KVH Industries Inc (KVHI) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to today's KVH Industries second quarter 2013 earnings announcement. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to your host for today, Mr. Peter Rendall, Chief Financial Officer. Please go ahead, sir.

Thank you, and good morning, everyone. I am Peter Rendall and with me is Martin Kits van Heyningen, Chief Executive Officer of KVH Industries. This call will address the second quarter earnings release that we issued earlier today. 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 be archived on our website for future reference. If you are listening via the web, feel free to submit questions to IR@KVH.com and we will answer them following this call.

This conference call will contain certain forward-looking statements that involve risk and uncertainty. 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 may 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, which was filed with the SEC on April 2, 2013. The Company's SEC filings are directly available from us, from the SEC or from the investor information section of our website.

Now, I will turn it over to Martin for today's discussion of results. Martin?

Thanks, Peter, and thank you all for joining us today. I am pleased to report that we achieved record top-line results during the second quarter, our fourth record quarter in a row. Revenues of $43.2 million were up 35% from the same period last year. Non-GAAP EPS for the quarter was $0.15, up $0.03 per share from the second quarter of 2012.

Headland Media's contribution to our revenues in the second quarter totaled $1.9 million since the acquisition in mid-May and added approximately $0.01 to our EPS. But even without Headland Media, we still would have achieved record results, with both revenues and earnings for the second quarter above our guidance.

Our continued strong revenue growth during the quarter was the result of increased shipments for our guidance and stabilization business, up 100% from the second quarter of 2012, and continued strong growth in our maritime VSAT airtime business, which was up 35% from the same period last year.

Our TACNAV business continues to benefit from our large, ongoing contract with the Saudi Arabian National Guard. Our fiber optic gyro sales were also solid, especially commercial sales of our inertial measurement units used in dynamic mapping systems and autonomous navigation. For the second quarter in a row, our commercial FOG sales were larger than our military FOG sales.

Looking at each segment in greater detail, our overall mobile broadband revenues, including Headland Media, were $27.3 million, up 13% year-over-year. The mini-VSAT Broadband portion of the business was up 17%, overall reflecting strong airtime growth of 35% year-over-year, which was partially offset by a decline in hardware sales, primarily in Europe. We believe our European sales continue to be down due to the continuing poor economic conditions in the EU, particularly in southern Europe.

On a positive note, we saw strong sales of our new TracPhone V11 product during the quarter. Its higher average selling price led to the V11 passing the V3 in terms of revenue for the first time during the quarter. We are working on a number of large opportunities, and the V11 is becoming the system of choice for leading maritime companies. We do expect hardware sales to increase year-over-year again starting this quarter.

Moving on to our satellite TV business, TracVision revenues were up in the US, but down overall due to very slow sales in Europe. Net was a 4% decline in the second quarter over the same period in 2012. Another factor in this we believe was the wet and cold Spring both in the US and Europe that adversely impacted the leisure marine market. We are confident that our competitive position is strong, and we have new products in the pipeline that should help maintain our leadership position in the global maritime satellite TV market.

In terms of strategy and longer-term positioning, we had several significant announcements in the second quarter relating to our strategy to expand our mini-VSAT Broadband service. There are many new initiatives underway to modernize the world's commercial shipping industry, driven by a series of new regulations to reduce greenhouse gas emissions, to convert electronic navigation equipment and digital charts, to improve training and to enhance the living conditions of seafarers.

Meeting each of these regulations often requires large amounts of digital data to be delivered to ships for things such as updating electronic chart databases and providing detailed weather forecasts, computer-based training courses and videos, and news, sports, music and movies for crew welfare and entertainment. These large files are now delivered on DVDs due to the high cost of sending these files individually to ships via satellite.

But shipping DVDs is a slow and costly effort when you consider the need to coordinate international delivery and get them through Customs and have them available to meet a ship that may only be in port for a few hours. This is the important customer problem that we will solve with our new content delivery solution.

Our second-quarter announcements related to how we will revolutionize delivery of large files to ships at sea included three major components -- enhancements to our network to support multi-casting; a whole new TracPhone product line; and the acquisition of a leading distributor of licensed media to the global maritime market. Together, they reflect our long-term strategy to introduce innovative new solutions to meet the needs of our customers to affordably deliver content to their ships, and in the process, to fundamentally change the basis of competition by disrupting the market in a way that positions our solutions far ahead of our competitors.

