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 [email protected]. 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 a 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 increased prices on some of our products and services in January. That is why effective May 1, we made incremental price increases to a select group of products in response to the increased cost of goods. By focusing on areas where we are industry leaders, we are well positioned for success in the long term. It is that long-term vision that has guided us to refine our strategic goals for 2022. We will drive profitability and shareholder value by focusing on our core businesses and by continuing to stay disciplined in our new product initiatives. Part of the plan also included divesting ourselves of assets that don't align with our core business. As an example, we finalized the sale of our retail radio business 2 weeks ago. This resulted in a $25 million unbudgeted cash benefit for Q2. Other strategies include acceleration and buildup of new subscribers via AgilePlans. We are also targeting higher-ARPU leisure customers and expanding our base in an industry where autonomy is a significant value-add. Our employees worldwide are critical to achieving these goals. We are committed to limiting disruptions following the restructuring. I recently met in person or virtually with our employees in every region, from Middletown, Rhode Island, to Athens, Greece, and Singapore. I have listened and received feedback that is crucial to keeping our core strong. Steps we have taken include: realigning reporting structures to gain efficiencies amongst teams; new opportunities for star performers to shine; and we are sharing weekly updates on our internal and external successes and highlighting progress on new product development efforts. While I was on the road, my primary focus was to emphasize our commitment to our employees and to our customers and service providers around the world. I continually reinforce what our brand stands for: quality, innovation, and dedication to superior service. It is important that we understand this is a transition period for KVH. The full benefits of the restructuring may not make an impact until the third quarter. However, I believe that KVH is on firm footing for growth and long-term value. I am confident in what we do, and I know we have a great future ahead. I'd like to touch on a few updates in our core markets to show where we stand and how we plan to move forward. In our mobile connectivity business, our quarterly airtime revenue increased $2.7 million, to $24 million. That's a 12% increase versus Q1 of 2021. New customer shipments of VSAT terminals were up 5%, and total mobile connectivity revenue was up more than $2.6 million versus Q1 last year. We achieved this growth even as we saw a 1% decrease in our total active subscriber base. This was due to the shutdown of our legacy satellite network. As anticipated, some of the remaining legacy subscribers at year-end are migrating to our HTS systems due in part to the spring refit season for leisure boaters. Even with that slight decline in subscribers, our efforts are paying dividends. Our airtime margins are increasing due to the elimination of the expense of our legacy network, and we are serving more customers on our HTS network. I would also like to recognize and applaud the first anniversary of our award-winning TracPhone V30 terminal. The V30 ended its first year as our most successful VSAT product in company history. The V30 accounted for almost as much hardware revenue as our best-selling TracPhone V7-HTS. That's impressive and an incredible achievement. In the commercial market, revenue driven by our AgilePlans increased roughly 10% sequentially from Q4 2021 and 48% from Q1 2021. Looking at TracVision satellite systems in Q1, the limited availability of select components impacted shipments. Our purchasing team was diligent and dedicated to build and ship. However, we did enter Q2 with a $3.6 million backlog. Moving forward, our priority is to increase efforts and make components available for higher-value, higher-margin systems. We're also expanding the scope of our commercial marine business. There is significant demand for our recently approved service in India. In South America, we are working with our regional airtime service partners to support commercial fishing, shipping, and river transport in several countries. The leisure market also remains strong, with seasonal demand for our satellite communications and TV products. We're also pleased to see the continued demand for KVH Elite, which is our unlimited streaming service. Subscriptions in the Caribbean and Bahamas remained solid in Q1, and our seasonal Mediterranean service launched at the start of April. Bookings are gaining momentum. Seasonal service along the Eastern seaboard of the United States and Canada just went live a few days ago, and we are looking forward to serving more lead customers there this year. Turning to inertial navigation, we did not see the unusually large TACNAV sales that we did in Q1 of last year. TACNAV sales declined from $4.5 million in Q1 of 2021 to $700,000 in Q1 of 2022. This is a prime example of the inconsistency of our military navigation business and why we no longer include uncontracted TACNAV revenue in our guidance. However, sales of our OEM inertial navigation systems increased 13% in Q1 compared to the same quarter last year. Here again, supply chain issues impacted shipments. As a result, we began Q2 with roughly $20 million in backlog for our inertial sensors. The good news? Demand remained steady in many of our traditional applications, including remote weapon stations and commercial products as well as platform stabilization systems. We are seeing growing momentum in applications for autonomy, which is critical and now represents 30% of our inertial sensors revenue. Autonomous trucking is a very exciting industry, and we are working closely with several leading developers. Currently, we are involved in comprehensive testing of our photonic chip-based fiber optic gyro in a number of autonomous trucking platforms. Our product is being put up against competing technologies, and I'm thrilled to report they are seeing very positive results. We entered Q1 with an array of challenges. We came out of the quarter having taken decisive steps to align our operations with our areas of strength and revenues. Our goal is to grow the business and make adjustments that will guide us to long-term success and profitability. I look forward to the quarter and the year ahead. And with that, I'll turn it over to Roger.

