Earnings Labs

KVH Industries, Inc. (KVHI)

Q4 2022 Earnings Call· Fri, Mar 17, 2023

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Transcript

Operator

Operator

Hello, and welcome to the Quarter Four Year 2022 Earnings Conference Call. My name is Caroline, and I will be your coordinator for today's event. [Operator Instructions] I will now hand over the call to your host, Mr. Roger Kuebel, to begin today's conference. Thank you.

Roger Kuebel

Analyst · Needham

Thank you, Caroline. 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 this morning. Joining me on the call are the company's Chief Executive Officer, Brent Bruun; and Chief Operating Officer, Bob Balog. 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. 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, 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 third quarter Form 10-Q filed on December 6, 2022, and our 2022 Form 10-K, which we expect to file sometime this afternoon. 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 fourth quarter, I'll turn the call over to Brent.

Brent Bruun

Analyst · Needham

Thank you, Roger. Good morning, everyone. I got to tell you, I'm tremendously excited to be with you today and to discuss our remarkable turnaround and our plans going forward. In March of 2022, we set out to reshape KVH. To do so, we needed -- we knew we needed to pursue several goals. First, to bring our operating expenses in line with revenue; second, to focus the company on our core businesses; three, grow our subscriber base and airtime revenue; and fourth, to put our company on the road to sustained and increasing profitability. I'm extremely pleased to inform you that we have delivered on every one of those goals. In the fourth quarter, we achieved our first operating profit in more than 6 years. We divested our inertial navigation and radio businesses earlier this year. We focus all of our efforts on mobile connectivity and value-added services, including the successful launch of our unique hybrid connectivity solution and 3 new services that meet vital customer needs and enhance their experience. Our fourth quarter revenue was $36 million, a 2% increase year-over-year, and our operating income for the quarter was $600,000 versus an operating loss of $3.9 million in the fourth quarter of 2021. As I mentioned a few moments ago, that's our first operating profit in more than 6 years. Additionally, our adjusted EBITDA was $4.3 million versus $700,000 in the fourth quarter of 2021. Our airtime revenue for the quarter increased 12% to $26.8 million with an associated gross profit margin of 43.5%. We also continue to add airtime subscribers, ending 2022 with roughly 6,900 users on our network. We continued our expansion into India, an exciting new market for us. We're currently shipping our legacy TracPhone V7-HTS systems into India, but we will shift our TracNet…

Roger Kuebel

Analyst · Needham

Thanks, Brent. First, I would like to note that unless specifically stated otherwise, my comments relate to our continuing operations, which exclude the results of our inertial navigation business, which was sold on August 9 of last year. With that, as Brent mentioned earlier, our fourth quarter revenue came in at $36.0 million, increasing $0.7 million from the $35.3 million recorded in the fourth quarter of 2021. Our gross profit margin was 35% for the fourth quarter as compared with 33% in the fourth quarter of the prior year. Service revenue for the fourth quarter was $28.8 million, an increase of $1.8 million or 7% from $27.0 million in the fourth quarter of 2021. This increase was primarily due to a $3.0 million increase in mini-VSAT broadband airtime revenue, primarily offset by a $1.2 million decrease in our content service sales, which was largely due to the sale of our radio business in April of last year. As Brent noted, airtime revenue grew to $26.8 million or approximately 12% over the fourth quarter of 2021, and total subscribers reached almost 6,900. As a reminder, total subscribers include those who have temporarily suspended their primary airtime service but continue to pay minimum fees. Airtime gross revenue -- gross margin was 43.5%, which is up 9 percentage points from the prior year. This increase is due to a combination of factors, primarily the growth in our subscriber base and the shutdown of our legacy network at the end of 2021. We are very pleased with these results. However, as I mentioned on our last call, we expect that going forward, our target for airtime margins will be in the high 30s. Product revenue for the fourth quarter was $7.2 million, a decrease of $1.1 million or 13% from the $8.2 million in…

Operator

Operator

[Operator Instructions] We will take the first question from Chris Quilty.

Chris Quilty

Analyst

Congratulations, guys, and impressive EBITDA guidance for the year going ahead. Just maybe, Roger, if you can talk through, obviously, we know the revenue assumptions, but are there additional cost-cutting actions? Or have you just found that the run rate on the OpEx has been better than expected? Because if I understood correctly, you're still sort of guiding margins to the same level.

