Earnings Call Transcript - KVHI Q2 2025

Operator, Operator

Thank you for standing by. My name is Rochelle, and I will be your operator today. At this point, I would like to welcome everyone to the Q2 2025 KVH Industries, Inc. Earnings Conference Call. I will now turn the call over to Anthony Pike, Chief Financial Officer. Please go ahead.

Anthony Pike, CFO

Thank you, operator. 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 [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 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 2025 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 talk you through the highlights of our second quarter, I'll turn the call over to Brent.

Brent C. Bruun, CEO

Thank you, Anthony, and good morning, everyone. Our second quarter results reflect our successful ongoing efforts to transform our business model and operations. Compared to the first quarter of this year, revenue was up. Adjusted EBITDA is up and our subscriber base is up, more than 8%, resulting in more than 8,000 subscribing vessels for the first time. Looking at our high-level results in more detail, our revenue declined year-over-year in the second quarter to $26.6 million, primarily due to the loss of revenue from our VSAT airtime service, which includes the loss of the U.S. Coast Guard. However, we returned to sequential airtime and service revenue growth for the first time since the second quarter of 2023. This led to a $1.2 million increase in total revenue over our first quarter 2025 results. Airtime gross margin rose more than 4% sequentially, and our adjusted EBITDA rose to $2.7 million, a $1.7 million increase compared to the first quarter. We also shipped more than 1,300 communication terminals for the second consecutive quarter. These shipments included Starlink terminals, ongoing orders for our TracNet and TracFone VSAT and OneWeb terminals. By delivering on our strategic initiatives, we believe we have reached an inflection point in our transition from a GEO-based hardware and service company to a multi-orbit LEO-focused service provider. For the first time, the increase in our LEO revenue more than offset the decline in revenue from our legacy VSAT business. Starlink terminals and service demand remains strong across the commercial maritime and leisure marine markets during the second quarter. We're also rapidly expanding our Starlink land sales, especially in Latin America, to support schools, villages, and other municipal and commercial facilities. We remain on target to deplete our prepaid Starlink data pool by year-end as planned. The prepaid pool has been a vital contributor to the improvement in our profitability. We are now in discussions with Starlink regarding a renewal. We are also pleased with the steady growth we are achieving in OneWeb, following the launch of the service at the end of January. Our CommBox Edge Communications Gateway also continued to thrive in the second quarter, due in part to its easy integration with Starlink and OneWeb, along with our VSAT and cellular services. In addition, we have started to deploy our CommBox Edge Secure Suite for commercial fleets expanding the value of this product. Compared to the first quarter of 2025, we increased CommBox Edge subscribers by 24%. Commercial maritime demand for crew welfare and content also remains strong. We now have more than 1,000 vessels subscribing to our KVH Link entertainment and news service. Looking at our overall business operations, we completed the sale of our headquarters facility at the end of June and expect to complete the sale of our factory facility in September. We have recently leased a new combined headquarters, production, and warehouse facility in Bristol, Rhode Island and expect to relocate there in early 2026. Lastly, we bought back shares during the second quarter under the terms of the stock repurchase program approved by our board in December 2024. Through the end of the second quarter, we purchased more than 242,000 shares at a cost of roughly $1,250,000. In conclusion, we reached a significant inflection point in the second quarter. Our transformation as an integrated service provider accelerated. Our LEO revenue growth more than offset the decline in our legacy GEO-based VSAT business. New services continue to grow. We continue to see new services contributing to growth in subscribers, revenue, gross profit, and cash. We reduced our operating expenses significantly, and we have the resources and new service pipeline needed for an exciting future. Now I'll 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 Q1, I will not restate data that is in the earnings release I 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 second quarter financial results, airtime gross margin, which is not reported in our earnings release, was 35.8%, which as Brent mentioned, is up more than 4% compared to the prior quarter gross margin of 31.5%. Excluding depreciation, our airtime gross margin for the second quarter was 46.4% compared to 44.1% in the prior quarter. This increase was partly driven by the ongoing change in airtime revenue mix between LEO and GEO, with LEO, which has stronger margins, continuing to grow to become a larger portion of our revenue. However, there was also a positive impact from the lower GEO bandwidth capacity costs, which may rise slightly in the second half of the year. Total subscribing vessels at the end of Q2 were just above 8,000, which, as Brent mentioned, is 8.3% up from the prior quarter and 13.5% up from the beginning of the year. Reported Q2 product gross profit was $0.3 million compared to breakeven in the prior quarter. We continue to expect product margins to be relatively modest as the real value of our mobile connectivity hardware shipments is the airtime revenue they generate in the future. The Q2 operating expenses of $9.5 million was $0.2 million or 2% lower than the prior quarter and $1.7 million or 15% lower than the second quarter 2024 on a like-for-like basis, excluding nonrecurring charges. Our adjusted EBITDA for the quarter was $2.7 million, and our earnings release had the usual reconciliation of that. Capital expenditures for the quarter were $2.4 million, and so adjusted EBITDA less CapEx, which we believe is a good proxy for free cash flow generated from our ongoing business, was $0.3 million. This compares to an adjusted EBITDA less CapEx of negative $0.1 million in the first quarter of 2025 with adjusted EBITDA of $1 million less capital expenditure of $1.1 million. The spike in CapEx in the second quarter from $1.1 million to $2.4 million was driven by OneWeb units on our AgilePlan program, which accounted for around 50% of the quarter's CapEx. We anticipate this CapEx to reduce in the second half of the year as the majority of the OneWeb AgilePlan CapEx in Q2 was related to a specific large fleet rollout. Our ending cash balance of $55.9 million was up approximately $7.3 million from the beginning of the quarter. Net proceeds from the sale of our property at Middletown, Rhode Island were $4.9 million, and we also spent approximately $1.1 million on our stock repurchase program in Q2. Excluding these two items, our cash balance was up approximately $3.5 million. Overall, we are very pleased with the second quarter results, which build on the progress made in the first quarter. Our LEO business continues to grow, and growth has actually accelerated in the second quarter. We are managing the transition of our GEO business well and in line with expectations, with revenue up quarter-on-quarter along with our gross margins, adjusted EBITDA, and cash balance. We are updating and narrowing our guidance on the basis of ARPUs being slightly less than anticipated; however, gross profit margins are better than expected. Therefore, our updated guidance for 2025 is revenue of $107 million to $114 million and adjusted EBITDA of $8 million to $12 million. This concludes our prepared remarks, and I will now turn the call over to the operator to open the line to the Q&A portion of this morning's call.

