KVH Industries, Inc.

Thank you for standing by. My name is Roselle, and I will be your operator today. At this point, I would like to welcome everyone to the Q2 2025 KVH Industries Inc. Earnings Conference. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keyboard. If you would like to withdraw your question, press star one again. Thank you. I will now turn the call over to Anthony Pipe, Chief Financial Officer. Please go ahead.

Thank you, Operator. Good morning, everyone. And thank you for joining us today for KVH 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 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.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 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 2025 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 talk you through the highlights of our second quarter, I'll turn the call over to Brent.

Thank you, Anthony, and good morning, everyone. Our second quarter results reflect our successful ongoing efforts to transform our business model and operations. Compared to the first quarter of this year, revenue is up, adjusted EBITDA is up, and our subscriber base is up, up more than 8%, resulting in more than 8,000 subscribing vessels for the first time. Looking at our high-level results in more detail, our revenue declined year over year in the second quarter to $26.6 million. primarily due to the loss of revenue from our VSAT airtime service, which includes the loss of the U.S. Coast Guard. However, we returned to sequential airtime and service revenue growth for the first time since the second quarter of 2023. This led to a $1.2 million increase in total revenue over our first quarter 2025 results, airtime gross margin rose more than 4% sequentially, and our adjusted EBITDA rose to $2.7 million a $1.7 million increase compared to the first quarter. We also shipped more than 1,300 communication terminals for the second consecutive quarter. These shipments included Starlink terminals, ongoing orders for our TrackNet and TrackPhone VSATs, and OneWeb terminals. By delivering on our strategic initiatives, we believe we have reached an inflection point in our transition from a geo-based hardware and service company to a multi-orbit, LEO-focused service provider. For the first time, the increase in our LEO revenue more than offset the decline in revenue from our legacy VSAP business. Starlink terminals and service demand remain strong across the commercial maritime and leisure marine markets during the second quarter. We're also rapidly expanding our Starlink land sales, especially in Latin America, to support schools, villages, and other municipal and commercial facilities. We remain on target to deplete our prepaid Starlink data pool by year-end as planned. The prepaid pool has been a vital contributor to improvement in our profitability. We are now in discussions with Starlink regarding a renewal. We are also pleased with the steady growth we are achieving in OneWeb following the launch of the service at the end of January. Our Combox Edge communications gateway also continued to thrive in the second quarter. due in part to its easy integration with Starlink and OneWeb, along with our VSAT and cellular services. In addition, we have started to deploy our Combox Edge secure suite for commercial fleets, expanding the value of this product. Compared to the first quarter of 2025, we increased Combox Edge subscribers by 24%. Commercial maritime demand for crew welfare and content also remains strong. we now have more than 1,000 vessels subscribing to our KVH Link entertainment and news service. Looking at our overall business operations, we completed the sale of our headquarters facility at the end of June and expect to complete the sale of our factory facility in September. We have recently leased a new combined headquarters, production, and warehouse facility in Bristol, Rhode Island, and expect to relocate there in early 2026. And lastly, We bought back shares during the second quarter under the terms of the stock repurchase program approved by our board in December 2024. Through the end of the second quarter, we purchased more than 242,000 shares at a cost of roughly $1,250,000. So, in conclusion, we reached a significant inflection point in the second quarter. Our transformation as an integrated service provider accelerated. Our LEO revenue growth more than offset the decline in our legacy geo-based VSAT business. New services continue to grow. New services contributed to growth in subscribers, revenue, gross profit, and cash. We reduced our operating expenses significantly, and we have the resources and new service pipeline needed for an exciting future. Now I'll turn the call back to Anthony to discuss the numbers. Anthony?

