Good day. Thank you for standing by. Welcome to KVH Industries Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. To ask a question during the session, you will need to press star one one 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 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 the 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'll find the definition of this measure in our press release, as well as a reconciliation to comparable GAAP numbers. I 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 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, and 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 multichannel solutions. What does this mean? In addition to VSAT services, we now offer LEO solutions, the most significant of which is Starlink. We've 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 from multiple wide and local area networks. Over the course of 2024, we integrated each of these elements, which is steadily building positive momentum. In the fourth quarter, we shipped more than one thousand Starlink units and roughly two hundred VSAT terminals, marking our fourth consecutive quarterly record for terminal shipments. With more than two thousand three hundred active maritime Starlink terminals at the end of 2024, Starlink is our fastest-growing product line in our history. Currently, there are roughly one thousand Starlink terminals in the field that are awaiting activation. Our customers find our 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 Veron fleet. The addition of Starlink to their existing KVH VSAT service illustrates a strong demand for hybrid connectivity. In fact, roughly fifty percent of our Starlink terminals have been activated in tandem with a new or existing VSAT terminal. Our CommBox Edge communication gateway, introduced early in 2024, is the heart of our integrated connectivity…

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-Ks. I'll focus my comments on information that elaborates on or clarifies the public 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 non-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 were $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 the quarter. And finally, our earnings release provides our guidance for 2025, which is revenue of $115 million 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 one one. To withdraw your question, simply press star one one again. And we have a question from Calyphendry with Quilty Space. Your line is now open.

Hey, guys. Couple of questions mostly related to LEO services. You mentioned having a thousand 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, you know, roughly how many satellite ads you'll anticipate seeing? Okay. Let's be clear. We shipped one thousand terminals. Anthony can see what the actual activations were. We had twenty-three hundred active Starlink terminals at the end of the quarter, and we shipped one thousand. And we also discussed a number of thousand. There's approximately one thousand 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. Ironically, some are 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 seven hundred Starlink Maritime Terminals.

Okay. Thanks for the clarification. And what is it that leads companies to delay their activation?

Well, there's a couple of 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 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, or boat builder, are willing to take units to have on hand at higher quantities than they did with a VSAT. One Starlink terminal from our sell price compares to a VSAT about an eight to one ratio.

And then another question just about the customer set that's procuring the Starlink dishes. Is this mainly, like, existing customers that you see transitioning to Starlink, or is it more so new customers that never had a VSAT before and had, like, 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've had sleep broadband or other, you know, 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. Yeah. 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 launch. Wondering if you have seen any kind of market response to those things or anticipate that?

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 gonna be well into 2026 or early 2027. So it's just 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. Got it. Thank you. Thanks, Chris.

Thank you. And our next question coming from the line of Chris Quilty with Quilty Space. Your line is now open.

Thanks, guys. I guess congrats on getting that OneWeb service launched. Just a general question: How much of a challenge is the terminal pricing relative to SpaceX 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 two times the price. But, you know, we see users, and we talked about C SPAN, that want diversity in the 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 gonna have a requirement to have diversity of networks, and it could very well be a LEO-LEO. As far as standalone OneWeb services, they do offer CAR 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 two times that of the high-performance flat panel Starlink. So it's not a huge difference as, like, the eight to one ratio I talked about with VSAT a few minutes ago.

Right.

Switching gears, it sounds like you're getting good traction with the CommBox. Any lessons learned there? And, you know, in what seems to be an increasingly competitive marketplace of, let's call them, you know, CommBox equivalents, do you still feel like the feature set 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 with adding those elements, it will make it even more attractive, and it's more than competitive to anything else on the market.

Understand. And does CommBox have applicability in any of the, I guess, new markets where, you know, you've started to see some interest? You've mentioned, you know, land and 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 in this call because it's still a bit premature, but we're getting some good traction in land as well. And CommBox is being sold in tandem with some of the land opportunities that we're pursuing.

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

It's actually evened out, you know. It 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 two hundred VSATs this quarter, as we did approximately the quarter before that. So there's still demand, and primarily, most of these VSATs are being sold in a hybrid configuration. And another nice element about the VSATs we're 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. It's a shrinking piece of our business, but as Anthony alluded to, we're trying to match revenue with 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 for the VSAT service is going to be decreasing.

Just to give a data point on that, just to evidence 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're

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

Well, so, yeah, at Agile's, yeah, it is a couple million dollars. Right? It's a small number this year. We're implementing a new ERP system. So we have about a million dollars to this ERP system. But other than that, you're talking hundreds of thousands of dollars. Nothing significant.

Yeah. Absolutely. I mean, it's seventy, eighty percent of our CapEx is our agile. Historically moving forward. So, you know, we don't expect much CapEx as, again, outside the new ERP system.

Right. So it's supposed to say free cash flow positive in 2025?

Absolutely. That's what we're striving for. Yes.

Great. Thanks, gentlemen.

Alright. 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.

Thank you.