KVH Industries, Inc.

Good day. Thank you for standing by. Welcome to KBH Industries' fourth quarter 2024 earnings conference call. At this time, all participants are on 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 will need to press star 1-1 on your telephone. You will then hear an automatic message advising you your hand is raised. Please note that today's conference may be recorded. I would now like to turn the conference over to Mr. Anthony Pike, Chief Financial Officer, Please go ahead, sir.

Thank you, Olivia. Good morning, everyone, and thank you for joining us today for KVH Industries' fourth 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 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, and if you are listening via the web, please 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 will find the 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 2024 Form 10-K, which we plan to file later today. The company's other SEC filings are available directly from our investor information section of our website. Now, to walk you through the highlights of our fourth quarter, I'll turn the call over to Brent.

Thank you, Anthony. Good morning, everyone. Before discussing our high-level results, I want to address the overall shift in our business. During 2024, we continued our transition from focusing solely on VSAT services to offering multi-orbit, multi-channel solutions. What does this mean? In addition to VSAT services, we now offer LEO solutions, the most significant of which is Starlink. We have also expanded our portfolio to include a high-speed cellular solution. Additionally, we added a cutting-edge appliance, the Combox Edge, to deliver advanced and easy-to-use onboard remote bandwidth management for multiple wide and local area networks. Over the course of 2024, we integrated each of these elements into our go-to-market strategy, which is steadily building positive momentum. In the fourth quarter, we shipped more than 1,000 Starlink units and roughly 200 VSAT terminals, our fourth consecutive quarterly record for terminal shipments. With more than 2,300 active maritime Starlink terminals at the end of 2024, Starlink is our fastest growing product line in our history. And currently, there are roughly 1,000 Starlink terminals in the field that are awaiting activation. Our customers find our custom Starlink data plans, along with our live 24-7 technical and airtime support, compelling differentiators. Additionally, Our KVH manager platform offers a robust and secure set of tools to track and control onboard data usage. These factors are driving our unit growth in both leisure and commercial markets. We recently completed the installation and activation of Starlink terminals across the entire Bruin fleet. The addition of Starlink to their existing KVH VSAT service illustrates a strong demand for hybrid connectivity. In fact, roughly 50% of our Starlink terminals have been activated in tandem with a new or existing VSAT terminal. Our Combox Edge communication gateway, introduced early in 24, is the heart of our integrated connectivity approach. Demand for Combox Edge remains strong. Q4 activations were double the number of activations in Q3. We are now preparing to roll out a range of new Combox Edge capabilities. including a suite of security features that deliver integrated cybersecurity, intrusion protection, and risk mitigation tools. In December, we launched our new TrackNet Coastal cellular Wi-Fi system, cellular and Wi-Fi system, excuse me, which offers data speeds as fast as 300 megabits per second and data costs as low as $1 per gigabyte. TrackNet Coastal uses our unique Fusion eSIM technology to create a high-performance marine-grade cellular solution offering connectivity in 135 countries. The Fusion eSIM enables us to add and provision multiple cellular services over the air and then switch intelligently among them based on geographic location or other parameters. As a result, we can deliver a maintenance-free and seamless global cellular service that makes BACnet Coastal an attractive enhancement for VSAT and LEO services as well as a standalone communication system. I'm also pleased to inform you that we've added OneWeb to our satellite communications service portfolio. C-SPAN, a leading owner and operator of container ships, recently signed an agreement with us to equip its fleet with the OneWeb service. They will be among the first commercial fleets to install OneWeb and use it in an expanded hybrid configuration alongside KVH VSAT and Starlink services. These strategic initiatives are beginning to take hold and will position us well in 2025. Total revenue for the fourth quarter was $26.9 million, roughly a 4.5 percent decrease from fourth quarter of 2023. But a more relevant comparison is our third quarter revenue of $29 million. Excluding the U.S. Coast Guard revenue reduction of $1.7 million, revenue was effectively flat sequentially. Non-U.S. Coast Guard geo-airtime revenue in the fourth quarter contracted by around $1 million, which was offset by increased Starlink revenues in the same period. Going forward, we anticipate Starlink as well as other new revenue sources to outpace the decrease in geo airtime revenue. Additionally, we anticipated a contraction in revenue in 2024 and worked diligently to implement cost reduction initiatives. As a result, we brought recurring OpEx down by almost 10% for the full year. So to wrap things up, mobile connectivity remains a market in transition, as the geo-marketplace continues to adjust to the new disruption caused by legal services such as Starlink and OneWeb. While our results reflect the impact of the dynamic nature of the geo-market, the decisive steps we have taken to embrace Starlink while adding supplemental offerings such as OneWeb, Combox Edge, and a global 5G cellular service are creating a foundation for future growth. We have made the hard decisions necessary to reconfigure our business operations, streamline costs, and focus on our core strengths. We are in a stronger position now than a year ago, and I believe we are on a path towards renewed growth and profitability. I will now turn the call back to Anthony to discuss the numbers.