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. As he mentioned, this product line is very lumpy, and this past quarter was quite light, with $700,000 of revenue and, as a result, a drop from last year of $4.5 million and also, as you can see, a decline in the total revenue year-over-year. 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 by $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 navigation 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 network on December 31, 2021. Total subscribers, which include those who have temporarily suspended, was up 1%. To explain that difference a bit, suspended subscribers are typically recreational customers who aren't using their boats during the colder months. While we refer to them as suspended, they still have access to voice services for which they pay by the minute. In addition, suspended Agile customers pay a modest monthly fee for the equipment that KVH owns that's on their vessels. Airtime gross margin was 41%, which is up 7 percentage points from a year ago. This increase is due to a combination of factors, primarily the shutdown of the legacy network, but also a number of onetime benefits. Going forward, we continue to target airtime margin in the high 30s. Product revenue for the first quarter was $14.4 million, a decrease of $4.1 million, or 22%, from $18.4 million in the first quarter of the prior year. By segment, mobile connectivity decreased by $0.3 million, or 5%, primarily due to a decrease in satellite TV product sales. This decline was partially due to supply chain issues which prevented us from manufacturing as much as we could have shipped. Inertial navigation product revenue decreased approximately $3.7 million, or 32%. Again, this was driven by the drop in TACNAV sales. For our other inertial navigation products, combined FOG and OEM revenues increased by $0.8 million, or 13%, and revenue for our inertial navigation service business was down by $0.1 million. Operating expenses for the quarter were $20.1 million, or $0.8 million more than the first quarter of last year. However, both this year and last year we had a significant amount of nonrecurring expenses in the first quarter. Last year, we had $0.9 million in legal costs related to a shareholder matter. This year, we had a total of $2.3 million related to our reduction in force and CEO retirement. As such, on a recurring basis, this quarter was $0.6 million less than the first quarter of last year. Given the timing of the recent changes, the full impact of these changes won't be seen until Q3, and we expect the full year operating expenses to be between $5 million and $6 million less than 2021 on a recurring basis. At the operating income level, the changes in revenue, margins, and operating expenses resulted in a loss from operations of $4.7 million, which was up $1.1 million compared with the $3.6 million loss recorded in the first quarter of 2021. Our mobile connectivity segment generated an operating profit of $1.3 million compared with an operating loss of $0.4 million last year, while our inertial navigation segment had an operating loss of $0.5 million for the quarter, compared with an operating profit of $2.1 million last year. Our unallocated loss was $5.6 million compared to last year's $5.3 million. These losses include the nonrecurring operating expenses just mentioned. After adjusting for those, our consolidated operating loss was $0.3 million less than last year. For the first quarter, our net loss was $4.7 million compared with a net loss of $4.0 million recorded in the same quarter last year. On a non-GAAP basis, which excludes amortization of intangibles, stock-based compensation, and other nonrecurring costs, such as unusual nonoperating fees, foreign exchange transaction gains and losses, employee termination costs, and CEO separation, related tax effects and changes in our valuation allowance and other tax adjustments, after all those adjustments we had a net loss of $1.0 million compared with a net loss of $0.9 million last year. EPS for the first quarter was a net loss of $0.25 per share compared with a net loss of $0.22 per share in the same period last year, and non-GAAP EPS loss for the first quarter was $0.05 per share, the same as last year. Our adjusted EBITDA for the quarter was a positive $1.9 million, compared with a positive $1.1 million in the first quarter of last year. This improvement is particularly noteworthy given that this year's results did not have the benefit of a large TACNAV sale that last year's did. For a complete reconciliation of our non-GAAP measures, please refer to the earnings release published earlier this morning. Net cash used in operations was $3.5 million, compared to $5.0 million provided by operations in the first quarter of last year. Capital expenditures for the quarter were $4.4 million. For the full year, we expect capital expenditures to be in the range of $18 million to $21 million, the majority of which is driven by AgilePlan shipments. Cash provided by financing activities was $0.1 million, resulting in an ending cash balance of $16.7 million as of March 31. I'd just like to clarify a comment Brent made earlier about the sale of the radio business. It may not have been clear as he was coming across. The net proceeds from that were $2.5 million. Looking ahead, as we said in our earnings release, we continue to expect consolidated annual revenue growth between 2% and 5% and adjusted EBITDA to be between $11 million and $15 million, assuming that supply chain issues don't worsen. Additionally, we are still targeting positive operating income for the second half of the year. 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.