So let's look at these components in detail. Starting off with our network enhancements, our new IP-MobileCast Content Delivery Service is based on the simple idea of broadcasting large files of commonly-used data to mini-VSAT Broadband customers all at once, using a single transmission rather than the current practice of sending an individual file hundreds or thousands of times on a one-to-one basis.

The elements of IP-MobileCast include improvements in our modulation technologies, designed to increase our shore-to-ship data carrying capacity of our network, special software with forward error correction, optimization and file verification capabilities that will provide reliable, automatic file delivery; and new software for our CommBox Ship/Shore Network Manager, which is the onboard hub for the IP-MobileCast Service.

We will begin rolling out these network enhancements this quarter and should have the service operational by the end of 2013.

We also announced the introduction of our TracPhone V IP Series product line, which now features a single box below-decks unit that integrates the capabilities of our CommBox network manager, our ViaSat ArcLight modem and our IP-enabled antenna control unit, all in a single 2U rack-mounted module called the Integrated CommBox Modem.

In addition to being significantly easier to install, this new product line provides the features of the CommBox and the ability to receive IP-MobileCast Service to every new TracPhone customer. So we will now deliver the capability right out of the box to provide vessels with unique firewalled networks for their operations and their crew and to offer voiceover IP, Internet cafe features and to receive multicast transmissions from our network, which for the first time will enable cost-effective transmission of large files and make available all sorts of exciting new content to the world's 1.4 million seafarers.

The third major announcement during the second quarter was our acquisition of Headland Media, the maritime industry's leading provider of commercially licensed news, sports, music and movies. Headland Media's services are popular among seafarers, but often difficult to deliver due either to the need to ship movies on DVDs to ports around the world or the expense of transmitting content over satellite. Shipping companies need to offer this type of amenity to their crews due to new labor laws that go into effect this month that were designed to improve seafarers' living conditions.

We intend to create new IP-MobileCast delivered services that will make it easy and affordable for maritime companies to provide Headland Media's news, sports, music and movies onboard their vessels.

Our extended content delivery strategy, which includes IP-MobileCast, the new TracPhone V-IP series and Headland Media content, was announced at the Nor-Shipping Show last month, along with our plan to work with electronic chart market leader, Jeppesen, to broadcast their entire chart database using IP-MobileCast.

The reaction from customers, the press and other potential application partners was universally positive. In coming months, we will announce new relationships with other leading application providers and introduce a series of exciting new value-added services to the maritime market.

Moving on to our guidance and stabilization business, our TACNAV product revenues were $5 million for the second quarter. That is up nearly 230% year-over-year, as we continue to ship the previously contract for the Saudi Arabian National Guard. We also had $2.4 million in nonrecurring engineering sales, which were mostly associated with the low-margin and facility construction and installation support contract that was part of the larger Saudi order.

Since most of our TACNAV business continues to be international, we don't anticipate any significant impact on this business due to sequestration; although, as expected, the higher-margin TACNAV production portion of the contract was largely completed during the first half of the year. There continue to be a number of other large programs that we are pursuing internationally, and we're optimistic about our prospects in this part of our business.

With the completion and formal acceptance of the installation and service facility in Saudi, we've demonstrated our ability to be a prime contractor on larger programs like this $36 million project. The facility and the hardware were delivered on-budget and ahead of schedule.

Turning to our fiber optic gyro business, our revenues grew to $8 million in the second quarter. That is up 43% year-over-year. We saw sales growth in both military and commercial sides of our FOG business, with commercial applications again accounting for more than half the revenues.

Our military FOG business was supported by new orders for gyros used in turret stabilization applications for a variety of vehicles and continued sales of gyros in remote weapon stations. We now expect to see a decline in remote weapon station market due to the US government's sequestration plan, which will impact Q3 and Q4, although these declines in programs like CROWS should be offset by gains in other FOG areas.