Thank you, Brent. As a reminder, I would like to note that similar to our call for Q3, I will not restate data that is in the earnings release or clearly described in our 10-K. I'll focus my comments on information that either elaborates on or clarifies the published data. With respect to our fourth quarter financial results, airtime gross margin, which is not reported in our earnings release, was 28.2%, which is down compared to the prior quarter gross margin of 36.5%. Excluding depreciation, our airtime gross margin for the fourth quarter was 41.4% compared to 48.6% in the prior quarter. This drop can be mostly attributed to the nature of our broadly fixed-cost VSAT services as we continue to see churn from our geo-based VSAT network, including the U.S. Coast Guard. However, our LEO margins remain strong. Our geo-bandwidth commitment will reduce by $5 million in 2025 and then a further $5 million in 2026. Total subscribing vessels at the end of Q4 were just below 7,100, which is approximately 4% up from the prior quarter. Reported Q4 product gross profit was positive 0.3 million as compared to a negative 0.6 million, excluding long recurring charges in Q4 of last year. The Q4 operating expenses of $9.3 million were $1 million or 10% down compared to the prior quarter and $1.6 million or 15% down from the fourth quarter of 2023 on a like-for-like basis excluding non-recurring charges. Our adjusted EBITDA for the quarter was $0.5 million and our earnings release has the usual reconciliation of that. Capital expenditures for the quarter was 0.8 million, and so adjusted EBITDA less capex, which we believe is a good proxy for free cash flow generated from our ongoing business, was negative 0.3 million. This compares to an adjusted EBITDA less capex of 1.4 million positive in the third quarter, with adjusted EBITDA of 2.9 million less capital expenditures of 1.5 million. So for the full year, adjusted EBITDA was $8.1 million and CapEx was $7.4 million. So adjusted EBITDA less CapEx was $0.7 million. Our ending cash balance of $50.6 million was up approximately $0.8 million from the beginning of quarter. And finally, our earnings release provides our guidance for 2025, which is a revenue of $115 to $125 million and adjusted EBITDA of $9 to $15 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. Operator?

Thank you. Ladies and gentlemen, to ask a question at this time, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 1 1 again. Please stand by while we compile the Q&A roster. And we have a question from Caleb Henry with Quilty Space. Your line is now open.

Hey, guys, a couple of questions mostly related to Leo services. You mentioned having 1,000 new ads from Starlink this quarter. I'm wondering if that's sort of your expectation going forward on a quarterly basis or if you have any expectation of roughly how many Starlink ads you'll anticipate seeing.

Let's be clear. We shipped 1,000 terminals. Anthony can see what the actual activations were. We had 2,300 active Starlink terminals at the end of the quarter, and we shipped 1,000. And we also discussed the number of 1,000. There's about 1,000. There's approximately 1,000 Starlink terminals in the field awaiting activation. Not all those were actually shipped in the fourth quarter. Some of them were shipped in the third quarter, and ironically, some were shipped in the second quarter. So we're staying on top of what's in the field. awaiting activation. A key thing here is any terminal we ship is locked to our service, so we know it can't be used without our permission on another service. But as far as activations for the quarter, we activated just under 700 Starlink maritime terminals.

Okay, thanks for the clarification. What is it that leads companies to delay their activation?

Well, there's a couple things at play here, right? You have commercial, leisure, and boat builders. So OEMs will buy a Starlink terminal and install it on a boat which yet hasn't been taken over by the owner. They might have them on the shelf. What we're finding is because of the cost of the equipment, you know, in comparison to what VSAT used to cost, people are willing to, whether it's a dealer, distributor, boat builder, are willing to take units to have on hand at higher quantities than they did with a VSAT. And one Starlink terminal from our cell price comparison to a VSAT, it's about an eight to one ratio. Okay.

And then another question just about the customer set that's procuring Starlink dishes. Is this mainly existing customers that you see transitioning to Starlink, or is it more so new customers that never had VSAT before, any satellite connectivity that are coming on board?

Well, as far as our activations, they're both new and existing customers. As far as the new ones, they may not have had VSAT. They could have had fleet broadband or other lower bit rate type of communication systems. And they're just taking advantage of the cost structure surrounding the Starlink terminals and airtime.

Okay, and then thanks. My last question is just around some emerging constellations. I think Kuiper may have some of their first satellites up later this year and seeing some headlines around Chinese constellations that are also starting to emerge. I'm wondering if you have seen any kind of market response to those things or anticipate that during the year?