Operator, Operator

Your first question comes from the line of Chris Quilty with Quilty Space.

Christopher David Quilty, Analyst

Some good progress in the quarter. You didn't give the total number of activated Starlink terminals, which you have done in the past. Where did you finish out the quarter in terms of net adds in total?

Brent C. Bruun, CEO

I'll turn that question over to Anthony.

Anthony Pike, CFO

In terms of total new Starlink stand-alone additions for the quarter, we reached about 2,500 stand-alone units. However, we also have a significant number of hybrids included, which we had previously referred to as combined. Overall, it was just short of 4,000.

Brent C. Bruun, CEO

Is that the question? Or was it I think he asked how many activations? Can you clarify, Chris, please?

Christopher David Quilty, Analyst

Yes. Activations also would be great.

Anthony Pike, CFO

Yes. So activation is clearly measured on a terminal basis due to costs, and we are now counting vessels and terminals separately. So that's the number for that quarter.

Brent C. Bruun, CEO

Yes. I guess, excuse me for intervening. It gets a bit irrelevant because it's going to skew the numbers if we have more than 2 terminals on board a vessel. So I think you can just back into the net adds, Chris, based on what we provided previously.

Christopher David Quilty, Analyst

Fair enough. And I think you mentioned when you added those OneWeb units, it was using AgilePlans. Does that mean you've sort of shifted the AgilePlan onto OneWeb? And are you doing that for Starlink also or just OneWeb because of the higher cost of the terminal?

Brent C. Bruun, CEO

We do offer it for Starlink, but considering the cost of the terminal, most customers prefer to buy the units.

Christopher David Quilty, Analyst

Got you. And the customers who are purchasing OneWeb, how do they differ from your Starlink subscribers? And what are you seeing in terms of network service and performance?

Brent C. Bruun, CEO

Yes. The network is performing well. As I'm sure you're aware, they don't have complete global coverage. So it definitely opens up the door to have a hybrid solution until they get their complete global coverage. And as far as the differentiation, it's just more of customers wanting diversity from Starlink. There's no real rhyme or reason to why they would choose one over the other from our perspective.

Christopher David Quilty, Analyst

Understand. Anthony, you mentioned that the GEO costs may go up in the second half of the year. I thought those were relatively fixed over the course of the year. Or are there new coming costs on?

Anthony Pike, CFO

No. They are, I'd just say, broadly fixed. What we were saying there is that we had a slight dip in the cost in Q2. And so Q3 and Q4 might be slightly higher than Q2, but the overall cost for the year is fixed. I think we've discussed previously our commitments to disclosing following in our 10-K filing.