Commercial FOG sales continue to be driven by applications like digital mapping and integration with precision GPS systems. During this past quarter, we delivered units for use in integration efforts or early trials in the field of robotics and self-driving cars. Our 1750 sensor has been popular in this market due to its competitive price point, high accuracy and small size.

Our FOGs are typically used as part of a navigation solution, where they operate in conjunction with a GPS, providing improved accuracy positions as well as vehicle dynamic feedback. These applications are very similar to the dynamic surveying applications we discussed during last quarter's conference call.

There appear to be growing markets where the accuracy of our technology is needed and represents a good value to the customer. [All of] recent news stories have featured, as discussed, the future of self-driving cars, which may become another good market for our FOG and IMUs. Although this market may only represent a few hundred vehicles over the next year or so, getting in on the ground floor of this emerging market will help us identify opportunities, both in the automotive market and in related industries, such as trucking, mining and farming, where the technology may also be deployed.

As we have explained in past calls, these early design wins are what lead to successful volume orders in the future, so we are very encouraged with our ongoing early success.

So looking forward to the remainder of the year, we are very excited about the opportunities and comfortable with our prospects for continued success in each of our strategic areas of the business.

For the mobile broadband business, the surge in V11s is encouraging, and the reception to our new IP series and the excitement about our upcoming IP-MobileCast service is helping create a solid market pull for our products.

Our new colleagues at Headland Media have already started to make a significant contribution to our plans to enhance our product with innovative new services that will affordably and automatically deliver news, sports, music and movies to ships at sea.

For our guidance and sta business, our new commercial FOG products like the 1750 IMU are helping to overcome headwinds due to sequestration. And our international TACNAV business is helping to keep us diversified, reducing our exposure to the US defense budget cuts. We have performed well in our TACNAV programs and we are optimistic about our future potential here.

So that covers where we are, and I'd like to turn it over to Peter now to go over the numbers. Thanks.

Thank you, Martin. This morning, we reported record Company revenues of $43.2 million for the second quarter, which included $1.9 million of Headland Media revenue. Excluding this Headland Media revenue contribution, revenues were at the high end of our expectations and the guidance we previously gave.

As Martin stated earlier, our mobile communication revenues, which include Headland Media, were $27.3 million, representing a 13% increase year over year, while our guidance and stabilization business grew 100% year-over-year to $15.9 million.

Our mini-VSAT business recorded $17.2 million in quarterly revenues, of which airtime services represented $11.3 million, which was 35% higher than the second quarter last year.

Total VSAT product and service revenue increased 17% year-over-year, while the ARPUs for by-the-megabyte plans continue to be in the $600 to$700 per month range, and ARPUs for our fixed-rate plans continue to be around the $1900 per month level. The mix of VSAT unit sales for the quarter was 38% V3, 51% V7, and 11% V11.

All other Marine SATCOM revenue, including TV systems and Inmarsat systems and airtime, was $8.1 million. Within that amount, as previously discussed, we saw a slight decrease of 4% in marine satellite TV sales year-over-year to $4.2 million. And as expected, the land-based systems declined by 27% to $1.3 million.

TACNAV product revenues of $5 million saw a more than threefold increase year-over-year, and included $3.6 million related to the final product delivery under the Saudi Arabian National Guard program. We also recorded $2.3 million in revenues under this program related to equipment installations and program management services and the finalization of the building of the installation facility.

We were pleased to see robust FOG sales of $8 million continue during the quarter, up 43% year-over-year, and we continue, as previously discussed, to see a greater proportion of our FOG products being used in commercial applications compared to those used in defense applications.

In terms of the split between products and services, our current quarter revenues of $43.2 million included over $17 million which was classified as service revenue. Of that amount, 71% relates to airtime, 13% relates to services performed under the Saudi National Guard program, and 11% related to Headland Media. In the second quarter last year, we reported service revenues of $11 million, 86% of which related to airtime.

The gross profit margin of 42% was in line with our expectations and over 280 basis points higher than the second quarter last year. The gross profit margin for VSAT airtime was 35% in the second quarter, which compares favorably to the 32% in the 2012 second quarter and is up sequentially from 33% in the first quarter of this year.

As we have discussed previously, construction, installation and program management services associated with the Saudi National Guard program are recorded at a gross margin of less than 10%. As I noted earlier, $2.3 million of this quarter's revenue related to such services.

