KVH Industries Inc (KVHI) 2009 Q1 法說會逐字稿

Good day, everyone. Welcome to the KVH Industries first-quarter conference call. Just a reminder, today's call is being recorded. And now at this time for opening remarks, I'll turn the conference over to Mr. Pat Spratt. Please go ahead, sir.

Thank you, and good morning. I am Pat Spratt, Chief Financial Officer of KVH Industries. And with me today is Martin Kits van Heyningen, Chief Executive Officer.

This call will address the first-quarter earnings release that we issued earlier this morning. Copies of the release are available on our website and also from our Investor Relations Department. This call is being simulcast on the Internet and will also be archived on our website for future reference.

For those of you listening via the web, feel free to submit questions to ir@kvh.com, and we will be happy to answer them following the call.

This conference call will contain certain forward-looking statements that involve risks and uncertainties. For example, statements regarding financial and product development goals are forward-looking. The Company's future results may differ materially from the projections described in today's discussion.

Factors that might cause these differences include, but are not limited to, those mentioned in today's call and risk factors described in our annual report on Form 10-K filed with the SEC on March 13, 2009. The Company's SEC filings are directly available from us, from the SEC or from the investor information section of our website.

Now I would like to turn the call over to Martin to begin today's discussion. Martin.

Thanks, Pat. Thank you all for joining us today. Well, we just completed a difficult quarter in an extremely challenging economic environment that put significant pressure on sales of our satellite products, in the leisure markets especially. Now, in stark contrast, our fiber optic gyro group had a record quarter, with sales up 95%.

Overall, and despite the depressed state of some of our key markets, first quarter did offer compelling evidence that our strategic growth drivers are gaining ground and establishing a foundation for long-term success. Recurring airtime revenues for satellite communications and broadband Internet are increasing as we roll out our global mini-VSAT network. Our aeronautical satellite TV initiative is about to take flight. And demand for our fiber optic gyros continues to grow for both military and commercial applications, and we're expecting another big jump in product sales in Q2.

Together, these elements of our business plan are generating diverse revenue streams that are helping us whether this recession. But in the short term, the results were not good.

First-quarter revenue was $18.3 million, and that is down 21% from the first quarter of 2008. The decline in revenue lead to a loss of $2.6 million, or $0.18 per share, for the quarter.

As we discussed in our February conference call, we recognize that 2009 will be a challenging year for KVH and many other companies. With that in mind, we are working diligently to ensure KVH's long-term financial health and to strengthen our competitive and technological positions. We are investing wisely in strategic growth areas and new products, and managing our balance sheet and financial resources carefully. I am confident that our business plan remains sound and that we have the resources to not only weather the current recession, but also to emerge with very solid prospects for the future.

Returning to our key business areas, our guidance and stabilization business enjoyed rapid growth and an excellent quarter, with revenue of $7.2 million. That is a 43% increase from Q1 of last year. Sales of our tactical navigation products were up 6%, and we recently added to our long-term backlog for these products with $1.3 million in new orders.

We also recorded our best quarter ever in our fiber optic gyros business, with $4.8 million in sales, a year-over-year increase of 95% and a sequential increase over our previous high in Q4 of last year. The continued success of our fiber optic gyro business is due in large part to our ongoing work with Kongsberg. Each of their Protector Remote Weapons Stations relies on three of our DSP-3100 gyros to provide stabilization and precision pointing to keep the weapon on target.

We view the Remote Weapon Station opportunity as one of our primary strategic initiatives. Our fiber optic gyros offer a great combination of precision and affordability that are very appealing to Kongsberg and other Remote Weapons Station manufacturers.

In the long-term, prospects appear very good, as well. Two weeks ago, we announced another new order for our gyros, this one valued at $2.9 million. In addition, the new Supplemental Defense Spending Bill includes $279 million for 1200 remote weapons stations, an expenditure that could result in significant new fiber optic gyro business for us.

Adding to demand for our FOGs is growing interest in our CNS-5000 navigation system. This collaboration with NovAtel combines their high-precision GPS and our fiber optic gyros and accelerometers to create an extremely accurate nav system for industrial applications. We are aggressively pursuing a number of commercial sales opportunities, including navigation solutions for dynamic surveying and unmanned vehicles, such as [securitor] and perimeter monitoring robots.

