select components impacted shipments. Our purchasing team was diligent and dedicated to build and ship. However, we did enter Q2 with a $3.6 million backlog. Moving forward, our priority is to increase efforts and make components available for higher value, higher margin systems. We're also expanding the scope of our commercial marine business. There is significant demand for our recently approved service in India, and in South America, we are working with our regional airtime service partners to support commercial fishing, shipping, and river transport in several countries. The leisure market also remains strong, with seasonal demand for our satellite communications and TV products. We're also pleased to see the continued demand for KVH Elite, which is our unlimited streaming service. Subscriptions in the Caribbean and Bahamas remain solid in Q1, and our seasonal Mediterranean service launches at the start of April, and bookings are gaining momentum. Seasonal service along the eastern seaboard of the United States and Canada just went live a few days ago, and we are looking forward to serving more Elite customers there this year. Turning to our inertial navigation, we did not see the unusually large TACNAV sales that we did in Q1 of last year. TACNAV sales declined from $4.5 million in Q1 of 2021 to $700,000 in Q1 of 2022. This is a prime example of the inconsistency of our military navigation business and why we no longer include uncontracted TACNAV revenue in our guidance. However, sales of our OEM inertial navigation systems increased 13% in Q1 compared to the same quarter last year. Here again, supply chain issues impacted shipments, and as a result, we began Q2 with roughly $20 million in backlog for our inertial sensors. The good news? Demand remained steady in many of our traditional applications, including remote weapon stations and commercial products, as well as platform stabilization systems. We are seeing growing momentum in applications for autonomy, in which economy is critical, and now represents 30% of our inertial sensors revenue. Economist Trucking is a very exciting industry, and we're working closely with several leading developers. Currently, we are involved in comprehensive testing of our photonic chip-based fiber optic gyro in a number of Economist Trucking platforms. Our product is being put up against competing technologies, and I'm thrilled to report they're receiving very positive results. We entered Q1 with an array of challenges. We came out of the quarter having taken decisive steps to align our operations with our areas of strength and revenues. Our goal is to grow the business and make adjustments that will guide us to long-term success and profitability. I look forward to the quarter and the year ahead. And with that, I'll turn it over to Roger.

Thanks, Brent.