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spk01: Good day, and thank you for standing by. Welcome to the Q3 2023 KVH Industries, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Roger Keeble, Chief Financial Officer. Please go ahead.
spk02: 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 earlier this morning. Joining me on the call are the company's Chief Executive Officer, Brent Bruin, and Chief Operating Officer, Bob Balog. Before we dive in, the usual announcements. First, if you would like a copy of the earnings release or if you would like to listen to a recording of today's call, both 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 adjusted EBITDA, which is a non-GAAP financial measure. You'll find a 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 third quarter, I'll turn the call over to Brent.
spk03: Thank you, Roger. Good morning, everyone. Let me start by saying KVH is on the rate track thanks to our successful efforts over the last year and a half. We divested non-strategic businesses, rate-sized our staff in 2022 to focus exclusively on mobile connectivity products and services, grew our subscriber base by more than 1,000 vessels, and maintained a debt-free balance sheet. In our most recent quarter, our airtime sales grew 3% year over year, and we maintained our airtime subscriber base at roughly 7,100 vessels, a slight dip from the all-time high we hit last quarter. Although we are pleased with modest year-over-year growth, it is a bit lower than past quarters due to increased demand for competing data and content streaming services. We are now focused on positioning KVH within a rapidly changing marketplace. Ever since we have entered the satellite space with our maritime TV receive-only antennas and then with our VSAT terminals and network, we won against traditional competitors due to four key differentiators. First, our proprietary terminals. Second, our geosynchronous VSAT network. Third, our Combox integrated network management tools. And fourth, our outstanding global service and support. However, the market has changed as communication solutions require faster speeds, highly competitive data rates, lower cost terminals, and multiple communication options. We believe we are well positioned to maintain our mobile connectivity leadership role as we continue our ongoing strategic evolution as an integrated solutions provider. This evolution includes a terminal agnostic approach that permits us to integrate our VSAT and cellular terminals with new and emerging hardware from Starlink and other manufacturers. A multi-network approach that includes integration of our global VSAT network with cellular, Wi-Fi, LEO, and other services. Our seamless approach to network management that delivers versatile bandwidth management tools along with cybersecurity and value added services. And of course, our global service and support capabilities. In recent months, we have made two major strategic moves critical to our future growth. First, we strengthened our position as a multi-orbit, multi-channel integrated solutions provider when we entered into an agreement to be a Starlink reseller. We are now offering Starlink both as a standalone solution and as a hybrid companion with our TrackNet, TrackPhone, and OpenNet terminals. We are activating the Starlink terminals through KVH's Airtime Services Group, providing 24-7 live technical support and working with leisure boaters commercial customers, and boat builders to deploy the Starlink service as part of a comprehensive KVH solution. Second, we entered into an exclusive maritime distribution agreement with Cognitive Networks, giving us access to their dynamic suite of network and bandwidth management tools. This agreement expands our network management portfolio which already includes our Combox bandwidth management suite of services and managed firewall from Fortinet. The cognitive technology enables us to seamlessly integrate communication channels aboard commercial and leisure vessels, such as LTE, 5G, VSAT, Starlink, and Wi-Fi. We can also deliver sophisticated network and bandwidth management for shipboard operations, crew, owners, and guests over the KVH-1 global hybrid network. I believe this new technology and service will be integral to KBH's multi-orbit, multi-channel communication solutions. We are excited by these two strategic moves and their implication for our long-term strategic direction. Our arrangements with Starlink and Cognitive Networks are examples of how we will continue to expand our position within the mobile connectivity market. Looking ahead, we will continue to leverage our strong distribution channel while drawing on our large pool of agile plan terminals, which will help us reduce CapEx going forward and support our continued focus on free cash flow. We also plan to continue our efforts to adapt to the changing competitive environment by adjusting our operations to improve profitability where we can. I'll now turn it over to Roger for some context regarding our results.