Thank you, Brent. As a reminder, I would like to note 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 35.8%. which as Brent mentioned is up more than 4% compared to the prior quarter gross margin of 31.5%. Excluding depreciation, our airtime gross margin for the second quarter was 46.4% compared to 44.1% in the prior quarter. This increase was partly driven by the ongoing change in airtime revenue mix between LEO and GEO, with LEO, which has stronger margins continuing to grow to become a larger portion of our revenue. However, there was also a positive impact from lower geo-bandwidth capacity costs, which may rise slightly in the second half of the year. Total subscribing vessels at the end of Q2 were just above 8,000, which as Brent mentioned is 8.3% up from the prior quarter and 13.5% up from the beginning of the year. Reported Q2 product growth profit was 0.3 million compared to breakeven in the prior quarter. And we continue to expect product margins to be relatively modest as the real value of our mobile connectivity hardware shipments is the airtime revenue they generate in the future. The Q2 operating expenses of 9.5 million was 0.2 million or 2% lower than the prior quarter. and 1.7 million or 15% lower than the second quarter of 2024 on a like-for-like basis, excluding non-recurring charges. Our adjusted EBITDA for the quarter was 2.7 million, and our earnings release has a usual reconciliation of that. Capital expenditures for the quarter were 2.4 million, and so adjusted EBITDA less capex, which we believe is a good proxy for free cash flow generated from our ongoing business, was $0.3 million. This compares to an adjusted EBITDA less capex of negative $0.1 million in the first quarter of 2025, with adjusted EBITDA of $1 million less capital expenditure of $1.1 million. The spike in capex in the second quarter from $1.1 million to $2.4 million was driven by OneWeb units on our Agile plan program. which accounted for around 50% of the quarter's capex. We anticipate this capex to reduce in the second half of the year, as a majority of the OneWeb Agile plan capex in Q2 was related to a specific large fleet rollout. Our ending cash balance of 55.9 million was up approximately 7.3 million from the beginning of the quarter. Net proceeds from the sale of our property at Middletown, Rhode Island were 4.9 million, and we also spent approximately 1.1 million on our stock repurchase program in Q2. Excluding these two items, our cash balance was up approximately 3.5 million. Overall, we are very pleased with the second quarter results, which build on the progress made in the first quarter. Our LEO business continues to grow, and growth has actually accelerated in the second quarter. We are managing the transition of our GEO business well and in line with expectations. And revenue is up quarter on quarter, as are our gross margins, adjusted EBITDA, and cash balance. We are updating and narrowing our guidance on the basis of ARPUs being slightly less than anticipated, however, gross profit margins being better than expected. Therefore, our updated guidance for 2025 is revenue of $107 to $114 million and adjusted EBITDA of $8 to $12 million. This concludes our prepared remarks, and I will now turn the call over to the operator to open the line to the Q&A portion of this morning's call. Operator?

This time, I would like to remind everyone, in order to ask a question, Press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Chris Quilty with Quilty Space. Please go ahead.

Thanks, guys. Some good progress in the quarter. You didn't give the total number of activated Starlink terminals, which you have done in the past. Where did you finish out the quarter in terms of net ads in total?

I'll turn that question over to Anthony.

Yeah, I'll just get you the... So in terms of total new Starlink standalone additions in the quarter, only one second. We were up to about 2,500 standalone, but we do have an awful lot which were included as hybrids, which I think we quoted combined previously. So all in, it was just short of 4,000.

Is that the question, or was it activate? I think he asked how many activations. Can you clarify, Chris, please?

Yeah, activations also would be great.

Yeah, so activation is purely on a terminal basis because, of course, we count vessels and terminals separately now. But the number for that is a quarter.

Yeah, I guess that, excuse me for interrupting, I think it's a bit irrelevant because it's going to skew the numbers if we have more than two terminals on board a vessel. So I think You can just back into the net ads, Chris, based on what we provided previously.

Fair enough. And I think you mentioned when you added those OneWeb units, it was using Agile plans. Does that mean you've sort of shifted the Agile plan onto OneWeb? And are you doing that for Starlink also or just OneWeb because of the higher cost of the terminals?

We do offer it for Starlink, but with the cost of terminal in mind, most customers choose to purchase the units.

Gotcha. And the customers who are purchasing OneWeb, how do they differ from your Starlink subscribers and what are you seeing in terms of network service and performance?

Yeah, the network is performing well. As I'm sure you're aware, they don't have complete global coverage. So it definitely opens up the door to have a hybrid solution until they get their complete global coverage. And as far as the differentiation, it's just more of customers wanting diversity and diversity from Starlink. There's no real rhyme or reason to why they would choose one over the other from our perspective.

Understand. Anthony, you mentioned that the geocost may go up in the second half of the year. I thought those were relatively fixed over the course of the year, or are there news coming on?