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 non-core asset sales, is there anything that you need or want out there? If you look at like a SWOT analysis of the strengths, weaknesses, opportunities, and threats out there, is there stuff that you'd like to add that should be part of core? And what might those types of 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. 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. One of the things that there's a lot of talk about is LEO constellations going up, but that's something that internally we're sort of keeping up with. 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?

The nice thing about our business, particularly in the airtime sector, is that it operates on a recurring revenue model. This recurring revenue typically leads to year-on-year growth. I'm not certain if there’s a direct link to recessionary periods, as we haven’t experienced many since launching the service, aside from a brief impact during COVID. In fact, we saw an increase during that time due to the crew needing to be onboard the vessels. The most significant impact we experienced was during 2008-2009, shortly after we launched the service, and it primarily affected the leisure side of the business, especially the RV sector, which suffered greatly. I don't expect a major impact on our recurring revenue, but sales in the leisure marine and hardware sectors might be affected, as we've observed 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 regarding supply chain, and we did need to source some components at a higher price than we have in the past. 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. I think Roger has some stuff to add.

I was just going to say that from a pure perspective, if you look at what do we have to pay in terms of higher prices, 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. We were thinking the same thing. It seems there might be a slight delayed effect regarding all those costs, but we should still anticipate some pressure.

Yes. You get the quotes and you find out the actual impact when it hits the financials is kind of a little bit delayed from when you 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 were 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. 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 were 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 during 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. 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 associated with the energy sector is in the 15% to 18% range.

Gotcha. And would you expect...

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, supply vessels, tankers moving fuel, etc. Regarding 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 timeframe.

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 regarding those types of initiatives in Q2.

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?

I think it's relatively soon compared to something like a driverless car. I don't expect to see a significant increase this year, but as we move into next year and the latter part of next year, we could see some progress.

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. As you would expect, some are going a little ahead of what we expected, some a little behind. Overall, it's a defense business. Because of everything that's going on in Europe, we're actually seeing an uptick versus what our expectations were last year, at the 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. 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. This is the big question, is how long this is going to last and is any of this stuff permanent? This is kind of like the huge question we've got out there. 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 heard around things. We think it is going to be more of an issue in Q2 from a cost perspective. It’s just 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.

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

Well, when you say transient, the price increases could be transient as well. There are a couple of things going on out there. There’s sort of underlying real inflation, which tends not to go away. The fact that you're trying to buy the last 100 chips that exist in the world at a particular price, 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 they were before.

Got it. All right. And then shifting gears, maybe 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.

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. 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.