Total operating expenses in the first quarter of $15.7 million were in line with our expectations. Compared to the second quarter last year, operating expenses were up 36%, the majority of which related to new Headland Media operating expenses, the Headland Media acquisition-related expenses and sales commissions for the Saudi National Guard program.

The reported tax expense for the quarter was 35% of pretax income. We expect our effective tax rate for the full year to be between 35% and 40%. As we have discussed before, taxes are always difficult to forecast since there can be so many variables and unanticipated discrete items.

Our diluted EPS for the quarter was $0.10 on net income of $1.5 million, which compared favorably to the net profit of $500,000 in the prior year and an EPS of $0.03.

The EBITDA adjusted for equity compensation expense was $5 million, and the adjusted EBITDA margin was 12%. Depreciation and amortization was $1.4 million and equity expense was approximately $900,000.

Moving on to the balance sheet. At March 31, we had -- sorry -- -- at June 30, we had cash and marketable securities of $54.3 million, an increase of $9.5 million from the end of the prior quarter. $1.6 million of this increase can be attributed to Headland Media. And since we financed $23 million of the $24 million Headland acquisition cost with bank borrowings, our debt at June 30 was $37.7 million, up $22.6 million from that shown at March 31.

Our quarter accounts receivable balance was $27 million and DSO were 55, down 10 from Q1 this year. At quarter end, our inventory balance stood at $17.4 million, which is up by approximately $500,000 from that on hand at March 31.

Capital expenditures were approximately $1 million for the quarter, and we expect our capital expenditures for the year to be in the range of $5 million to $6 million.

Backlog for our guidance and stabilization products and services at the end of March was $30 million, down by -- sorry -- June -- was $30 million, down by about $8 million from March 31. This decrease is primarily attributed to product backlog shipped and services recorded under the [SANGLAV] contract during the quarter.

Turning to our outlook for the third quarter and full year. We expect our VSAT business will continue to grow at a strong year-over-year pace, driven by a combination of product sales, as well as new airtime subscribers being added to our network. We will also record a full quarter of Headland Media's revenues. We do, though, continue to remain cautious as it relates to the leisure markets for our mobile communications business, particularly after experiencing some softness in Europe this quarter.

As it relates to our TACNAV business, we have now shipped all of the product backlog under the Saudi National Guard program. With uncertainties surrounding defense budgets, we continue to remain conservative in our estimates regarding the timing of new order wins. We also expect product sales will show solid year-over-year growth as we continue to ship against our backlog and book new orders. Our effective tax rate for the third quarter and the rest of the year is expected to be approximately 40%.

Considering all of these factors, our guidance for Q3 is as follows. We expect revenue will be in the range of $38 million to $42 million, with an EPS in the range of $0.08 to $0.12 per share. We have increased our guidance for the full year now and expect that revenues will be in the range of $160 million to $165 million, and that the GAAP EPS will be in the range of $0.38 to $0.46. Excluding the Headland Media acquisition-related costs, non-GAAP EPS is expected to be in the range of $0.43 to $0.51 per share.

So in conclusion, our confidence in our strategic growth businesses and operating fundamentals remains strong. And now, we would like to take your questions. Operator?

(Operator Instructions). Chris Quilty, Raymond James.

Good morning, gentlemen. Congratulations on the results.

Thanks, Chris.

I wanted to follow up a little bit on the mini-VSAT business and what you are seeing in terms of rate of antenna shipments, trials and activity with some of the larger shipping companies.

Sure. So this quarter was generally in line with last quarter, so sales from a hardware perspective were flat. As I said in my prepared remarks, it was actually sequentially -- sorry, year-over-year, there was a slight decline.

Part of that is that because the numbers are still fairly small -- we are still in the 250 to 300 per quarter range -- so in the year-earlier period, we were doing three big rollouts on fleets, like NYK and Varun, and whereas this quarter, we are doing that across one. So that can be a little bit lumpy. We don't expect that to continue this quarter. So there is a little bit of up and down there, because you get these binary contract wins.