No, they are, I'd just say, broadly fixed. What we were saying there is that we had a slight dip in the cost in Q2, and so Q3 and Q4 might be slightly higher than Q2, but the overall cost for the year is fixed and I think we've discussed previously our commitments are disclosed in full in our 10K.

I understand. And when you look at the margin outlook, are you still, and this is on the service margin, are you still targeting that sort of 35% to 40% range, or what are you seeing in terms of the mix changes between OneWeb, Starlink, and legacy geo products?

So I think we are certainly looking to keep in the range you described. But as we said in the prepared remarks, really what's happening is, you know, as the LEO becomes a bigger proportion of the overall airtime revenue, that's, you know, driving the margins a little bit. And obviously as the GEO revenue declines with a fixed, you know, broadly, you know, a significant amount of fixed costs in the cost of sales for GEO, That's going to put pressure on the geo margin. But the two broadly offsetting each other, you know, we're hopeful to retain in that sort of range that you described.

Great.

And I think for, you said, the renewal, or you're in discussions with your pre-purchase on Starlink. So two questions. One, do you anticipate doing the same with OneWeb? And number two, as you look at the prior deal, you know, you cut with Starlink, how has the market or market demand changed or their pricing plans? And do you anticipate, in other words, do you anticipate a similar sort of arrangement or has the plan pricing changed significantly that this deal might look significantly different?

We're not at liberty to discuss the one web, what pricing we might be doing with them. And we're also quite limited to what we can say in regard to Starlink. What I will say is that the terminal access charge that they've introduced to all end users will be included in our follow-up.

And is that a one-time access charge or is that done on a monthly basis?

A monthly charge.

Gotcha. And presumably that would just accrue to the gross margins directly?

I mean, it's part of our cost. Well, it's a cost to the customer that you're adding on. Yeah, I'm not quite sure I understand the question. Maybe.

Yeah, no, sorry. Can you just clarify that question, Chris?

So the access charge to the customer is a monthly fee you're charging for access to the network. Is that how you're classifying it?

Yeah, I mean, there's no big secrets here. If you go to the Starlink website, they clearly show what plans they offer, you know, and how it works. So it's an incremental charge, but they've also, you know, at the lower end, they've changed the pricing at the lower end on a per gigabyte basis. But when you put the access charge on top of that, it gets you back to where they were at

So I think Chris, it'll increase revenue, but gross profit will be fairly flat in a dollar sense, which will inevitably drive down the margin percentage ever so slightly. But obviously, the terminal access charge is a fairly small portion of general ARPUs, so it shouldn't drive the margin percent down a great deal.

Got it. And are you seeing any changes in the plans that your customers are choosing over time?

Not necessarily. It's been pretty consistent as far as the split.

Got it. Question on Combox. Looks like you've had good growth in that. What type of attachment rates are you seeing with subscribers and where do you think you will get to in the longer term?

The attachment rate right now is one-eighth, and last quarter it was much higher than that. So we disclosed that we have over 1,000 subscribers. I don't know if we did disclose that. We disclosed the percentage increase. It's right around 1,000. So we have about 8,000 vessels. We would anticipate that growing quite a bit as a percentage because of the interest of what's going on because of the need for hybrid solutions, the need for the secure suite. So, you know, the attachment rate on a go-forward basis, on a quarterly basis of new activations from a commercial maritime perspective should be, you know, in close, anywhere from a quarter to a half of our customers, but that's a bit of guesswork on my part.

Got it. And maybe a final question here on just the end market. Obviously, you don't see a huge impact from tariffs, but have you seen any changes in customer demand or patterns in sort of global shipping that are impacting the take-up rate, in your view?

We haven't seen any impact.

Got it. And the overall... commercial maritime market in terms of container rates and fuel prices and everything relatively stable from your perspective?

At this point, yes. Great.

All right. Well, thanks, guys.

Appreciate the... Just one point of clarification, Chris. I overstated the number of Combox subs out there by a bit. It's actually closer to...

About 600, 700. At the end of the quarter. It's a number that we look at every day.

Very good. All right.

Well, thank you, gentlemen. Thanks, Chris. That concludes our Q&A session.

I will now turn the call back over to Anthony Pipe for closing remarks.

Just to thank everyone really for joining the call. And if anyone has any follow-up questions, please feel free to reach out at ir.kvh.com. Thank you.

Thank you.

That concludes today's call. Thank you all for joining. You may now disconnect.