Earnings Call Transcript - KVHI Q1 2025

Operator, Operator

Good day and thank you for standing by. Welcome to the Q1 2025 KVH Industries, Inc. Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Anthony Pike, Chief Financial Officer. Please go ahead.

Anthony Pike, CFO

Thank you, Stephen. Good morning, everyone, and thank you for joining us today for KVH Industries first 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 [email protected]. 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 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 2024 Form 10-K, which was filed on March 10. 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.

Brent Bruun, CEO

Thank you, Anthony, and good morning, everyone. Our first quarter results reflect the positive impact of our strategic initiatives and our commitment to managing costs. Compared to the fourth quarter of last year, our gross profit grew sequentially. We increased our subscriber base by 5% and operating expenses and capital expenditures were both in check. Revenue declined year-over-year in the first quarter to $25.4 million, primarily due to lower revenue from our VSAT airtime service, which includes the loss of the U.S. Coast Guard revenue. However, airtime gross margin was up roughly 3% from the fourth quarter, thanks to solid margin contribution from Starlink. We saw Starlink revenue continue to increase as a percentage of our total revenue over the course of the quarter. We also increased quarterly shipments of connectivity terminals to more than 1,300 units, our fifth consecutive record quarter. These shipments include a significant increase in Starlink terminals, continuation of orders for our TracNet and TracFone VSAT terminals and for the first time, OneWeb terminals. Our subscriber growth also accelerated in the first quarter as we increased our subscribing vessels by 5% compared to the fourth quarter of 2024. I'm pleased to report that we have more than fully recovered from the decline in subscribing vessels that we experienced in 2023 in the first quarter of 2024. We now have more than 7,400 subscribing vessels. Starlink drove this growth as we experienced strong demand in the commercial and leisure markets in the first quarter. Roughly 30% of Starlink activations in Q1 were hybrid configurations, illustrating the value of our ability to deliver a multi-orbit managed solution for vessels. We also added the new Starlink Mini terminal to our product portfolio for land and maritime applications. Our Commbox Edge Communications Gateway also continued to thrive in the first quarter due in part to its versatility in managing Starlink Communications. Product shipments were up 33% from the fourth quarter of last year, and we increased our active CommBox Edge subscribers by 35% from last quarter. We are working diligently to expand the capabilities, features and value offered by CommBox Edge. Earlier today, we announced the launch of CommBox Edge Secure Suite. This new feature set is designed to detect, prevent and report on cybersecurity threats. Thanks to its advanced intrusion prevention system, Security Suite actively identifies and blocks harmful traffic in real time to reduce the risk of vessel communications, operations and network security. To achieve this, Security Suite employs some of the most advanced cybersecurity and proactive monitoring technology available, including Cisco Talos, which focuses on identifying emerging and existing cyber threats and Cisco Snort, which monitors, analyzes and responds to malicious network traffic in real time. As discussed in our Q4 earnings call, we began shipments and activations of OneWeb terminals in late January. We are seeing significant interest in the service, especially outside the U.S. We are very pleased that OneWeb has been added to our product and service portfolio. Looking at our overall business operations, the sales of both our headquarters and factory facilities remain pending, subject to closing conditions. We expect to close the sale of our headquarters before the end of the quarter and anticipate that the factory sale will close in Q3 following zoning approvals. During Q1, we bought back shares under the terms of the stock repurchase program approved by our Board of Directors in December 2024. Through the end of Q1, we purchased more than 30,000 shares at a cost of roughly $163,000. And finally, we are keeping an eye on tariffs, but their status and potential impact are uncertain. Our exposure to potential tariffs on imports from China is reduced, thanks to the purchase of components we carried out in 2024 as part of our manufacturing wind-down efforts. At this time, we don't expect tariffs to have a material impact on our costs. So in conclusion, we are very pleased with the results driven by our strategic initiatives. We achieved record-breaking subscriber growth, increased product shipments and successfully added OneWeb to our portfolio. While there are still challenges ahead, I am confident in our path going forward. And now I will turn the call back to Anthony to discuss the numbers.

Anthony Pike, CFO

Thank you, Brent. As a reminder, I would like to note that similar to our call for Q4, I will not restate data that is in the earnings release or clearly described in our 10-Q. I will focus my comments on information that either elaborates on or clarifies the published data. With respect to our first quarter financial results, airtime gross margin, which is not reported in our earnings release, was 31.5%, which is up compared to the prior quarter gross margin of 28.2%. Excluding depreciation, our airtime gross margin for the first quarter was 44.1% compared to 41.4% in the prior quarter. This improvement in gross margin can be mainly attributed to two things: firstly, a reduction in our 2025 GEO bandwidth commitment, resulting in the first quarter cost being $1.4 million less than the prior quarter and secondly, because the proportion of airtime revenue derived from LEO is increasing, and we are seeing strong margins from our LEO revenue. Total subscribing vessels at the end of Q1 were just above 7,400, which, as Brent mentioned, is approximately 5% up from the prior quarter. GEO churn was in line with our expectations, but LEO shipments were actually higher than predicted. Reported Q1 product gross profit was breakeven compared to a positive $0.3 million, excluding nonrecurring charges in the prior quarter. We expect product margins to remain about breakeven and view the real value of our hardware shipments as coming from the airtime revenue they generate in the future. The Q1 operating expenses of $9.7 million were $0.4 million or 5% higher than the prior quarter and $2.3 million or 19% lower than the first quarter of 2024 on a like-for-like basis, excluding nonrecurring charges. Our adjusted EBITDA for the quarter was $1 million as our earnings release has the usual reconciliation of that. Capital expenditures for the quarter were $1.1 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 $0.1 million. This compares to an adjusted EBITDA less CapEx of negative $0.3 million in the fourth quarter of 2024, with adjusted EBITDA of $0.5 million less capital expenditure of $0.8 million. Our ending cash balance of $48.6 million was down approximately $2 million from the beginning of the quarter, which was driven by movements in working capital. Overall, we believe the first quarter results are positive with our LEO business growing at an unprecedented rate and our GEO business transitioning as expected. We continue to closely manage our GEO bandwidth commitments, which run until the end of 2026 as GEO demand decreases. This will continue to put pressure on our GEO margins. However, we are very pleased with our strong LEO margins as we transition the business away from being GEO focused and into a primarily LEO-based mobile connectivity market. This ongoing double-digit annual growth in subscribers combined in line with strong LEO margins and careful cost control leaves us confident that the company will be in a solid position to generate positive cash flow moving forward. 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

Our first question comes from Chris Quilty of Quilty Space.