But we are seeing good activity. We have got a lot of stuff in the pipeline. There's some big RFPs out on the street now that we are bidding on. So we see continued strong interest. And I think if you look at our sort of steady-state daily bookings kind of business, we are seeing good growth there.

And regarding the mix between what you'd classify as leisure versus commercial, clearly the V11 is a commercial product. Can you characterize, first of all, the mix and how it has changed, and second of all, the type of customers that you see adopting the V11?

So, you are right, the V11 is more focused on commercial, although we have had some nice uptake by some boatbuilders like Westport and Sunseeker, who are putting the 11s on with a matching HD11 dome.

But the V11 is really targeted at the larger shipping companies and natural gas companies. We have had some good fleet wins there with LNG companies. So it's really about the higher-value platforms and the ones that are going global.

So a big advantage is that you don't need to have a backup carrier in the V11 has both C and Ku. So in effect, it's internally redundant and fully global, which is a unique feature. So companies that have vessels that go anywhere really like the V11.

And regarding Headland, have you yet previewed for some of your customers what the pricing models will look like for distribution? And what do you expect either for your existing customers, what their adoption rate will look like, say, a year out?

No, we haven't rolled out anything yet in terms of the new service. What we've started doing immediately after acquisition is to start cross-selling. So we've been training their folks on our products and our folks on their products. So we want to sell what they have today as we prepare for this new service launch, which will be really quite different from their product offerings, what they have today. So this will be an all-new service. And we have come up with some internal price points that we are testing amongst ourselves before we show it to customers. And that really will be rolled out in the fall.

Can you talk about maybe philosophically, if a customer is currently paying a couple hundred dollars for movies a month to a vessel, would the concept it be to charge less because you are costs are less or to charge more because of the convenience of the service?

Yes, at a high level, I think that we would charge roughly the same, meaning that they buy the content. So if you are buying a movie for $20 and we beam it to you or you buy it in the mail on DVD, the value to you is roughly the same -- or sorry -- the cost to you will be roughly the same.

Where we hope to increase revenues is we will be offering a lot of other things that aren't available today, so that there will be additional packages that you can buy besides just movies. More timely things, live news and sports and things like that.

Got you. Shifting gears to the FOG business, the 1750 had a real slow roll in terms of its adoption. Are you happy with where you are at now with that product line?

The sensor side has been a little bit slow, but the IMU has been going faster than we expected. So the integrated product, which is a higher-value product as well, has had a very exciting start. So we are optimistic about that product.

Great, I will bow out and back into the queue, if I have more questions. Thank you.

(Operator Instructions). Jim McIlree, Chardan Capital.

For the increase in the revenue guidance, is that mostly attributable to the addition of Headland Media?

Well, certainly, that's part of it. Their revenues are on the order of $3 million a quarter. So for the balance of the year, that's going to be roughly $3 million in each of the next two quarters, in round numbers.

We anticipate that that will also be accretive, and we are hoping that that -- we are expecting rather that that would cover also the one-time acquisition costs that we incurred in the second quarter. So should be a little bit better than a wash for the full-year on an EPS basis, as well as contributing to the top line. So a wash, by that, I mean it's covering the one-time acquisition costs, it is accretive in each of the next two quarters.

Okay. And then this transaction expense of $865,000, where does that show up in the income statement?

Jim, this is Peter. The (technical difficulty)

Ladies and gentlemen, please stay on the line as we attempt to reconnect with our speakers.

Gentlemen, you are back in conference.

Okay, great. Sorry about that, Jim.

We got disconnected there.

Can you repeat the question, Jim?

The $865,000 in transaction expense, where does that show up in the income statement?

That's all in general and administrative.

Okay. So Peter, going forward, what's kind of a normalized OpEx in Q3? So we are going to take out the $865,000, but we need to put in a full quarter of Headland OpEx. So what's the normalized OpEx going forward?

It's broadly around the $15 million mark. Obviously, there will be some ups and downs.

Okay. Great. And is there -- in order to roll out the Headland products, is there is significant increase in R&D or any other items?

No, I wouldn't say it is significant. There are definitely costs associated with that. There are no bandwidth costs because we are using our existing network, but there are some ground-based infrastructure costs, some CapEx and some incremental spending that we've baked into the numbers. But it's not significant compared to rolling out the C-band network, for example.