spk02: Thanks, Brent. First, I would like to note that unless specifically stated otherwise, my comments with respect to Q3 of last year relate to our continuing operations, which exclude the results of the inertial navigation business that we sold in August last year. Also, in a change from prior calls, I will not restate data that is in the earnings release or clearly described in our 10-Q. I'll focus my comments on information that either elaborates on or clarifies the published data. Therefore, airtime gross margin, which is not called out in our earnings release, was 42.4% down from 44.0% last year. However, due to a number of factors, it's still above our near-term expectation of high 30s, which has not changed. Total subscribers were up about 4% from Q3 of last year. However, growth has slowed, and Q3 ending subs were basically flat from the end of Q2. Product gross profit was negative by about $600,000, and while the MD&A section of our 10Q describes the change from Q3 of last year, the primary driver of the negative margin was low unit volumes. Operating expenses excluding the impairment charge were $11.6 million. We expect that will tick up in the fourth quarter as we filled several key positions, and we also have some normal seasonally higher OPEX in Q4. As such, we continue to expect the normal quarterly run rate to be between $12.5 and $13 million. The impairment charge of approximately $6 million represents a write-off of all the company's remaining goodwill, as well as approximately $660,000 of media group assets. This charge is described in detail within the footnotes in our 10Q. However, just to clarify, it was a non-cash event and was driven by the decline in our stock price in August, when the market value of our equity fell below the book value of our net assets. Our adjusted EBITDA for the quarter was a positive $4.5 million, and our earnings release has the usual reconciliation of that. Capital expenditures for the quarter were $2.4 million, and so adjusted EBITDA less capex was positive by over $2 million. Our ending cash balance of $69 million was down $1.8 million from the beginning of the quarter. However, that decrease was due to increases in our inventory and prepaids. So without those, our cash balance would have been up by more than the amount of our interest income. With respect to the full year, given that adjusted EBITDA for the first nine months was $12 million, we are increasing the low end of our guidance from $12 million to $13 million, giving a new range of $13 to $15 million. For total revenue, we are also narrowing the range to $133 million to $136 million. This concludes our 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.
spk01: Operator? Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Chris Quilty of Quilty Space. Your line is now open.
spk04: Thanks, gentlemen. I wanted to follow up a little bit on Starlink. I think originally your plan was to only bundle that with the KVH VSAT suite. It sounds like you're now selling that individually. Two questions. One, what sort of drove that change? And number two, can you just remind us, I mean, when you sell Starlink hardware, that is sold at basically no margin. So really, it's only the services associated with that. So if you're selling Starlink alone, are you able to actually wrap in some services with it?
spk03: Yeah. Good morning, Chris. To answer the first part of your question, the We felt it was a requirement to sell it as a standalone service in particular for Leisure Marine. Leisure Marine users aren't as focused on having a bundled solution along with the VSAT. And the majority of our activations that have been standalone have been Leisure Marine. In regard to your second question, yeah, the margins are rather tight. We do add a few other components that aren't necessarily included, such as a longer length cable. and other type of options. We do the installation, and we provide other value-added services on board.
spk04: Gotcha. So year over year, having the subs about flat, Is there something, you know, seasonal or is it really just a Starlink impact? And I guess question on how you treat those Starlink subs. Do they count as subs for your total or do they not count since you're not doing the service revenue?
spk03: At this point, they're not a factor as far as our overall sub count. We just entered into the arrangement with Starlink at the end of September. So in regard to third quarter results,
spk04: startling terminals are not included in those subs as we go forward we very well may break those out separately we haven't really crossed that bridge yet gotcha cognitive can you I know you had the press release which I read but can you give us maybe a little bit of background on both relationship the decision to do an exclusive and you know what what you gave up to get that exclusive and how that positions you relative to other players in the market. Clearly, Starlink offers almost nothing, but a lot of your larger competitors do have these sort of suites. Does this feel like it's something that is hugely incremental, or is it just bringing you up to par with where our competitors are?
spk03: I think it's a bit of both, actually. It is definitely incremental in regard to where we're going with our multi-channel multi-orbit approach that we need to join different types of communication channels on board a network. They can do a tremendous number of activities that we couldn't do with our core Combox functionality, such as channel bonding, which is incredibly important so you can take advantage of the multiple channels on board the vessel. And it also enables us to have a seamless approach to bringing on competitors' VSATs. We have our own VSATs. We have our Combox technology embedded, software embedded into our VSAT design, but when we're bringing on a terminal made from another manufacturer, it enables us to provide onboard bandwidth management tools that are actually more advanced than what we previously have provided with our Combox suite of services.
spk04: Got you. And the relationship there, how did you, you know, come together with them?
spk03: They've been in the market. They've shown into maritime. You know, I've been in the satellite industry for quite some time. I'm familiar with Anad's time at Gogo. It's just, you know, we were working with them in regard to some standalone customers, airtime customers that migrated over to our network, talking about competing terminals. So it's just a, It was just a natural progression. Bob Baylock wants to add something.
