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Earnings call: KVH Industries faces revenue dip, banks on strategic alliances

EditorAhmed Abdulazez Abdulkadir
Published 2024-08-04, 02:34 p/m
© Reuters.
KVHI
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KVH Industries , Inc. (NASDAQ: NASDAQ:KVHI), a leading provider of in-motion satellite TV and communications systems, reported a decrease in airtime revenue and total revenue in the second quarter of 2024 compared to the previous year. The dip was attributed to a decline in VSAT product sales and corresponding service revenue. Despite the revenue downturn, the company has implemented a reorganization strategy that is expected to save approximately $5 million annually in operating expenses. KVH Industries also announced a promising partnership with Starlink, allowing the development and sale of custom data plans, which could bolster future sales.

Key Takeaways

  • KVH Industries experienced a decline in both airtime and total revenue due to reduced VSAT product sales.
  • The company anticipates annual savings of $5 million from operational reorganization.
  • A new agreement with Starlink to offer custom data plans may enhance the product portfolio.
  • Expansion of value-added services, including vessel-based telephony, cybersecurity, and crew Internet, is underway.
  • Optimism remains for subscriber growth in Q3 and achieving 2024 strategic goals.

Company Outlook

  • KVH Industries is optimistic about subscriber growth in the upcoming quarter.
  • Strategic, financial, and operational targets for 2024 are expected to be met.

Bearish Highlights

  • Decline in sales, particularly in VSAT products, impacted revenue negatively.
  • Market dynamics have not significantly affected the maritime industry but have influenced sales.

Bullish Highlights

  • The partnership with Starlink is opening up new markets in leisure and commercial sectors.
  • The company is introducing 5G services and testing OneWeb service, with a launch expected later in the quarter.
  • Positive product margins are expected to continue as manufacturing winds down and bandwidth management improves.

Misses

  • The company missed last year's revenue figures due to lower VSAT product sales.

Q&A Highlights

  • No further questions were asked during the conference call, indicating that the presentation covered the pertinent points.

KVH Industries is navigating a challenging market by leveraging strategic partnerships and expanding its service offerings. The collaboration with Starlink signifies a notable shift in the company's approach to market demands, providing tailored data solutions to its customers. Furthermore, the expansion into value-added services such as enhanced cybersecurity and crew Internet options represents a proactive response to evolving industry needs.

The company's efforts to manage its manufacturing wind-down and maintain positive margins on its products reflect a keen understanding of cost control and product lifecycle management. Despite facing potential competition from future market entrants like Kuiper and Lightspeed (TSX:LSPD), KVH Industries remains focused on its growth trajectory and market expansion, particularly with the introduction of 5G services to the marine industry.

As the company continues to test and prepare for the launch of OneWeb services, it maintains a cautious yet optimistic outlook for the remainder of 2024. KVH Industries is committed to achieving its strategic objectives and strengthening its market position through innovation, cost-saving measures, and customer-centric service enhancements.

InvestingPro Insights

KVH Industries, Inc. (NASDAQ: KVHI) is navigating a complex market landscape, as reflected in the recent InvestingPro data and tips. With a market capitalization of $88.71 million, the company is trading at a low revenue valuation multiple, which may catch the eye of value investors. The price/book ratio as of the last twelve months ending Q2 2024 stands at 0.62, suggesting that the stock may be undervalued relative to its assets.

Despite the company's efforts to reorganize and save on operating expenses, InvestingPro Tips indicate that KVHI is quickly burning through cash and analysts do not anticipate the company will be profitable this year. This aligns with the reported revenue decline of 11.66% over the last twelve months ending Q2 2024, which has undoubtedly impacted the company's financial position.

On a more positive note, KVHI holds more cash than debt on its balance sheet and its liquid assets exceed short-term obligations. This could provide the company with a buffer to weather the current market challenges as it continues to innovate and expand its service offerings. Interestingly, KVHI does not pay dividends, which may be a strategic decision to reinvest earnings back into the company during this pivotal time.

For investors looking for a more comprehensive analysis, there are additional InvestingPro Tips available that could provide deeper insights into KVHI's financial health and future outlook. These tips are part of the valuable resources found on Investing.com, which can be accessed for KVH Industries at https://www.investing.com/pro/KVHI.

Full transcript - KVH Industries (KVHI) Q2 2024:

Operator: 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.

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.

Brent Bruun: 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 in developing and selling custom data plans. As a matter of fact, this morning, we introduced a number of custom Starlink data plans, which offer new options for fleet operators and boaters to select the plan most suitable for each vessel and budget. Additionally, we have expanded our value-added services to include vessel-based telephone connections using our global voice over IP service offering. We can now provide any Starlink equipped vessel with two voice lines and as many as 10 virtual local numbers. Starlink is an exciting part of our multi-orbit, multi-channel portfolio that offers outstanding communications for commercial and leisure subscribers worldwide. We are pleased to be able to offer custom data plans and other valuable supporting services, such as global VSAT, LEO hybrid always-on connectivity, the CommBox Edge Communications Gateway service, and 24/7 365 live airtime and technical support for our customers around the world. Our customers appreciate the breadth and quality of our integrated solutions and support. The result is the fastest growing connectivity service in our history. We have activated more than 1,000 new Starlink terminals for new and existing customers since the start of the year. We are also moving forward with other new product and service enhancements. In addition to the anticipated rollout of OneWeb service later this quarter, we will be expanding the capabilities of CommBox Edge in the coming months with enhanced cybersecurity and crew Internet options. At the same time, we plan to offer new ways to bring crew entertainment and news content to onboard using the KVH Link service. Our industry is changing rapidly. Stand-alone VSAT service subscriptions have declined faster than anticipated, but we have been nimble and have taken steps to adjust our business model. We are seeing continued growth in VSAT, LEO, hybrid solutions and reduced churn for those deployments, which indicates that commercial fleet managers and leisure boaters recognize the value of our hybrid approach. We are anticipating subscriber growth in the third quarter and are hopeful that this trend continues. We are on our way to achieving our strategic, financial, and operational goals for 2024, and believe that we are on the right path, and we'll emerge on our view orientation to world-class solutions provider built on global airtime and superior service and support. I'd now like to hand it back to our CFO, Anthony Pike, for look at the numbers.

Anthony Pike: 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?

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.

Chris Quilty: 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.

Brent Bruun: Yes. Sorry. Yes, Chris. That was for operating expense.

Chris Quilty: Okay.

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

Chris Quilty: 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?

Brent Bruun: 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.

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

Brent Bruun: 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.

Anthony Pike: 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.

Chris Quilty: 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?

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

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

Brent Bruun: 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.

Chris Quilty: And OneWeb service is that up and running yet?

Brent Bruun: 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.

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

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

Chris Quilty: 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?

Brent Bruun: Go ahead.

Anthony Pike: 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.

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

Brent Bruun: 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.

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

Brent Bruun: 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 (NASDAQ:AMZN) 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.

Chris Quilty: All right. Very good. Thank you.

Brent Bruun: Yes. Thanks, Chris.

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

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

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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