I anticipate a market response. I think it's still too early. You know, Kuiper is testing, but by the time they have a commercial service, it's going to be well into 26 or early 27. So it's still a bit out until they're actually up and going. But we're keeping a close eye on it, and we talk to everyone in the industry. Okay.

Okay, got it.

Thank you.

Thanks, Chris.

Thank you. And our next question, coming from the lineup, Chris Quilty with QuiltySpace. Your line is now open.

Thanks, guys. I guess congrats on getting that one web service launched. Just a general question. How much of a challenge is the terminal pricing relative to SpaceX's for customers or are the customers choosing OneWeb for reasons other than cost?

I think it's a bit of both. You know, I just talked about the cost of VSAT terminals, Chris. So, you know, although OneWeb terminals are more expensive than a Starlink terminal, the half-duplex is roughly 2x the price. But, you know, we see users, and we talked about C-SPAN, that want diversity in network, right? We have hybrid users using both our VSAT and our Starlink, but like in regard to C-SPAN, they're using Starlink, OneWeb, as well as VSAT. And we anticipate, you know, you're going to have a requirement to have diversity of networks, and it could very well be a Leo-Leo solution. As far as standalone networks, One web services, they do offer CIR and other compelling features that may make it more attractive for the end user. But, you know, as far as the cost, as I said, for the half duplex, it's about 2x that of the high performance flat panel Starlink. So it's not a huge difference as like the 8 to 1 ratio I talked about VSAT a few minutes ago.

Right. Switching gears, it sounds like you're getting good traction with the Combox. Any lessons learned there? And what seems to be an increasingly competitive marketplace of, let's call them Combox equivalents, do you still feel like the feature set that you guys are offering stands out?

Yeah, we think the feature set stands out. And as I discussed, the feature set is being expanded. in particular for intrusion protection and cybersecurity. So we feel that adding those elements will make it even more attractive, and it's more than competitive to anything else on the market.

I understand. And does Combox have applicability in any of the, I guess, new markets where you've started to see some interest? You've mentioned land and some things in South America. that were, you know, off-nominal from your traditional business?

Yeah. The short answer is yes, absolutely. You know, we didn't really talk about our land initiative on this call because it's still a bit premature, but we're getting some good traction in land as well, and Combox is being sold in tandem with some of the land opportunities that we're pursuing.

Great. And I guess final question. As you look at the BSAT terminals coming off the network, are you able to cut costs along with the rate of terminal loss so that your margins are not overly impacted on a go-forward basis? And I guess more generally, have you seen the rate of BSAT loss stay the same, accelerate, decelerate?

It's actually different. It's evened out, you know, so it almost has decelerated to a degree, but we're seeing a pretty consistent churn number. And, you know, and also an important metric is we shipped 200 VSATs this quarter as we did approximately the quarter before that. So there's still demand, and primarily most of those VSATs are being sold in a hybrid configuration. And another nice element about the VSATs for shipping, for the most part, they're agile units that we've gotten back. and refurbished, so we don't have any significant amount of CapEx to go along with those terminals that we're shipping. So as we go forward, we're carefully managing the VSAT network, and we're concentrating every day. It is a shrinking piece of our business, but as Anthony alluded to, we're trying to match revenue with expense. We have our commitments being decreased as far as the geo-bandwidth. We're taking good advantage of our installed base of VSAT terminals. We have special pricing for hybrid configuration to keep terminals active, as well as taking advantage of our pool of Agile units that we've had over the years. So as we go forward, the amount of CapEx that we'll be incurring, in particular for the VSAT service, is going to be decreasing. I think Anthony has something he wants to add.

Well, just to give a data point on that, just to evidence that, that in the fourth quarter, our CapEx, which was related to our Agile program, was a quarter of what it was in the second quarter. So, you know, we've reduced it significantly just in six months, and we expect that trend to continue.

And, Anthony, what is, I mean, if you put aside Agile plan, what is the base run rate capex?

Well, so... Agiles? Yeah. A couple million dollars, right? It's a small number this year. Yeah. We're implementing a new ERP system, so we have about a million dollars for this ERP system. But other than that, you're talking hundreds of thousands of dollars. It is nothing significant.

Yeah, absolutely. I mean, it's 70%, 80% of our CapEx is Agile historically moving forward. So, you know, we don't expect much CapEx, again, outside the new ERP system.

Great. So suffice it to say, free cash flow positive in 2025.

Absolutely. That's what we're striving for, yes.

Great. Thanks, gentlemen. All right. Thanks, Chris.

Thank you. And there are no further questions at this time. Ladies and gentlemen, this concludes today's conference. Thank you all for your participation. And you may now disconnect.