KVH Industries, Inc.

hello and welcome to the kvh industries q3 2022 earnings call my name is laura and i will be your coordinator for today's event please note this call is being recorded and for the duration of the call your lines will be on listen only however you will have the opportunity to ask questions at the end of the call this can be done by pressing star 1 on your telephone keypad to register your question if you require assistance at any point Please press star zero and you will be connected to an operator. I will now hand you over to your host, Roger Cable, to begin today's conference. Thank you.

Thank you, Laura. 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 Executive Officer, Brent Bruin, and Chief Technology Officer, Bob Bailoff. 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. 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 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, and Form 10-Q, which is expected to be filed sometime this afternoon. The company's other SEC filings are available directly from the information section of investors on our website. Before turning the call over to Brent, I would like to briefly comment on the delay in filing our 10-Q for the third quarter. On August 9th, we signed, announced, and closed the sale of our inertial navigation business to MCOR Corporation. In the form 12B25 that we filed on November 10th, we noted that as a result of the added demands on our financial and accounting personnel due to the sale, we were unable to file our 10-Q in a timely manner. Without going into all the details, I can tell you that having the inertial navigation business in the same legal entity and same set of accounting books as the mobile connectivity business, having shared vendors, closing the sale mid-month, and complying with our reporting obligations to MCAR under both the sale agreement and the transition services agreement all made the disaggregation of results a complicated and lengthy process. However, we have completed that process and believe we are in a good position to move forward. Now, to walk you through the highlights of our third quarter, I'll turn the call over to Brent.

Thank you, Roger. Good morning, everyone. We wrapped up a very positive and exciting third quarter that was highlighted by solid financial results, the sale of our inertial navigation business, the launch of our new TrackNet H series, and we also completed a lengthy competitive process, which resulted in a five-year renewal of our U.S. Coast Guard contract. Financially, it was a good quarter. Excluding any contributions from inertial navigation, we recorded $35.2 million in revenue, up 2% from the third quarter of last year. An aggregate gross margin of 37.1%, which includes airtime gross margin of 44.2%, a new record. Adjusted EBITDA of $4.1 million, non-GAAP EPS of $0.07 per share, and we ended the quarter with more than 6,800 airtime subscribers. However, our growth was slower than anticipated. Continued supply chain challenges slowed shipments, while economic and inflationary pressures seemed to be impacting some new orders. We're also seeing increased competitive pressure, particularly in the leisure marine market. KVH is in a good position to respond to these challenges. The restructuring we embarked on in March is working. After the initial navigation divestiture, we implemented additional restructuring initiatives that resulted in further annualized savings of approximately $2 million. Overall, we have made significant positive progress in reducing operating expenses. Third quarter OpEx on a reported basis was $14 million. an 11% decrease versus Q3 of last year. As discussed during our call in August, we sold inertial navigation assets to MCOR, which resulted in net proceeds of approximately $52 million. Over the last four months, we've unwound inertial navigation from our operations. These efforts touched on almost every department in the company, including sales and service, marketing, human resources, IT and data systems, facilities, engineering, and finance, which has proven to be the most difficult. We are still in a transitionary period, but the bulk of this effort is now behind us. We continue to evaluate the best use of the proceeds from the transaction and the best path forward, including assessment of strategic alternatives for the company. We can now focus on the success and growth of our core business. On that front, we completed some outstanding initiatives and achieved strong results during Q3. First, the US Coast Guard selected us to deliver global communications for their small cutter fleet. We won this five-year contract renewal through a competitive bid process. The contract is worth as much as $69 million and supports more than 140 vessels and platforms. U.S. Coast Guard Cutters will continue to use our TracFone V7 HTS terminals and our global HTS network. We're proud to have delivered superior communications to the Coast Guard for more than 12 years and are thrilled to be keeping crew and ships connected for the next five. Additionally, we look forward to pursuing other connectivity and service opportunities with the Coast Guard. In July, we introduced our new KVH-1 hybrid network and TrackNet H-series terminals. Every TrackNet terminal includes fully integrated VSAT, 5G cellular, and shore-based Wi-Fi, an industry first. These channels are managed by our unique intelligent channel switching technology, which considers the cost of service, data throughput, and connection quality. The result is a seamless and automatic process that enables users to enjoy connectivity without having to worry about what service is active. TrackNet is the long-term foundation for what we believe will be a vibrant hybrid connectivity ecosystem that takes advantage of faster-to-celerator services and new technologies to support the growing demand for data. That's why every TrackNet system is capable of integrating additional third-party channels, such as user-supplied SIM cards for local cellular services, L-band backup services, such as Iridium service, and in the future, LEO and MEO constellations. All these features are managed with our automatic hybrid switching to deliver a multi-channel communication service that will support future connectivity solutions. TrackNet is shipping and feedback from customers is positive. The systems are easy to install, offer affordable airtime plans that are easy to understand, and delivers a seamless hybrid experience. Financially, we continue to make progress in our connectivity business. We recorded airtime revenue of $27 million, an 8% increase in comparison to the same period last year. We achieved record airtime margins of more than 44 percent, and third quarter KVH Elite subscriptions were up 60 percent over Q3 of last year. However, during the quarter, we faced lower than anticipated VSAT and satellite TV terminal orders and shipments because of the dual impact of ongoing supply chain challenges and inflationary pressures. As a result, with the supply chain issues, We entered Q4 with more than $2.1 million in TVRO and $300,000 in VSAT systems backlog. The supply chain issues are steadily clearing, and we expect any backlog we have entering Q1 will be based on customers not wanting or needing delivery until next year. We're also seeing challenges in the market. For example, in Alaska, where we support a large portion of fishing fleets, the king crab season was canceled due to unexpected and significant declines in crab stocks. The Baltic Index, a leading indicator for the commercial markets, has been cut by two-thirds since the beginning of the year. And we are experiencing competitive pressure from new entrants into the market, especially in the leisure market. As a result, we will be slightly more conservative with our expectations for the remainder of the year and as we look at 2023. Roger will share additional insights on this in his comments. Nevertheless, we remain confident and enthusiastic about our business. We continue to roll out new features to expand the capabilities of the TrackNet H series. These include value-added services such as an ultra-compact DC-powered below-deck unit, ideal for smaller yachts and regional commercial vessels. The ability to support both alternate primary and backup communication channels, all managed through our intelligent hybrid hub. A new enterprise-grade cybersecurity option. A new cloud-based email system that will offer tremendous flexibility and customer self-service. And SportsLink Stats. our new real-time sports statistics news service for crew morale and entertainment. We're also in discussions with other third-party providers to deliver additional services over our network. These are vital competitive differentiators for our KVH-1 hybrid network and TrackNet systems, especially as new connectivity services are rolling out. It's important to remember that these new services are simply data pipes. with none of the critical tools and services required by commercial fleets and other customers. KVH-1 offers tools as well as integration with these new services. We're making the maritime hybrid connectivity ecosystem a reality. To wrap things up, our restructuring efforts are building a healthy foundation for KVH's sustained growth. We are steadily moving toward profitability. and we can now focus entirely on our core business and strengths. Customers are thrilled with our innovative hybrid product line, and we continue to introduce complimentary value-added services and expanded integrations with third-party services. We are carrying out these strategic efforts with the goal of returning value to shareholders, and I believe our results demonstrate that we are on the right path. Now I'll turn it over to Roger for the financial details.