At the same time, NovAtel is also marketing and selling the CNS-5000 under their own brand, and seeing very strong interest, as well. That translated recently into a new $900,000 order for the CNS-5000, and more expected orders are on the way.

Turning to our mobile satellite business, our Q1 revenue was $11 million, and that is down 39% compared to Q1 of last year, as a result of the decline in domestic and international sales of satellite products into the leisure land and leisure marine markets.

Our land mobile business saw sales decline 72% versus Q1 of last year, with sales to the RV industry itself down more than 80%. To give you an idea of the challenges we face in the leisure market, new RV sales are at historic lows, and two leading recreational vehicle manufacturers that sold KVH products as OEM equipment declared bankruptcy during the first quarter.

Within our marine business, the increased weakness that we began to see at the end of Q3 and throughout the fourth quarter continued. Now, retail boat sales appear to have reached a bottom in January, based on new boat registration data, but I don't think that boat builders will see any significant increase in sales for some time. This situation affected sales both overseas and domestically, with our total marine sales down 27% overall during Q1.

Within the leisure market, the primary decline in sales came from our larger TracVision satellite TV products. And it's worth noting that our small, lower-cost TracVision M1 that we recently launched is selling well, as consumers look for excellent value when choosing their accessories now. As a result, our unit sales have not declined as much as revenues, indicating that we are still maintaining or even growing our market share in this recessionary economy. Solid TracPhone V7 hardware and airtime sales also helped offset some of the loss on the leisure side of the business.

As we've discussed previously, the TracPhone V7 and our mini-VSAT broadband service represent one of our primary strategic initiatives for 2009. This compact, mobile broadband communications system offers a compelling combination of a small antenna and affordable bandwidth. During the first quarter, we achieved several notable milestones that further increased the appeal of this unique satcom product.

First, users began to take advantage of our new Northern Pacific coverage area, enabling us to support the Alaskan fishing grounds, as well as vessels making the transit from Asia to the West Coast of the United States. Shortly thereafter, we activated broadband service in the Persian Gulf. This investment paid dividends almost immediately, as just two weeks ago, we announced that a number of US military and government platforms in the Gulf region are now relying on our products and airtime for mission-critical communications. More importantly, this relatively small number of platforms is expected to generate almost $1 million in hardware and airtime revenue in the coming year.

Our next step is the further expansion of the mini-VSAT broadband service into Southeast Asia and Indian Ocean waters. When this coverage goes live towards the end of this year, it will be then possible for vessels to circumnavigate the globe without any interruption in mini-VSAT broadband service.

In addition to our goal of rolling out global coverage, we are also focusing on bringing subscribers on board as quickly as possible to cover the cost of transponders used to provide that service. A valuable element of this is our new distribution agreement with Thrane & Thrane. I am pleased to report that the first TracPhone V7s have been shipped to Thrane, and are now being marketed and sold through their global distribution network under the SAILOR brand, using our mini-VSAT service.

Our expanding coverage areas, affordable service and ground-breaking antenna design are driving significant interest in the commercial maritime market for both one and two vessel installations, as well as for larger fleet applications. This value proposition is increasingly important, as capital investments at shipping companies are tightening up. While fuel costs have receded and industry metrics like the Baltic Dry Index provide a potential early indicator of an improvement in the global shipping business, commercial maritime operators are still affected by reduced shipping volume and reduced prices.

To address these concerns, we are being more creative in our sales efforts, in our financial and leasing options and being more aggressive in general. For example, we are in a position to offer a great deal of flexibility when it comes to meeting the needs of commercial prospects through custom hardware lease and airtime packages because we control both the hardware and the network. The result is hardware pricing and monthly airtime costs and capacity designed for each customer's unique financial and operational needs. It offers the additional benefit of avoiding the need for large one-time capital expenses in favor of fixed monthly costs for the entire satcom solution.

Now, when we began to address the commercial market nine months ago, commercial operators wanted to focus on the data speeds that were available. Now, they want to know how the TracPhone is going to save them money. New regulatory requirements are putting additional IT burdens on shipping operations. The need for greater efficiencies in shipboard operations is increasing the value that is gained from the 24/7 engine and fuel monitoring, route planning, cargo management. And our product, the V7 and the mini-VSAT service, are ideally suited to meet these needs, especially when many shipping companies are losing money and need to cut costs.