Roger Kuebel

Analyst · Needham

Yes. I think the -- we were pretty conservative when I gave the guidance back and I think it was back when we did the March announcement, and I think maybe it was a response to a question, I said we were expecting like $5 million to $6 million. It's actually turned out to be more like up closer to $10 million. So that's been good. We don't see any sort of restructuring going forward. Obviously, we reserve the right to make changes in the business just as any normal business would with respect to cost. But within terms of sort of structuring the business, we feel like we're now in a vivid position. We did some work -- some changes in September after we sold the inertial nav, but we now we feel like we're in a good position. We've got the right team in place, and we're going to move forward with the initiatives that Brent talked about.

Chris Quilty

Analyst

Got you. And so maybe just shifting gears over to a little bit more high level and excuse me, I'm at the satellite show now, and there's probably the biggest -- one of the bigger topics here has been Starlink and their enterprise rollout. And obviously, they have a very aggressive model that they're working with partners, not a lot of ways for them to give profitability of the channel. As you look out and guide the expectations for next year, does that Starlink to the degree we see broader adoption impact your overall reported margins? Or do you see ways to offset that with the bundled services that you offer associated with the Starlink service?

Brent Bruun

Analyst · Needham

Yes. Chris, it's Brent. It's primarily the latter. It's the bundled service. It's the full feature of services that we provide we're being a bit conservative as far as airtime margins, as Roger alluded to. And the main reason for the margin conservativeness is in anticipation that we might have a bit of erosion, but we're hopeful that we can avoid it.

Chris Quilty

Analyst

Got you. So the other big trend or I think the largest announcement here was Amazon coming out with their new antennas electronically steel flat panel antennas and they're implying costs in hundreds of dollars, whereas typically with VSAT terminals, we're talking 5 figures, right, to purchase those. Where do you see the technology evolution on the antenna side going in the future and both in terms of pricing and type of units used. But in the maritime market where you guys live and work every day, can a flat panel antenna actually deal with the maritime environment given ships move around a lot and there's a lot of roll-off with those flat panel antennas or is it they're simply cheap enough that you're going to blanket [60 or 70] all over the ship, so you've always got a look angle. I mean is that a reasonable way? Or are there challenges just from a wiring engineering perspective that flat panels you think will be more of a marginal technology in the long term?

Brent Bruun

Analyst · Needham

I'll let Bob answer the detailed question. But I think you correctly summarized the situation. If you have one, you probably have a lot of roll off, if you have space where you can have multiple and you can switch from one to the other, you could probably mitigate that quite a bit. But I'll pass it to Bob to...

Bob Balog

Analyst · Needham

Yes I mean, really -- the solution we're behind right now is a hybrid integration of those panels into the system -- into our systems. And part of the reason behind that is you could probably do multiple antennas on a vessel, right? But you're really talking about at a minimum, like 5 panels to cover your pitch and roll. But it's really not just your pitch and roll. There's limitations in geographic coverage, and there's limitations with blockage as well. So you're always going to be in a situation where for a commercial or for a high reliability application, you're going to want to make sure you have connectivity. So we're going to continue to integrate those panels into the solutions that we have already. And we're pretty comfortable that's going to provide the best, most reliable solution.

Chris Quilty

Analyst

Great. And when you think about the -- just sort of the macro environment here with COVID ending in China, shipping [indiscernible] is picking up. I mean where are you seeing demand signals strength and demand signals on the maritime side? And in terms of the leisure market where you've had a good position, again, to flat panels, I think, certainly in the RV market, you've seen some challenge there. But in the broader consumer market or consumer leisure, do you see is a different metric in terms of the enterprise where clearly operational performance matters targeting the consumer market might be more successful for something like a Starlink or a [Kuiper]service?

Brent Bruun

Analyst · Needham

I would say, to answer your last question, I would say that that's the market that is most exposed from our perspective to moving over to some of the new services. You had a question to begin with as to where do we see new market opportunity. As I alluded to, India is a huge market, and they've just recently enabled Ku-band VSAT into that market where it's been an L-band market for a number of years. And as we move on, talking about L-band, there's still a tremendous number of L-band terminals out there that are still transitioning to better communication systems.

Chris Quilty

Analyst

Is there...

Brent Bruun

Analyst · Needham

Took another questions. You had -- that was a very long set -- 3 or 4 questions.

Chris Quilty

Analyst

I'll do a bit shorter questions. But maybe just the final follow-on there on India, a question of if there is sufficient capacity because ISRO historically, the sole capacity provider, I know there's been a lot of challenge for operators to actually get Ku capacity to provide services in that market.

