KVH Industries Inc (KVHI) 2015 Q1 法說會逐字稿

Good day and welcome to the KVH first-quarter 2015 earnings call. Today's conference is being recorded. At this time I'd like to turn the call over to Peter Rendall, Chief Financial Officer. Please go ahead, sir.

Good morning and thank you for joining us today to discuss KVH Industries first quarter results and update for 2015 guidance. With me on this call is Martin Kits van Heyningen, the Company's Chief Executive Officer. We issued our first-quarter earnings and 2015 guidance press release this morning which is available on our website and also from our Investor Relations department. If you would like to listen to a recording of today's call you can access a webcast replay on our website. If you are listening via the web, feel free to submit questions to IR at KVH.com, and we will answer them following this call.

This conference call will contain certain forward-looking statements that are subject to a number of assumptions and uncertainties that may cause our actual results to differ materially from those expressed in these statements, and we undertake no obligation to update or revise any forward-looking statements. We will also discuss certain non-GAAP financial measures and you will find definitions of these measures as well as reconciliations of these non-GAAP measures to comparable GAAP measures in our earnings press release. We encourage you to review the cautionary statements and other disclosures made in our SEC filings, specifically those under the heading risk factors in our 10-K filed on March 17. The Company's SEC filings are directly available from us, from the SEC, or from the Investor Relations section of our website.

At this time, I would like to turn the call over to Martin.

Thanks, Peter, and thank you all for joining us today. We've got a lot of news to go over. KVH has gotten off to a good start in 2015 with a number of encouraging developments in every area of our business.

Starting off with our first quarter results, we were right in line with our guidance. Our revenues of $41.3 million were up 12% year over year from $37 million in Q1 of 2014. Our non-GAAP earnings of $0.06 per share were also in line with our expectations and up from breakeven year over year. We are happy we were able to achieve our numbers in Q1 in light of the economic headwinds created by the strong US dollar and the impact of low oil prices on our customers in the Gulf of Mexico and the South American offshore markets. But overall we are seeing clear indications of increasing demand in each of our major market areas. That gives us confidence in meeting our projections for the year.

Peter will cover the numbers in more detail shortly. I'll provide the operating highlights for each of our key business areas. Beginning with our mobile broadband business, our Q1 revenues of $36.2 million were up 25% from Q1 of 2014. Our strategy of focusing on network, hardware, content, and delivery is starting to pay off. We are starting to cross sell our new training, entertainment, and other content with our maritime VSAT services. In fact, our sales pipeline has never been stronger.

Our global TracPhone V11 has been selling particularly well as we continue to when multi-vessel orders from larger fleet customers. The dual band V11 is the only maritime VSAT product that can deliver truly global coverage with a 1-meter antenna. This is appealing as the coverage limitations of the new Inmarsat Global Xpress VSAT service become apparent. While we shipped some of these orders in Q1, many are part of fleet-wide rollouts which take time to coordinate, and overall our backlog of mini-VSAT hardware is larger than it's ever been and is growing.

Now that we have IP-MobileCast media servers in the field, the feedback we were receiving from early customers has been extremely positive. When people use the service they love it. Seafarers working on ships equipped with IP-MobileCast service don't want to work on other ships in the fleet that don't yet have it, creating a natural demand for fleet rollouts.

We are seeing a ramping of the adoption rate and positive word-of-mouth endorsements, which are critically important in building customer confidence and momentum especially in an industry as traditional as the commercial shipping market. The majority of our new fleet sales are signing up for IP-MobileCast service and it's a unique and distinguishing feature that provides a significant differentiating advantage in our proposals. While still very early, we are seeing a broad distribution in the range of packages for our first customers -- that our first customers are ordering and it's encouraging that some of the early tanker fleet adoptions are going for our highest-end platinum package. Our ability to source our own content through the KVH Media Group including rebroadcasting of local TV news shows from seafarers' home countries, publishing our own digital newspapers in 18 languages, and offering music services enables us to offer a much wider variety and a better perceived value than our competitors' offerings.