Moving from the ocean to the air, we expect to generate incremental revenues from the aeronautical TV market as we prepare to make our first production deliveries of our DIRECTV antenna for commercial jets to our customer, LiveTV.

So in conclusion, while we are facing challenges as a result of the economic environment, we did achieve major milestones in Q1, and we see some very positive trends in key businesses. New products are also in the development pipeline for both mobile satellite and fiber optic gyro applications.

Now, while most companies are pulling back and are unable to make any aggressive moves in this economic environment, KVH is taking a different approach. We have a clear vision of a seamless global broadband network that will cover all the major shipping and air routes around the world. This will require a significant investment in infrastructure and represents a calculated risk, particularly in the midst of this recession. You can see some of these costs for this effort showing up now in our expenses.

However, we believe that when this recession subsides and global trade resumes, having the only global broadband network in place will be a tremendous economic opportunity.

So now, I would like to turn the call back over to Pat to talk to you about the numbers. Pat?

Thank you, Martin. The first quarter was difficult because of the very weak economies in every geographic area in which we operate. Conditions worsened throughout the quarter, and as a result, we missed our original expectations for revenue and earnings.

Gross margin was only 30%. We had anticipated a sequential decline to approximately 36% to 37% due to a lower revenue level and a concurrent continuing buildout of the infrastructure for the mini-VSAT business. But several additional factors contributed to missing that expectation. In fact, the EPS variance from our original guidance was totally reflected in gross profit.

The primary factors that contributed to the low gross profit level were the direct margin impact of the nearly $3 million revenue shortfall, a consumer shift in mix to lower-priced products and a higher level of price discounts to maintain our competitive position in the market. And lastly, additional reserves to account for a greater risk of excess inventory associated with very weak consumer demand.

For Q1, operating expenses were essentially flat compared to last year. Early in the quarter, we reduced our employee population by approximately 10%. Due to the impact of severance costs, the full quarterly expense benefit of this action was not reflected in the first quarter.

For the quarter, reported R&D spending was 9% lower than last year. This continues to partly reflect the impact of the capitalization of the antenna development for the LiveTV in-flight entertainment system. The total actual spending for engineering was about equal to the first quarter last year. We will continue to aggressively invest in new products to drive the long-term strength.

First-quarter sales and marketing expenses increased 2% year-over-year, but were down about 4% sequentially. We continued to expand our mini-VSAT capabilities and market presence, while we also reduced activities in areas that are showing the weakest demand and in those areas that are not as strategic.

Administration expenses were up 10% compared to last year and sequentially. The increase is primarily due to consulting, legal and license costs in direct support of the mini-VSAT business rollout.

During the quarter, we recognized a modest tax credit that reflects the monetization of a small portion of pre-2006 R&D tax credits. This is only the tip of the iceberg, however. We have completed a comprehensive study that will allow the Company to file for substantial federal and state R&D tax credit recoveries that we had not previously reported for the periods 2000 through 2008. The full cash and tax expense benefit to the Company could exceed $4 million.

Initially, this tax asset will be offset on the balance sheet by a full valuation allowance. But over time, when we have returned to sustainable profitability, we will bring this onto the income statement. We will provide enhanced disclosure about this in our upcoming 10-Q filing with the SEC. Going forward, we should also see annual credits due to this more diligent R&D tax reporting process.

Turning to the balance sheet, cash and marketable securities were $37.1 million. I will also note that we paid off a $2 million mortgage on our headquarters building in February, and then completed a new financing of $4 million in early April, after the close of Q1.

For the quarter, cash flow from operations was negative at about $2.5 million. Capital expenditures were about $260,000. Capital expenditures over the course of the year will increase substantially as we purchase additional hubs for the mini-VSAT network deployment.

During the quarter, we repurchased 123,000 shares of stock. The program is currently suspended. Over the past 18 months, we have used approximately $9.6 million to repurchase 1.2 million shares.

Accounts receivable at $11.9 million was lower than Q4 by more than $2 million. Days sales outstanding was steady at 59. The weak economy is putting added pressure on collections. During the quarter, we experienced a higher-than-normal level of bad debt with selected customers, and that cost is included in our sales and marketing expenses. We will continue to closely monitor the condition of all of our accounts.