Brent Bruun

Analyst · Needham

Yes, yes. Through our partnership with Intelsat, we're completely buttoned up as far as capacity is concerned.

Chris Quilty

Analyst

Got you. And is there a prospect for new capacity coming online in the future that you can actually drive some incremental growth in that market?

Brent Bruun

Analyst · Needham

There is going to be new capacity coming online, whether it comes from Intelsat or others. You see how many satellites are under construction and whether it's geo or NGSO. So I don't think capacity is a concern.

Chris Quilty

Analyst

Okay. Great. And thank you for the feedback.

Operator

Operator

We will take the next question from Ryan Koontz from Needham.

Ryan Koontz

Analyst · Needham

Real quick clarification. You talked about that $5 million to $6 million becoming $10 million. That was the EBITDA from the cost adjustments you made.

Roger Kuebel

Analyst · Needham

No, it was the savings, the reduction in OpEx, which is a little -- that comment I made early on or last year rather, early last year was when we still had inertial nav. So we've had -- even with the...

Ryan Koontz

Analyst · Needham

Got it.

Roger Kuebel

Analyst · Needham

Yes. So its OpEx.

Ryan Koontz

Analyst · Needham

It's OpEx run rate. OpEx, thanks. And then if you jump this down for me a little bit on the kind of the value proposition of Starlink versus your VSAT product, is Starlink a lower cost per bit? Does it provide additional coverage? Can you kind of clarify how it fits in the value prop there for the Starlink partnership?

Brent Bruun

Analyst · Needham

Yes. I mean it's a lower cost per bit. It's a bit lower latency, but you can have dropouts in packet loss in jitter. So a combined service with what we already offer an integrated service with our geo LTE/5G and WiFi combined with that, we'll give you a robust service. And I talked about some of our other back-end tools, [CIR SLAs] and everything that all comes together and that's coming through the VSAT component of our offering. Do you want to add...

Bob Balog

Analyst · Needham

Yes. I mean it's kind of to follow the concept behind our H Series products, right? We're delivering VSAT services with those products. And when available, we're latching on to 5G or LTE services because that will give the end user a little better throughput and performance. And when available from there we'll also bridge over to available Marina WiFis. And really, if you think about this concept, if you have a Starlink available, and it's working in the Marina, why not use it, why not give the user of that opportunity. In the real value that we have or that we add to this is that we're actively -- the way we actively monitor switch and make all of this happen seamlessly so that no one has to think about it. No one has to worry about switching connections or what's available. We just make sure that the end users experience is the best it can possibly be.

Ryan Koontz

Analyst · Needham

Got it. So -- and that's really helpful. So you also handle the Starlink subscription and Starlink billing...

Brent Bruun

Analyst · Needham

No. As [indiscernible] in my remarks, the activation for the Sterling terminal will be handled between the end user and Sterling directly.

Ryan Koontz

Analyst · Needham

Got it. That's helpful. And you talked about some development partners as well in terms of bringing new products to market. Can you kind of clarify what sort of applications that's going to -- what kind of market segments that will help you in.

Brent Bruun

Analyst · Needham

It's value-added services to make the onboard operations more efficient. And we can't really go into a lot of details at this point in time, but we will in due course.

Bob Balog

Analyst · Needham

I mean it's probably sufficient to say. We're looking at people. We've mentioned [Fort] in that a few times, security, firewalling, that's what they do best. And they do it on large-scale commercial network. So we want to look for appliances, applications and value adds that are really being developed for sort of a broader market and then bring them to the marine specialization of sort of exactly what we're delivering and make sure we're utilizing sort of best-in-class technology rather than trying to develop something and do it on our own. There's a lot of cases where some of that stuff just needs to be adapted.

Ryan Koontz

Analyst · Needham

Sure. That's kind of enterprise caliber, got you. That's really helpful. That's all the questions I had. Congrats on the operating profit, really great work days.

Operator

Operator

Thank you. There's no further question at this time.

Roger Kuebel

Analyst · Needham

Okay. All right. Well, thank you, operator. Thank you, everyone. Given that there are no questions, I appreciate everyone's joining the call who is on. And thank you, and have a good day.

Brent Bruun

Analyst · Needham

Thank you.

Roger Kuebel

Analyst · Needham

Thanks, everyone.

Operator

Operator

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