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spk04: Good day and thank you for standing by. Welcome to the Q2 2024 KBH 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 a question. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated advising that your hand is raised. To withdraw your question, please press star one one again. Please be advised, today's conference is being recorded. I would now like to turn the call over to our first speaker for today, CFO, Anthony Pipe.
spk01: Thank you, Crystal. Good morning, everyone. And thank you for joining us today for KBH Industries' second quarter results, which are included in the earnings release we published earlier this morning. Joining me on the call is the company's Chief Executive Officer, Brent Bruin. Before I get into the numbers, a few standard statements. Firstly, if you'd 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. And if you are listening via the web, please feel free to submit questions to IR at KBH.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 will 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 Q2 2024 Form 10Q, which will be filed 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 second quarter, I'll turn the call over to Brent.
spk03: Thank you, Anthony, and good morning, everyone. Let me begin with a high-level overview of our results. Second quarter airtime revenue was $23.0 million, down $3.9 million from the second quarter of 2023. As anticipated, airtime gross margins declined slightly due to a shift in our airtime subscriber base. Total revenue for the quarter was $28.7 million, roughly a 15% decrease from a year ago. This was due to the continuing decline in VSAT product sales and corresponding VSAT service revenue. These results are in line with the expectations we provided last quarter. The maritime industry continues to undergo significant changes driven by the emergence of NGSO networks. In response to the new market realities, we have taken aggressive steps this year to reposition the company for the future. We're already seeing encouraging results. We have now completed our reorganization efforts and believe that we are now appropriately sized with the right resources to meet our goals as we move forward. The reorganization is expected to result in annualized operating expense savings of approximately $5 million. We achieved a slight increase in our subscriber vessel count in the second quarter, reversing the decline in subscribers we experienced in the first quarter. We shipped a record number of communication antennas for the second consecutive quarter and we substantially increased shipments of our ComBox Edge gateway. Many of the second quarter product shipments are now being installed in a waiting activation. Historically, previous quarter shipments have been a strong leading indicator for future airtime and service subscription growth. Additionally, we signed a bulk data distribution agreement with Starlink. Under this agreement, we made a prepayment for a large block of data to be used over a period of more than one year at favorable rates. This new arrangement offers us increased flexibility in developing and selling custom data plans. As a matter of fact, this morning we introduced a number of custom Starlink data plans, which offer new options for fleet operators and boaters to select the plan most suitable for each vessel and budget. Additionally, we have expanded our value added services to include vessel-based telephone connections using our global voice over IP service offering. We can now provide any Starlink equipped vessel with two voice lines and as many as 10 virtual local numbers. Starlink is an exciting part of our multi-orbit multi-channel portfolio. It offers outstanding communications for commercial leisure subscribers worldwide. We are pleased to be able to offer custom data plans and other valuable supporting services such as global VSAT-LEO hybrid always-on connectivity, the ComBox Edge communications gateway service, and -7-365 live airtime and technical support for our customers around the world. Our customers appreciate the breadth and quality of our integrated solutions and support. The result is the fastest growing connectivity service in our history. We have activated more than 1,000 new Starlink terminals for new and existing customers since the start of the year. We are also moving forward with other new product and service enhancements. In addition to the anticipated rollout of one web service later this quarter, we'll be expanding the capability of ComBox Edge in the coming months with enhanced cybersecurity and crew internet options. At the same time, we plan to offer new ways to bring crew entertainment and news content on board using the KVHLink service. Our industry is changing rapidly. Standalone VSAT service descriptions have declined faster than anticipated, but we have been nimble and have taken steps to adjust our business model. We are seeing continued growth in VSAT-LEO hybrid solutions and reduced churn for those deployments, which indicates that commercial fleet managers and leisure boaters recognize the value of our hybrid approach. We are anticipating subscriber growth in the third quarter and are hopeful that this trend continues. We are on our way to achieving our strategic, financial, and operational goals for 2024 and believe that we are on the right path and will emerge from a reorganization as a world-class solution provider built on global airtime and superior service and support. I now like to hand it back to our CFO, Anthony Pike, for a look at the numbers.
spk01: Thanks, Brent. As a reminder, I would like to know that similar to our call for Q1, I will not restate data that is in the earnings release or clearly described in our 10Q. I will focus my comments on information that either elaborates on or clarifies the published data. So with respect to our second quarter financial results, airtime gross margin, which is not reported in our earnings release, was 36.0%, down compared to the prior quarter gross margin of 41.8%. As noted during prior calls, we do expect airtime margin to compress slightly over time as LEO services become a larger percentage of our total airtime revenue. However, this decline in airtime gross margin from Q1 was primarily driven by churn in our traditional VSTAT vessels, where a significant portion of our costs associated with this service are fixed. Total subscribing vessels at the end of Q1 were just below 6,700, which is approximately 1% up from the prior quarter. Reported Q2 product gross profit of negative 0.3 million included 0.5 million of employee severance charges related to the reorganization and manufacturing wind down. Excluding these charges, product gross profit was a positive 0.2 million as compared to a negative 1.4 million in Q1 of last year. The Q2 operating expenses of 11.8 million include 0.7 million of employee severance charges related to the transformation initiatives and manufacturing wind down announced on February 13. Q2 operating expenses, excluding RIF charges, were down around 1 million or 7% from the prior quarter. As mentioned previously, the restructure we have performed will generate 9.1 million of annualized savings and employee costs. Around 3.7 million of this will benefit product gross profit, and around 5.4 million will reduce operating expenses. Our adjusted EBITDAF of the quarter was 2.6 million, and our earnings release has a usual reconciliation of that. Capital expenditures for the quarter were 2.6 million, and so adjusted EBITDAF less CAPEX was zero. This compares to a negative 0.3 million in the prior quarter with adjusted EBITDAF of 2 million less CAPEX of 2.3 million. Our ending cash balance of $49.3 million was down approximately 17 million from the beginning of the quarter, and this was due to a payment to Starlink related to our pooled data agreement, which we announced on June 26. Our expectations for revenue and adjusted EBITDAF in 2024 are unchanged from what we disclosed in our Q1 call, in that we expect our 2024 revenue will be in the range of approximately 117 to 127 million, and that our adjusted EBITDAF for 2024 will be in the range of approximately $6 to $12 million. This concludes our prepared remarks, and I will now turn the call over to the operator to open the line for the Q and A portion of this morning's call. Operator.