Christopher David Quilty, Analyst

Understand. When considering the margin outlook for service, are you still aiming for that 35% to 40% range? What are you observing regarding the changes in the mix between OneWeb, Starlink, and legacy GEO products?

Anthony Pike, CFO

So I think we are certainly looking to keep in the range you described. But as we said in the prepared remarks, really, what's happening is as LEO becomes a bigger proportion of the overall airtime revenue, that's driving the margins a little bit. Obviously, as the GEO revenue declines with a fixed broadly, a significant amount of fixed cost in the cost of sales for GEO, that's going to put pressure on the GEO margin. But the two broadly offsetting each other, we're hopeful to retain in that sort of range that you described.

Christopher David Quilty, Analyst

Great. I understand you are discussing the renewal or your ongoing discussions with your prepurchase on Starlink. I have two questions. First, do you expect to pursue a similar opportunity with OneWeb? Second, reflecting on your previous agreement with Starlink, how has market demand or pricing changed? Do you foresee a similar arrangement, or have there been significant changes in pricing that would make this deal look quite different?

Brent C. Bruun, CEO

We're not at liberty to discuss the OneWeb, what price we might be doing with them. We're also quite limited to what we can say in regard to Starlink. What I will say is that the terminal access charge that they've introduced to all end users will be included in our follow-on.

Christopher David Quilty, Analyst

And is that a one-time access charge? Or is that done on a monthly basis?

Brent C. Bruun, CEO

It's a monthly charge.

Christopher David Quilty, Analyst

Got you. And presumably, that would just accrue to the gross margins directly?

Brent C. Bruun, CEO

It's a part of our cost.

Christopher David Quilty, Analyst

Well, it's a cost to the customer that you're adding on.

Brent C. Bruun, CEO

I'm not quite sure I understand the question; maybe.

Anthony Pike, CFO

Yes. No, exactly. Can you just clarify that question, Chris?

Christopher David Quilty, Analyst

So the access charge to the customer is a monthly fee you're charging for access to the network. Is that how you're classifying it?

Brent C. Bruun, CEO

Yes, there's no secret here. If you visit the Starlink website, you'll see their available plans and how they function. There is an additional charge, and they've also adjusted the pricing on the lower end from a strictly per-gigabyte basis. However, when you add the access charge on top of that, it roughly brings you back to where they were at the lower end.

Anthony Pike, CFO

So I think, Chris, it will increase revenue and margin, and gross profit would be fairly flat in a dollar sense, which will inevitably drive down the margin percentage ever so slightly. But obviously, the terminal access charge is a fairly small portion of general ARPUs, which can drive the margin percent down a great deal.

Christopher David Quilty, Analyst

Got it. And are you seeing any changes in the plans that your customers are choosing over time?

Brent C. Bruun, CEO

Not necessarily. It's been pretty consistent as far as the split.

Christopher David Quilty, Analyst

Got it. A question on CommBox. It looks like you've had good growth in that. But what type of attachment rates are you seeing with subscribers and where do you think you will get to in the longer term?

Brent C. Bruun, CEO

The current attachment rate is 1 in 8. Last quarter, it was significantly higher. We have disclosed that we have over 1,000 subscribers, but I'm not sure if that percentage increase was shared. We have about 8,000 vessels, and we expect substantial growth in that percentage due to increased interest in hybrid solutions and the secure suite. Moving forward, the quarterly attachment rate for new activations from a commercial maritime perspective should be around 25% to 50% of our customers, although that's just my estimate.

Christopher David Quilty, Analyst

Got it. And maybe a final question here on just the end market. Obviously, you don't see a huge impact from tariffs, but have you seen any changes in customer demand or patterns in sort of global shipping that are impacting the take-up rate in your view?

Brent C. Bruun, CEO

We haven't seen any impact.

Christopher David Quilty, Analyst

Got it. And the overall commercial maritime market in terms of container rates and fuel prices and everything relatively stable from your perspective?

Brent C. Bruun, CEO

At this point, yes. Just one point of clarification, Chris. I overstated the number of CommBox subs out there by a bit. It's actually closer to about 600, 700 at the end of the quarter, but it's a number that we look at every day.

Operator, Operator

That concludes our Q&A session. I will now turn the call back over to Anthony Pike for closing remarks.

Anthony Pike, CFO

Well, just to thank everyone for joining the call. And if anyone has any follow-up questions, please feel free to reach out at [email protected]. Thank you.

Brent C. Bruun, CEO

Thank you.

Operator, Operator

Gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Anthony Pike, CFO

Okay. Thank you.