Since IP-MobileCast is the type of service that needs the experienced to really be appreciated, we are also feeling customer demo units with our distributors and using trade shows and a global series of customer events to get in front of as many sales prospects as possible. To show our existing customers what the service is like, we've offered a free 30 day preview of IP-MobileCast to every one of our new and existing mini-VSAT customers. And we have new videos up on IP-MobileCast.com and YouTube demonstrating service.

Overall, the adoption rate seems faster for IP-MobileCast than it was for the original mini-VSAT broadband communications service when we started, and we're confident that we will see ramping demand as more and more people experience IP-MobileCast.

Our lead pipeline is also looking very good. We're currently pursuing a dozen different fleet sales opportunities representing more than 600 vessels and a full three-quarters of these potential customers have expressed interest in subscribing to our IP-MobileCast services. Several of these opportunities already have trial units onboard their vessels, and we hope to be announcing some significant new fleet orders in the coming months.

One of the major deals we recently closed is for a Videotel customer that has a fleet of around 100 vessels. Their experience with Videotel training resulted in us getting the opportunity to upgrade their satellite connectivity solutions and to integrate everything together with IP-MobileCast and our V11. We're definitely seeing the halo effect of our strategy to offer market-leading training and entertainment content in addition to our connectivity service.

The KVH sales team has been strengthened with some great new additions through our recent acquisition of the KVH Media Group and Videotel, and we are benefiting from their extensive experience and industry-wide customer relationships.

Looking at our content services, we are very happy with the success of integrating our acquisitions into the KVH family. Our entertainment content business continues to do well, as I mentioned earlier. And likewise, the new Videotel training solution business is delivering great results and actually growing at a faster rate now than when we acquired it last year. We've added a selection of Videotel training videos to our IP-MobileCast training link service, and we are offering a preview video on Videotel as part of our 30-day free trial to expose our mini-VSAT customers to the high-quality of Videotel programs.

We've just completed our 500th computer-based training course, adding to our excessive video-based training as part of the Videotel library. We've now exceeded over 12,000 vessels using Videotel training today. Combined, our students completed 660,000 training events during Q1. So, e-learning is a very exciting market and are Videotel solutions are in great position to help shipping companies meet new regulatory requirements. We believe e-learning will be a significant source of future growth for KVH's mobile broadband business.

To get in front of as many potential customers as possible, we're running a series of events in major shipping cities around the world, bringing together ship owners and operators to learn about developments in communications and content services. The first of these events was held in Cyprus a couple of weeks ago and attracted all the top prospective customers for KVH, Videotel, the KVH Media Group, and our application partners, which included AWT and Transas.

Over the next two weeks we'll hold similar conferences in Copenhagen, Singapore, and Seattle, and five additional events are planned by the end of the year in Hamburg, Athens, Oslo, Hong Kong, and New Orleans. Each of these will provide important network opportunities amongst a combined pool of customers from each of our groups, prospects of KVH, and each of our application partners, as well. Also will give us a chance to bring our collective salesforces closer together to encourage future cross-selling opportunities of complementary content and connectivity services in leading shipping markets.

For our core VSAT offering we continue to enhance our mini-VSAT broadband infrastructure. During the first quarter we rolled out a global MPLS network connecting our 16 teleports around the world to a fiber optic backbone joined by three mega-PoPs, or points of presence, in the US, Germany, and Japan. This infrastructure provides great security and faster data transmission between our hubs and our customer servers, and enables them to use single global static IP addresses, which provide a big benefit for IT departments rolling out data applications.

We've also developed -- we'll the rolling out a new customer portal in the second quarter. It will provide improved network management capabilities and a great tool for fleet monitoring and tracking. Overall, we're continuing to invest to scale our network and to provide industry-leading service and capabilities and funding these improvements as we go through our normal operating budget.

In addition to all of our progress in the satellite communications market, our satellite television business is doing well. Our premier TracVision HD7 product, which enables yachts to receive high-definition programming from DirecTV, is selling especially well. And we recently rolled out our new TracVision TV8, which is an 80-centimeter product designed for larger vessels traveling in areas with weak satellite signals, completing our two-year program to fully update our entire satellite TV product line. This should provide a sequential boost in Q2 for our satellite TV business, especially in the EMEA region in Europe where larger yachts desiring local programming need its capabilities.

