Good day, and welcome to the KVH Industries, Inc., Q1 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Roger Kuebel. Please go ahead, sir.

Thank you, Operator. Good morning, everyone, and thank you for joining us today for our KVH Industries first quarter results, which are included in the earnings release we published this morning. Joining me on the call is the company's Interim Chief Executive Officer, Brent Bruun. 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@kvh.com. Finally, 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 11. 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 first quarter, I'll turn the call over to Brent.

Thank you, Roger, and good morning, everyone. I'm happy to report that we recorded several positives that I want to share. Total revenue for the quarter was $41.1 million. That's a 3% decrease from the first quarter of last year when we shipped a large TACNAV order. However, if we exclude TACNAV sales, our results show growth in our core businesses. Excluding TACNAV sales, we had year-over-year increase in revenue, driven by double-digit growth in our core strategic businesses: airtime, AgilePlans and inertial navigation. Consolidated gross margins and airtime margins were both up versus Q1 of last year. And while our net loss for Q1 was $4.7 million, or $0.25 a share, this included a significant portion of restructuring costs. Without the restructuring charge, we achieved an adjusted EBITDA of $1.9 million, an $800,000 increase over the first quarter of 2021. As with most companies, supply chain issues continued to impede shipments of some of our products. That contributed to a $25 million backlog across our mobile connectivity and inertial navigation businesses. Overall, sales into our core strategic markets are strong, and we continue to see demand in these markets. This is encouraging, and I have confidence that we will continue to do well here. Our expense model was our most significant challenge, both in the short term and the long term. This led us to our restructuring in early March. The effort included a reevaluation of our operating expenses to align with our expected revenue. This has also meant that we needed to make a difficult decision, which resulted in reduced personnel. This was one of the most challenging and personal decisions we had to make. We are committed to evaluating our product prices on an ongoing basis and adjust as necessary. As a result of that commitment, we…

Thanks, Brent. As Brent mentioned earlier, our first quarter revenue came in at $41.1 million, compared to $42.3 million recorded in the first quarter of last year. Brent also discussed TACNAV and that we had a very large order for the product last year. Total sales of TACNAV in Q1 of last year were $5.3 million. And as he mentioned, this product line is very lumpy. And this past quarter was quite light, with, as he said, $700,000 of revenue and, as a result, a drop from last year of the $4.5 million and also, as you can see, a drop in the total revenue year-over-year. And also, you can see that collectively, as Brent mentioned, we had year-over-year growth collectively in our other businesses. Our consolidated gross profit margin was 37% for the first quarter of both this year and last. That's a particularly good result, as last year benefited from the high-margin TACNAV sale, and this year did not. Revenue from our mobile connectivity segment increased $2.6 million, with a gross margin of 39%, up 4 percentage points. Revenue from our inertial navigation segment decreased $3.8 million year-over-year, with gross margin decreasing 12 percentage points to 32%. TACNAV falls within inertial nav and was a driver for this decline. Service revenue for the first quarter was $26.7 million, an increase of $2.9 million, or 12%, from $23.9 million in the first quarter of last year. By segment, service revenue in mobile connectivity increased by $3.0 million, or 13%. This increase was primarily due to a $2.7 million increase in mini-VSAT Broadband airtime revenue. As Brent noted, airtime revenue grew to $24.0 million, or approximately 12% over the first quarter of last year, despite a 1% decrease in active subscribers as a result of the shutdown of our legacy…

[Operator Instructions] And we will take our first question from Ric Prentiss, from Raymond James.

A couple of questions. One, thanks for that clarification on the radio business. I had written $25 million down instead of $2.5 million.

That was a misstatement on my part. I'm glad that Roger caught it.

I was like, wow. But obviously, your balance sheet is in very good shape. As you guys look at maybe other noncore asset sales, is there anything that you need or want out there? If you look at like a SWOT analysis of the strength, weaknesses, opportunity and threats out there, is there stuff that you'd like to add that should be part of core? And what might those type things be?

We're always evaluating how to best position our products and services in the market and how we can increase shareholder value along with that. At the current juncture, as you know, over the years, we acquired Virtek and then Headland Media, and then Videotel came and went. And now this radio business actually came from Headland Media. If something comes up from an opportunistic standpoint that we think can add value and provide incremental value-added services, we'll consider it, but there's nothing in particular that we're focused on at the current moment. I mean one of the things that there's a lot of talk about is LEO constellation is going up, but that's something that internally we're sort of keeping up with that. We have the ability to sort of develop what we'll need to do that internally. So I don't think there's any need to sort of go out and do anything around that, but that's obviously something that as you think about what are the needs that we have going forward, the potential ability to operate on a LEO network is certainly one of the things that we're tracking and staying up on.