spk05: Yeah, hey, Chris. An easy way to think about it is, of course, for years we've had Combox and we've had built-in switching in the H series to switch between the different WAN channels. And it provides a really decent functionality. It automatically does the switching, keeps you connected, keeps your user experience always in a state where you're online. What the cognitive networks devices do is they're really sort of the next generation step up as far as network management goes. And they're providing things, and it's really a tiered, layered offering. When you upgrade to that sort of performance, now you're getting shared channel bonding. You're getting channel balancing. And that kind of stuff is super important when you throw on multiple devices. say on a larger boat, multiple Starlink terminals where you've got blockage on one or the other and you want to make sure the experience stays seamless. They also allow us to provide not just application filtering and things like that, data usage monitoring. It allows us to do it all the way down to the device level. So we can, for example, let one of the ships turn off a crew member that was using up too much data on a specific application. So there's several tiers of that offering. So really what we're doing is going really strong into the value-added services to layer all of that stuff on to give the customers exactly what they're looking for in levels of performance.
spk04: Great. That's good detail. Switching gear on the hardware, I mean, we've run negative margins for several quarters now. Do you see a path forward to getting back to profitability, or are you engaging in some sort of strategic review around what you should do with the manufacturing side of the business on hardware?
spk02: I think it's something we've been evaluating. It's a somewhat complicated issue. I would say we're just in the process of sort of evaluating what the right next step is.
spk04: Fair enough. And I missed on the forward guidance. I think you gave revenue of 33 to 36. Did you give EBITDA?
spk02: Yes, adjusted EBITDA, it was 12 to 15. We're moving it 13 to 15.
spk04: Great. And I guess a final question here, with regard to agile plans, that was historically a big CapEx component for you. Do you expect that to be as large now that you're Forgive me, I forget the service. Is it KBH1 where you're putting, using competitors' hardware?
spk03: We'll be backing off on the amount of CapEx and the Agile plans. One of the reasons is using competitors' hardware, as you just indicated. Secondly, we've had the program in place here for almost 10 years. Of course, we've had a bit of churn, which we do just in the normal course. So we have a pool of assets that we refurbish and redeploy. So as far as the CapEx is concerned, every unit that goes out the door, even though we're activating new Agile customers all the time, the CapEx for that unit could have been spent many years ago, two or three years ago. So the answer is we're going to be reducing CapEx on a go-forward basis.
spk04: And have you seen any change in the churn? I mean, you made it through the COVID without a big spike in churn as Starlink. started to impact that at all?
spk03: We've had an uptick in churn, in particular with Leisure Marine. Going back to your original question about selling Starlink on a standalone basis, that's where we've seen the most.
spk04: Gotcha. And you're still good in terms of satellite capacity, still 100% KU based. Are you good on capacity and what do you, I mean, I know obviously Intelsat has four software-defined satellites on orbit, but you've got more than you're out for that capacity to come online and Starlink's growing every day. Are you still in a good position?
spk03: We're in a fine position in regard to the satellite capacity.
spk04: Great. And final question, I know I said that before.
spk03: You already had the final question.
spk04: I know, I know. So with the competitor terminals, when you bring those on, those just show up as regular subs, right? If you switch and swap a competitor? Yes. And have you had – I know that program was just launched recently, and I think last quarter you were just tooling up. Are you starting to see any pickups?
spk03: A small amount.
spk04: Okay. Very good. We'll appreciate all the color guys, and good quarter.
spk01: Okay. Thank you. All right. Thank you. One moment for our next question. Our next question comes from the line of Ryan Kuntz of Needham & Company. Your line is now open.
spk00: Good morning. Thanks. Most of my questions have been answered here, but just following up on the Starlink model, it sounds like are you taking a proactive role on the support side there with Starlink that maybe your customers can't get direct?
spk03: Yeah. Well, we're providing 24-7 live technical support for As we always have. So Starlink is just another component of that support that we provide.
spk00: Got it. And on this cognitive relationship, any more about the company you can share in terms of their position in the market? What are their markets they serve? You know, any of the colors you can provide the company is helpful. Thanks.
spk03: I think they made the most... inroads into the maritime industry. I know they would like to expand beyond maritime into other fixed and enterprise solutions, but I'm really not in a position to speak on behalf of their company. Got it.
spk00: All right. And in terms of the seasonality looking forward, any changes that we should consider there on the revenue line in terms of your traditional seasonality going into the winter here?
spk03: I mean, we don't see seasonality that we've experienced in the past. We expect to experience again, you know, this quarter, the fourth quarter, as well as the first quarter. Got it.
spk01: Okay, that's all I got. Thanks, guys.
spk02: All right.
spk01: All right, thank you. This does conclude the question and answer session. I'm seeing no further questions. I'd like to thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
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