Christopher Quilty, Analyst

I had a question to begin with on the LEO margins. Obviously, you did a pre-purchase of capacity, which has helped. But when you look at your LEO margin, how much of that – like if you were to break it down into a pie is the actual margin on the airtime versus the contribution from the services that you're pulling along on top of that?

Anthony Pike, CFO

Yes, sure. Chris. So yes, the vast majority of the margin is both in terms of dollar, but in percentages, really coming from the actual airtime. I'm assuming you're referring to the kind of the One Care support that we add on to that.

Christopher Quilty, Analyst

Yes, either warranty or care or cyber or service sort of add-ons to the core airtime revenue?

Anthony Pike, CFO

Yes. So the add-ons are similar to the margins we received from similar add-ons in the rest of the business. But the actual underlying LEO bandwidth margin is still very strong. So when we're talking about the strong margins, that's actually for the bandwidth. We're not just really deferring to the value-added services in that regard.

Christopher Quilty, Analyst

Great. SpaceX tends to change their plans fairly frequently. What is your current position regarding whether these plans are well optimized for your customers, or do you anticipate further changes?

Brent Bruun, CEO

That's a very good question. The plans we currently have are well optimized for our customers. However, Starlink has recently updated some pricing on their website and is introducing a monthly terminal access charge. We will also need to implement a similar terminal access charge later this year as we renegotiate our follow-on pool for Starlink. The market is dictating what is best for our customers, and we believe we are in a strong position to offer them a reliable service now and in the future after we secure a follow-on pool with improved access.

Christopher Quilty, Analyst

So obviously, I think in the land market, you're seeing up charges for capacity-constrained areas. Do you see the access charge here on the maritime? Is that related to capacity issues or literally just pricing strength of SpaceX?

Brent Bruun, CEO

You could refer to it as pricing strength. There is still a significant load on their network from a terminal that isn't transmitting much data. They aimed to manage the load on their network, allowing them to secure a steady level of revenue per terminal, rather than receiving minimal revenue just from the 50 gigabyte plan.

Christopher Quilty, Analyst

Understand. And I mean, again, this is, what, 5 straight quarters of record shipments and the vast majority being Starlink terminals. Do you see a slowdown? I mean you're adding terminals on a quarterly rate more than you would on an annual basis historically. Are there concerns around like are you still seeing large pools of demand and customers out there? Or is the maritime market going to eventually reach some kind of a saturation point?

Brent Bruun, CEO

Yes. That's a multi-pronged question. One, the rate at which we've been selling terminals very well may not keep up. However, we will continue to sell them, which we anticipate will increase our installed base. As far as saturation with some of the price points with this mini terminal as well as being able to get data plans in hundreds of dollars, it's opened up the market completely, not only to take on existing VSAT service or L-band services, but just services that weren't provided at all. So the market is so much larger. I don't envision saturation at any point in the foreseeable future with how much larger the addressable market has gotten over the last year or two.

Christopher Quilty, Analyst

And you've talked about the fact that you're starting to see some expansion beyond the maritime market. Has that gotten to the point where you're actually hiring in people to target applications outside of maritime?

Brent Bruun, CEO

Are you referring to land-based communications?

Christopher Quilty, Analyst

Yes, for some of the land apps.

Brent Bruun, CEO

Right now, our existing sales team is handling all land-based application sales. It's not large enough to report on at this juncture. They are working with service providers that are specific to land-based opportunities versus we work with a number of maritime service providers. So we're not hiring, but we are identifying new and signing up service providers, which are specifically focused on land opportunities.

Christopher Quilty, Analyst

Great. And I guess just a final question here. The Coast Guard contract, how does that roll off through the balance of the year where those headwinds finally lift? Is it all the way out to the fourth quarter of '25 or more like the third quarter?

Brent Bruun, CEO

We had a small amount of revenue in the fourth quarter. Anthony can provide the specific numbers. Between the first, second, and third quarters, our revenue was quite consistent. Therefore, we expect a negative variance through the third quarter, which will still be negative but significantly smaller in the fourth quarter.

Anthony Pike, CFO

Yes. I was just going to add to that, Chris. So for the first three quarters last year, it was around $2.5 million revenue per quarter. And then in the last quarter, there was a final contractual payment of around $0.5 million. And of course, there'll still be nothing in this year, certainly nothing of any significant value. There's still a small amount of business with them, but less than $100,000 a quarter.

Christopher Quilty, Analyst

Got it. And actually, final question. You did a small, maybe symbolic buyback here in the quarter. But given the fact that the company is expecting to be free cash flow positive in '25, is that something that you think you'll put more effort into on the buyback?

Brent Bruun, CEO

We're dedicating the right amount of effort to this. While the numbers may seem small, that was only in the first quarter. We're consistently buying back shares every day, and we expect to report a significantly larger figure next quarter.

Operator, Operator

Thank you. I am showing no further questions at this time. We'd like to thank you for your participation in today's event, and have a great day. This does conclude the program. You may now disconnect.