Good day and thank you for standing by. Welcome to the Q2 2024 KVH Industries, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to turn the call over to our first speaker for today, CFO, Anthony Pike.

Thank you, Crystal. 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 Bruun. 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 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 Q2 2024 Form 10-Q, 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.

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 are 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 CommBox Edge gateway. Many of the second quarter product shipments are now being installed and awaiting 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…

Thanks, 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 are clearly described in our 10-Q. 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 margins 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 VSAT 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 includes $0.7 million of employee severance charges related to the transformation initiatives and manufacturing wind-down announced on February 13. Q2 operating expenses, excluding rig 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 in employee costs around $3.7 million of this will benefit product gross profit, and around $5.4 million will reduce operating expenses. Our adjusted EBITDA for 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 EBITDA less CapEx was 0. This compares to a negative $0.3 million in the prior quarter with adjusted EBITDA 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 pool data agreement, which we announced on June 26. Our expectations for revenue and adjusted EBITDA 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 million to $127 million, and that our adjusted EBITDA for 2024 will be in the range of approximately $6 million 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&A portion of this morning's call. Operator?

Thank you. At this time, we’ll conduct a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Chris Quilty of Quilty Space. Your line is now open.

Thanks, guys. I just wanted to start with a clarification. I heard that Anthony affirmed the $9 million in cost savings. But Brent, somewhere in the script, you mentioned $5 million of annualized cost savings.

Yes. Sorry. Yes, Chris. That was for operating expense.

Okay.

So I was referring approximately $5 million of operating expense, which correlates to the $5.4 million that Anthony discussed.

Got you. 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 TracVision product simply swapping for Starlink? Are they generally adding that on? And for, I would say, new Starlink subscribers where you're just add -- they're new to you and you're bringing them on with Starlink. Are those generally in one class of vessels? Does it tend to be on the leisure side, more commercial? Or are any other trends you're seeing?

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 adds, 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 midrange, larger yachts and commercial maritime, they're adding a Starlink to their existing VSAT. As far as new product sales, we sold a number of stand-alone Starlink, but we've also have sold quite a few into the merchant marine arena, providing both VSAT as well as Starlink along with our CommBox Edge and a variety of other value-added services.

Got you. And what are you seeing in terms of the ARPU trends as this mix shifts?

Yes. Right now, it's a bit early. The ARPU on a Starlink, on a stand-alone Starlink tends to be a little bit lower than what we've experienced from a VSAT stand-alone as far as -- sorry; I lost my train of thought. As far as the combination of the Starlink and VSAT, they could -- it's very much in line and actually a bit more than what we've seen historically. But Anthony, there's more details that you can provide.

Yes. I mean, ARPU is overall fairly flat, I guess, but that's still a Starlink, is still a relatively small portion of our overall business.

Got you. And what are you seeing just in terms of end market? I mean, there's quite a bit of dislocation in the world, especially at maritime. Is that having any impact on sales, either positive or negative?

I'm sorry. What do you mean by end market?

Well, speaking about the overall shipping and logistics industry. At times we've had -- okay, probably good at that.

Yes. We haven't seen much of an impact from other market dynamics, but we have seen an impact the vessels that were previously not signing up for communications or VSAT communications are moving forward with a Starlink. So 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 size fishing vessels out there and the midsize to larger ones would always have communication connectivity. And most of those -- a lot of those won't VSAT. We're seeing at the lower end of that market opening up. We also anticipate the market opening up further as we introduce 5G service offerings around the world in particular with marine.

And OneWeb service is that up and running yet?

No. It's in -- we're testing it right now, but it has not been launched. We're anticipating later this quarter, but we do not have an exact date.

Got you. And so far, customers find that a comparable service to Starlink, are they purchasing it for different reasons? They need high latitude.

We haven't launched it yet. So we're just testing on a couple of vessels and it seems to work well.

Got you. And in terms of the wind down of the manufacturing, it looks like the gross margins came out better than I had expected, and certainly better than recent trends. Is it fair to assume we should look at sort of teen's type negative margins as the product burns through?

Go ahead.

So yes, we talk -- the restructures helping us significantly in the factory. We expect additional cost of sales savings and maybe $0.5 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 yes, we do hope and anticipate that the trend to positive margins on the product will continue.

Okay. And on the service side, you're comfortable with managing your GEO bandwidth as that draws down?

Yes. We have the network appropriately sized for our installed base right now, and we have some flexibility to reduce bandwidth as we move forward.

Got you. And final question, anything you're seeing out there beyond Starlink competitively in the market?

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 OneWeb is just about here, and then you would have Amazon Kuiper. And behind there, Lightspeed 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.

All right. Very good. Thank you.

Yes. Thanks, Chris.

Thank you for your questions. I am showing no further questions at this time. This does conclude today's conference. You may now disconnect.

Okay. Thank you very much. Have a good day, everyone.