That'd be kind of like maybe some antenna design or some things to make sure you're able to acquire a signal from LEO, is that what you're thinking?

Exactly.

Okay. Great. That makes good sense. Obviously, there's a lot of concern about interest rates, inflation, supply chain. A lot more also concern about will we tip into a recession and what part of the world might turn into a recessionary environment. Can you update us, and Brent, you've been around this business a long time, update us a little bit about how the business has performed in past kind of recessionary cycles that you've seen around the world?

Well, the nice thing about our business, in particular, the airtime business, it's a recurring revenue model. And with that recurring revenue, we see year-on-year revenue and typically growth. And I don't know if there's a direct correlation to recessionary periods because we haven't really experienced a lot, other than briefly with COVID, since we've had that service up and going, in which we actually saw an increase because of some of the impacts of the crewmen needing to be on board the vessels. Prior to that, the most significant impact was back in 2008-2009, when we had just launched the service and where the impact we saw there was truly on the leisure side of the business, in particular, the RV business. And the RV business actually imploded completely. So from a -- I won't anticipate a significant impact to any of our recurring revenue. But as far as sales into leisure marine and hardware, in particular, those could be impacted. And that's what we have seen in the past.

Okay. And then one of the things that looked attractive to the quarter is that we were expecting maybe a little more pressure on equipment margins, given supply chain, maybe having to source from different areas, possibly offset a little bit with the PIC chip. Help us understand a little bit about where you see kind of equipment margins, going forward.

Well, as far as the margins and what we experienced, we definitely had our challenges in regard to supply chain, and we did need to source some components at a higher price than we have in the past. And we responded, in particular, with our TV products with a price increase here in May, which I talked about within my script. But we're continuing to see some pricing pressure. We're not necessarily giving direct guidance on what that pressure would be, but it is definitely a concern as we move forward into the year. And I think Roger has some stuff to add.

I was just going to say that from a [pure], if you look at what do we have to pay in terms of higher prices, the Q1 wasn't as big of an impact, I actually was digging into this in the last couple of days, Q1 wasn't as big of an impact as I thought it was going to be, but we are still going to see an impact in Q2, and it's hard to say after that, but we are definitely not out of the woods on this yet.

Okay. That's what we were thinking, too. We thought it was -- so maybe it's just a little delayed impact as far as all those costs coming into it, but we should still expect some pressure.

Yes. You get the quotes, you find out. The actual impact when it hits the financials is kind of a little bit delayed from when you sort of first find out about it. So we know that there's going to be a bigger impact in Q2 than there was in Q1.

Gotcha. Okay. And then last one for me. Any update on the CEO search? I think it was about 60 days ago, a little more, when we chatted on the year-end results, and I think the initial thoughts was maybe the CEO search would take 60 to 90 days? Is that still looking like the process? Or just an update on the search, both internal obviously as well as external.

Well, the board of directors is still continuing the search process. I can't say for certain what the end date on that is. I'm hopeful that it will take place somewhat soon. And they're continuing the process, and they're working with an outside recruiting firm to assess both external and internal candidates.

And our next question is coming from Chris Quilty, from Quilty Analytics.

I was hoping you could perhaps give us a macro overview of what you're seeing in the shipping market. Obviously, some countervailing trends in terms of higher fuel costs and continuing intermodal containers getting stacked up. Overall, do you see the situation getting better or worse for your customers on the commercial side? And what does that imply as you look out through the balance of the year, maybe on a quarterly basis? Do you expect any large movements in terms of customer uptake?

I think there was a couple of questions in there, Chris. But as far as the impact with what's going on within the industry, both from a fuel consumption and needing to transport product, it's definitely a maritime industry issue. But as far as communications, those companies still require our communications, even [Indiscernible] shipping if they're backed up in certain ports. As far as fuel pricing, that's actually benefiting some of our customers, although it's hurting us at the gas pump. And you see some of the earnings that are being released from companies in the energy sector. They're all very positive from their perspective, which means they have more money to spend on communications.

What percent now, I think you've given in the past, is the energy sector in terms of your subscriber base?