Inventory decreased to $14.4 million. This reflects actions to rebalance our supply with the current level of demand, and it also reflects the impact of the higher level of reserves for excess inventory. We will continue with programs over the next several quarters to further reduce our overall inventory levels.

Now I will turn to our expectations going forward. In the past, each time we have provided forward-looking guidance, we did so with the intent to share with investors our outlook for the near term as we saw it at that point in time. It is always a challenge to know how much information is enough and to set an appropriate degree of conservatism. Our first-quarter results confirmed that in these very weak and volatile economic times, we do not have the visibility, even for the very near term, to provide highly quantitative guidance.

As of today, our outlook for the second quarter is that we should see a sequential improvement on both the top and bottom lines. We do not believe it is appropriate to be more specific at this time. Factors that cause us to expect an increase in revenue compared to the first quarter are the continuing growth of the mini-VSAT airtime revenue, a higher level of fiber-optic gyro output and the initial shipments of our aeronautical TV antenna to LiveTV.

On the other hand, it is nearly impossible to accurately forecast consumer and commercial demand in this environment. Although we expect to see improvement in our financial performance over the rest of the year, we do not feel it would be prudent to provide additional guidance until we see clear evidence of economic stabilization.

Like so many companies, we are navigating through these unique economic times as carefully as we know how. We will remain very cautious in managing discretionary activities, but at the same time, we will continue to be aggressive with respect to our new growth initiatives.

Our backlog at the end of March for guidance and stabilization products and services exceeded $13 million. In April, we have already received additional new orders of $4.5 million for these, as well as an initial order of $3.6 million for our aeronautical antenna system. Combined, these boosted our defense, commercial stabilization and aeronautical backlog to more than $20 million. Over the next several months, we expect to receive additional new orders for fiber optic gyros for use in remote weapon stations and the Mark 54 torpedo program.

We are very upbeat about our future. To reaffirm the proof points for our confidence, we have a diversified portfolio of products and services; we are executing growth strategies that play to our strengths; and we have the financial resources to support a healthy level of continuing investment, even in the face of this economic storm. We intend to use these to increase the probability of strong financial returns when the economy does ultimately turn for the better.

Now we would like to take your questions. Stephanie, could you please open the call?

(Operator Instructions) Chris Quilty, Raymond James.

Thanks, gentlemen. Looking at the service revenue, it was a little lower than I had anticipated. Can you give us any sense of a breakdown there in terms of usual or unusual items that may have happened with some of the funded R&D or the recurring V7 revenue?

Yes, I will, Chris. And without getting too precise, the what we call nonrecurring engineering or the engineering consulting services or development services was down pretty substantially on a year-over-year basis. And actually I would have to -- it was down compared to the fourth quarter, as well. Also down and part of that is repair services. And that is for non-warranty repair services for satellite communications products, as well as other products.

I can tell you that the airtime revenue continues to grow very nicely, very aggressively, both sequentially as well as year-over-year. And so what you've got going on there is clearly a mix shift, a lot less of the more traditional kinds of things that we would have reported in service and a very healthy increase in the airtime portion.

Okay. And given the fact that we are at least a month here into what is normally your hot season for the maritime market, the consumer leisure part of the business, any early indications that things might be getting back on track?

The short answer is no. We haven't really seen the normal seasonal euphoria that you have this time of year. So I think that we are anticipating things to pretty much continue as they were in Q1. So that's what we are planning on.

Obviously, it would be great if things do start to turn around. The only positive sign I've seen is actually some of the research I think that came out of another analyst at Raymond James who covers the boat market. And it looked like the boat registration data sort of formed a bottom in December/January and has been going up since then. It will take a while for the new boat production to reflect that, meaning that there is a lot of product in the channel. So -- but that seems like a positive sign.

Okay. And Pat, can you give us a sense of -- or at least a ballpark, maybe a range, of what you think the contribution coming out of the LiveTV production might be this year?

When you say contribution, are you asking --?

Top line.

Top line. Well, without getting too precise, again, it's probably going to be in excess of 100 units.

Okay. So that is substantially getting to around half of the continental fleet, if I remember correct.

Well, I think their contract with Continental was something in excess of 200 planes.

Okay.

But whether this is exclusively for that or not, I don't know.