spk04: 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, one, one on your telephone and wait for your name to be announced. To withdraw your question, please press star, one, one again. Please stand by while we compile the Q and A roster. Our first question comes from the line of Chris Quilty of Quilty Space. Your line is now open.
spk02: Chris. Thanks, guys. I wanted to start with a clarification. I heard that Anthony affirmed the nine million in cost savings, but somewhere in the script, you mentioned five million of annualized cost savings. Is that...
spk03: Sorry?
spk02: Sorry,
spk03: yeah, Chris. That was operating expense.
spk02: Okay. So I was referring to approximately
spk03: $5 million of operating expense, which correlates to the 5.4 that Anthony discussed. Gotcha.
spk02: Okay. Second question, I think you in the past sort of mentioned what you're seeing in terms of customer bundling. Are you seeing existing customers with a TrackVision product simply swapping for a Starlink, or are they generally adding that on? And for, I would say, new Starlink subscribers, where you're just, they're new to you and you're bringing them on with Starlink. Are those generally in one class of vessels that tend to be on the leisure side, more commercial, or are there any other trends you're seeing?
spk03: Well, we're seeing a bit of everything, quite frankly. So as far as, you asked a few questions embedded into one long question. As far as the Starlink terminal ads, as far as existing customers, some have swapped out and those tend to be the lower end of the leisure market. It would have previously used our 37 centimeter. In the mid-range, larger yachts and commercial maritime, they're adding a Starlink to their existing VSAT. As far as new product sales, we've sold a number of standalone Starlinks, but we've also have sold quite a few into the merchant marine arena, providing both VSAT as well as Starlink, along with our ComBox Edge and a variety of other value-added services.
spk02: Gotcha, and what are you seeing in terms of the ARPU trends as this mix shifts? Yeah,
spk03: right now, it's a bit early. The ARPU on a Starlink, on a standalone Starlink, tends to be a little bit lower than what we've experienced from a VSAT standalone. As far as, sorry, I lost my train of thought. As far as the combination of the Starlink and a VSAT, they could, it's very much in line and actually a bit more than what we've seen historically. But Anthony has more details that he can provide.
spk01: Yeah, I mean, ARPU is overall fairly flat, I guess, but that still is a Starlink, it's still a relatively small portion of our overall business.
spk02: Gotcha, and what are you seeing just in terms of end market? I mean, there's quite a bit of dislocation in the world, especially in maritime. Is that having any impact on sales, either positive or negative?
spk03: Well, I'm sorry, what do you mean by end market?
spk02: Well, speaking about the overall shipping and logistics industry, you know, at times we've had, okay, probably good at that.
spk03: Yeah, we haven't seen much of an impact from other market dynamics, but we have seen an impact that vessels that were previously not signing up for communications or VSAT communications are moving forward with a Starlink. So a Starlink is opening up a larger market, both in leisure and like commercial. And like commercial would include fishing as well. There's a variety of different sized fishing vessels out there, and the mid-sized to larger ones would always have communication, connectivity, and most of those, a lot of those won't be set. We're seeing that the lower end of that market opening up. We also would anticipate the market opening up further as we introduce 5G service offerings around the world. In particular, with the Marine.
spk02: And OneWeb service, is that up and running yet?
spk03: No, we're testing it right now, but it has not been launched or anticipating later this quarter, but we do not have an exact date.
spk02: Gotcha, and so far customers find that a comparable service to Starlink or are they purchasing it for different reasons, they need high latitude?
spk03: We haven't launched it yet, so we're just testing on a couple vessels and it seems to work well.
spk02: Gotcha, and in terms of the wind down in the manufacturing, it looks like the gross margins came out better than I'd expected and certainly better than recent trends. Is it fair to assume we should look at sort of, teens type negative margins as the product burns through?
spk01: So, yeah, we talk, the restructures helping us significantly in the factory. We expect additional cost of sales savings of maybe half a million in the third quarter on the labor side, so obviously that will help things, but also as we continue to build out, we are absorbing our costs much more successfully. So yeah, we do hope and anticipate that the trend to positive margins on the product will continue.
spk02: Okay, and on the service side, you're comfortable with managing your geo bandwidth as that draws down?
spk03: Yeah, we have the network appropriately sized for our install base right now, and we have some flexibility to reduce bandwidth as we move forward.
spk02: Gotcha, and final question, is there anything you're seeing out there beyond Starlink competitively in the market?
spk03: When you say beyond Starlink, you're talking about other NGSO or Leo solutions, I think the next big one to come would be Kuiper. We have to get one web is just about here and then you would have Amazon Kuiper. And behind there, wait speed from Telesat seems to be a bit delayed, but I think that's the next big move that would take place and I believe that would be in the 2026 timeframe.
spk02: All right, very good, thank you. Thank you for
spk04: your question. I am showing no further questions at this time. This does conclude today's grant. You may now disconnect.
spk03: Okay, thank you very much. Have a good day, everyone.
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