Okay. Great, thanks a lot.

(Operator Instructions). Rich Valera, Needham & Company.

Martin, could you just talk about the diversity of the V11 sales? I know you had one large customer that was sort of looming out there with kind of a backlog. Have you secured other meaningful wins? Was it fairly diverse?

Yes, it is pretty diverse. We've gotten some good -- a good win or two that's being rolled out. And we have some projects that we are bidding right now which are primarily all V11, which is a little bit different from what we were thinking before. We were thinking that across the fleet, it might be a mix.

But what we are seeing now is some of the big fleets are just really focusing on V11 for everything. So that might be -- that might skew the numbers a little bit going forward -- in a good way.

Of course. And with respect to the unit sales in the quarter, is it safe to say you were within the 250 to 300 range, albeit likely at the low end in this quarter?

Yes, yes, yes, we are still in that range. We haven't broken out consistently over the 300 mark, so we are still in that range.

Great. And then with the TACNAV, in the past, you've given a little bit of color, without too much specificity, on the pipeline there, kind of given us some sense of the magnitude of potential deals out there. Is there any color you can give us on what that pipeline looks like over the next year or so?

Yes, I think we pretty much have a full year of TACNAV booked what we expect to get. So there's no -- we don't really see any exposure for 2013. We have some projects that we expect to be awarded in Q4, which will impact 2014. And we are optimistic about that. These are projects with existing customers and system integrators that we have worked with for many years. So we feel pretty good about our chances there.

So generally, our visibility is, I would say, moderate for 2014 on TACNAV, but so far, I think we are in pretty good shape.

Great. And then with FOG, relative to -- I'm not sure how to -- I guess sort of maybe relative to the $8 million run rate you saw in 2Q, how we should think about that business going forward. How much of the recent weakness in CROWS and remote weapon station is factored into 2Q. Or should we expect some level of kind of step down in 3Q as you factor in some of that CROWS-related weakness?

No, I think broadly speaking, the $8 million, we did see a decline from what we were thinking for the Kongsberg and CROWS for US, which was on the order of under $1 million for the second half. But we believe we can make that up in other programs. So right now, we are thinking $8 million on average is a pretty good number.

Okay. And looking out -- I know it's early, but looking into next year, I would assume commercial you would think continues to grow. Not sure what the outlook would be for defense-related stuff there. But any color at all you'd be willing to give on that trajectory as we move into next year?

No, that would be tough. I think some of the design wins we are getting with the 1750 IMU, that has an average selling price of around $18,000, so it's a nice high-margin, big-dollar sale for us compared to selling the sensors like the CROWS, which are a lot less expensive and tighter margins.

So we think that's going to be a good, solid business for us. Customers like Novotel are doing very well with their product, which integrates our IMU. So Google and Microsoft are big customers in their mapping systems. So I'd say at this point, we expect that business to continue to grow next year.

Great, that's helpful. And one final one from me, with respect to the Headland acquisition. Have you tried -- have you gotten a sense of what percentage of your existing mini-VSAT customers subscribe to the Headland service now, i.e. sort of what percent is sort of opportunity versus ones that maybe you could do the multicast with, but you don't necessarily get the incremental revenue from the content itself?

Exactly. Yes, the overlap is surprisingly small. So it's actually -- we did the cross-reference and it's actually very, very small. So the good news is that almost all of it is greenfield from both customers' perspective.

That's great. And then in terms of the actual timing of the multicast? You mentioned this year, but it sounds like -- is it late this year, late 4Q, or any other timing on that?

Yes, it's going to be late this year. We are going to start rolling out the network improvements within the next -- call it -- 30 to 60 days, and those will have to be tested and then there's hardware and software that's going on the vessels, and content. There is new content that we are acquiring. So that might be a little bit of a staged rollout as well, where we start to roll out some of their services, as opposed to doing a big bang.

Great, look forward to hearing about that.

Okay, thanks, Rich.

(Operator Instructions). Gentlemen, it appears we have no further questions at this time.

Okay, great. We will sign off, and as always, feel free to contact Peter or myself directly if you have any follow-up questions.

Thank you, and that does conclude today's conference. Again, we thank you all for joining us.