All right. (multiple speakers) Now, there was -- EMS Technologies got a contract a couple days ago for ruggedized storage units from LiveTV for what amounts to about 1000 aircraft. But if I look at JetBlue's combined fleet of installations, even including Continental, I think it only adds up to around 600 aircraft or so. So do you guys have indications that there are other large orders forthcoming?

Well, we know that they are talking to all the majors, and we know that they've got some specific interest from some of the European and South American airlines that are looking to put something in place in time for the World Cup, which is starts in June, I believe, of next year. It happens every four years. So we know that there is a lot more airlines out there that they are targeting.

Okay. And switching gears over to the commercial FOG opportunity, the order you picked up there from Wavecom in the quarter, which seems to be a fairly decent sized order, discrete, or do you see the opportunity for this to pick up into more of a regular contributor? A smoother business, or is this always going to be a lumpy sort of order business for you?

I'm not sure I understand your question, Chris. What is the Wavecom reference?

I'm sorry -- the NovAtel.

Yes, that is a very big bright spot. We see that business as growing. In fact, we just got another sizable order from them in the last few days. So we see that continuing. And that is -- in fact, that is right now looking like it's going to be in our probably top three or five products in terms of revenue this year. So that is really looking good.

Great. That's a good piece of news. Thank you, gentlemen.

(Operator Instructions) Rich Valera, Needham & Company.

Thanks. Good morning, gentlemen. Pat, just to get a sense of the OpEx, it sounds like you made the RIF part way through the quarter; obviously didn't see the full impact. Just trying to think about how do we model OpEx sequentially? I would expect down some amount, but probably not the full maybe 10% that you indicated would be sort of magnitude of the RIF.

Yes, and -- true enough, Rich. And there's other things going on as well, naturally, within the spending that we would look at for the rest of the year. As you know, we are adding some resources to support the mini-VSAT business.

And another thing that when you look out going forward, on the P&L anyway, on the reported numbers, is keep in mind that as we finish up the development here for the LiveTV antenna system, that development has been capitalized and put on the balance sheet. And so now as we complete that, those engineering resources will be naturally working on things that do get reported on the income statement directly.

So we do have some other things going on that are going to cause us to see spending. I would say that over the course of the year right now, we are looking at operating expenses being relatively flat throughout the year.

Okay. That's helpful. And then, I know you don't want to give too specific guidance, but I think in your prepared remarks, when you referred to the FOG business, you -- I think, Martin, in your comments, you talked about -- I think the word was a significant sequential increase in FOG business. I was wondering if you could quantify that at all.

And then secondarily, it does sound like you have a healthy backlog and pretty healthy prospects for orders. So wondering if you could give some sense of the sustainability of that overall defense business in what looks to be sort of the high-single-digit range, perhaps, that you would hit in the second quarter.

Right. I think the FOG business, we did 4.8.

$4.8 million in the quarter.

We are expecting a 20%, 30% increase again in Q2. And we are actually capacity constrained, so we are ramping our production. So almost all of that, if not more than that, is already in backlog. So that is why we are pretty confident that will happen.

As far as long-term, we do see continued -- we think that is sustainable. So --.

And how about on the navigation side? How do you see that portion of the business trending?

There, we tend to have a little bit less visibility because it is more specific order-based, contract-based. We don't have some of the nice long-term programs that we are enjoying now in the FOG business. So there still are some large programs that we expect during calendar year 2009 that would start in 2010, and these would be in the potentially $10 million to $15 million range for an overall program. And then at that point, we would have the annual visibility, like we were seeing on some of the FOG programs.

Right. And could you just remind us, Martin, what your content is per CROWS unit? I think you have -- is it two FOGs per system, or is it --?

It is three right now.

Okay, so it's three.

So it's three. And the list price of our fiber optic gyros is about $3700. Obviously, in big volumes, the price is better than that. But that just gives you a sense. So if you (multiple speakers) something around the $3000 figure, you won't be far wrong.

Right. That's helpful. And then, Pat, just a bookkeeping one -- the depreciation in the quarter?

It was $592,000, Rich.

Great. Thank you. That's it for me. Thank you.

(Operator Instructions).

If there is no other questions, we will wrap up. And if you think of something, you can feel free to call us directly or e-mail us.

Thank you.

Thanks.

Once again, that will conclude our teleconference. Thank you all for your participation. Have a great day.