I'd have to go do a reassessment, and I don't think it's probably changed the percentage very much. But I believe that, and I'll double check after this call, that the number of vessels that are associated with the energy sector is in the 15% to 18% range.

Gotcha. And would you expect...

We'll confirm that.

That's good, just as an order of magnitude. And are there any particular commercial sectors where you're most constructive on? And can you, this is a separate question, can you give us a quick update on, if there is any, on KVH Watch?

Well, when you look at energy, it's tankers and it's basically the movement and supply vessels. We're not necessarily on rigs. So it's everything that revolves around the energy sector, with the exception of rigs. It could be tugs, it could be supply vessels, tankers moving the fuel, et cetera. In regard to KVH Watch, we have the service. We're going to integrate it with our core products. So if you're a KVH customer, you would be able to subscribe to KVH Watch, both Remote Expert Intervention as well as Flow, and Cloud Connect, where we'll also integrate, but that won't be integrated probably until the 2023 time frame.

Gotcha. And you had indicated, I think, in the last call that you had several new products that you expected to launch this year, including the integration of KVH Watch. When should we expect that and, presumably, any of the R&D costs associated with that are baked into your forecast?

We'll release more information in regard to those types of initiatives in 2Q.

Great. And shifting gears, autonomous trucking. I think in the past you had mentioned, I think it was, maybe a dozen or more potential customers. When might we expect to see some material movement in those customers? Do you have a sense of when some of these programs might actually get adopted and move forward in a meaningful way?

Well, I think it's -- in comparison to like a driverless car, it's relatively soon. I don't think we'll see a significant uptake this year, but I think as we get into next year and the latter part of next year we could see some movement.

Great. And I know TACNAV is not in the forecast, but the existing programs that you're tracking all remain on track? Or any delays that you see?

Well, there's a significant number of programs out there. And so as you would expect, there's some that are going a little ahead of what we expected, some a little behind. Overall, it's a defense business. And so because of everything that's going on in Europe, we're actually seeing sort of, I would say, an uptick versus what our expectations were last year, end of last year.

And any of those that have the potential to come to light in the next 12 months?

Yes.

And we will take the next question from Ryan Koontz, from Needham.

I want to ask about supply chain again. And Roger, if you can kind of parse out your impacts there between transient cost impacts of expedites versus the permanent types of price changes that probably drove your price increase. Maybe a bit more color there would be helpful.

So as you said, we've had sort of like freight costs, where we're getting things done at the last minute and we have to ship them, and then we've also got product costs. And this is the big question, is how long this is going to last and is any of this stuff permanent? Or is this --? And this is kind of like the huge question we've got out there. So I don't have an answer on how long it's going to last. Again, the impacts in Q1 weren't as bad as I had sort of expected based on what I had sort of heard around things, but we think it is going to be more of an issue in Q2 from a cost perspective. But it's kind of a daily battle on the parts front about trying to -- chips and boards that those chips go into. It's just it's a big unknown for this year for us, as it is probably for a bunch of companies.

Sure. So would you say like in the quarter in the books here that it was closer to kind of 50/50 in terms of the cost impact to the company?

When you say 50/50, of what? I'm sorry. [Indiscernible]

Between kind of transient costs and price increases from the source.

Well, when you say transient, so the price increases could be transient as well. I mean, there's a couple of things going on out there. There's sort of underlying real inflation, which tends not to go away. And then the fact that you're trying to buy the last 100 chips that exist in the world of a particular price. And suddenly, the quote is 10x of what it used to be a year ago. So while that's a product cost, I wouldn't necessarily view that as permanent, because at some point we think supply will catch up or scalpers will stop hoarding and those things are going to go back to some kind of normal, maybe a little bit higher than they were before, but not hopefully the 10x of what they were before.

Got it. All right. And then shifting gears, maybe kind of can you let us know where you are in the process of evaluating different product divestitures? Are you still in the beginning of that process? Or kind of entering the middle of that process?

Right now, the radio business was a good business, a very solid business, and the one that was most noncore. As far as our remaining businesses, there's no particular business to stand alone such as that, that we're actually focused on. But we may look at different product lines or services within our product line.

And as we have no further questions, I would like to turn the conference back to our speakers for any additional or closing remarks.

I think that's all. Operator, thank you. We appreciate everyone's participation on the call. And we're going to keep working hard to drive towards being profitable.

Okay. Great. Thanks very much, everyone. Have a good day.

This concludes today's call. Thank you for your participation, and you may now disconnect.