In general, it seems that sales of leisure vessels and super yachts are increasing as these markets continue to recover from multiyear malaise. As the market leader, we benefit directly from increased boat production. Thanks to our loyal customers and dealer base and our excellent exclusive relationships with leading boat builders like Sea Ray, Viking, and Sun Seeker. While Q1 sales were slowed a bit by the unusually cold winter, we expect to see increases in Q2 at the US market benefits from a late spring, which delayed the sales uptick we normally enjoy at the end of the first quarter.

Moving on to our guidance and stabilization business, our revenues were $5.1 million in the first quarter and that's down 36% year over year which is somewhat more than we predicted. This decline reflects the uneven sales created by large orders that come in on irregular basis.

Our backlog for the guidance and stabilization business increased during the quarter by almost $1 million above the end of 2014 to $26 million. Our TACNAV products continue to be well received, and we are still anticipating being able to announce multiple significant contract wins over the next few months. The recently announced $1.5 million TACNAV order was actually a plus-up to the $19 million order we announced in Q4 of 2014.

We're also optimistic that we'll win an extension of the $4.3 million, which we also announced last quarter -- which is part of a larger initiative that might result in a record-breaking TACNAV order for a customer in the Middle East, if they decide to equip their entire fleet of vehicles.

Now, part of this order would be the basis of the ramp in sales we forecast for the end of 2015. While we're very optimistic about this program and it's in our guidance, there's always risk of some delays with foreign military sales. But perhaps the most important thing that happened recently in our defense business is that we've been designed in to a vehicle being rolled out in a major US military program. We expect to receive the initial order and contract for this program shortly.

Getting back into the US Army has been a major strategic objective for us. While we've then on US vehicles dating back all the way to Desert Storm, this would be our first major contract with the U.S. Army for TACNAV in quite a while. This design win is based on one of our high-end TACNAV systems that takes advantage of our fiber optic gyros to deliver higher accuracy.

Although TACNAV systems that include our FOG continue to do well, we had disappointing sales in our stand-alone FOG last quarter. Nevertheless, we continue to get promising design wins for our FOGs and IMUs, although the volume applications in some of these emerging markets have been slow to develop. KVH inertial systems are found in the leading contenders in the self-driving car and robotics market are doing well in a wide variety of other exciting applications including dynamic surveying, street mapping, and a variety of systems used on commercial and military drones.

So in summary, the first quarter finished in line with our expectations, and we are optimistic that we'll soon see significant orders as our business gains momentum. While concerned about the headwinds in the oil and gas sector and the impact of foreign currency on our business, we are optimistic that we will be able to overcome these challenges.

We anticipate some new fleet orders for our mini-VSAT broadband business, including orders for our TracPhone V11-IP, which is our global dual band system, and cross-selling content and connectivity seems to be a winning combination that's generating tangible results.

IP-MobileCast appears to be gaining popularity, and we believe we are on our way to making it the new standard for offshore entertainment on commercial vessels. Our TracVision product line has been refreshed and it's in good position to continue winning a dominant market share in the yachting and super yacht markets around the world. The prospects for TACNAV on military land vehicles looks very good.

And finally, we're optimistic that when one of our customers' emerging applications in self-driving cars or robotics or drones or stabilized platforms takes off, we'll see a strong rebound in our fiber optic gyro sales, as well.

And now I'd like to turn to call back over to Peter for detailed financial results. Peter?

Thank you, Martin. Now I'd like to discuss in more detail the financial results of the Company for the first quarter. As Martin mentioned earlier, our first quarter revenues of $41.3 million were in line with the guidance range we previously gave and were 12% higher than the first quarter of 2014. The primary drivers for this growth were the incremental contribution of Videotel revenues and higher VSAT airtime revenues which were offset somewhat by lower guidance and stabilization revenues.

Our product revenues of $15.4 million in the first quarter decreased by 15% or $2.6 million from the prior year quarter mainly due to lower FOG and TACNAV revenues. Our first-quarter service revenues of $25.9 million increased year over year by 37%, mainly due to the addition of Videotel in conjunction with our VSAT revenue growth.

Looking at our service revenues more closely, our total airtime subscription revenues for the first quarter of $15.7 million were up 12% from the prior-year period. Our VSAT ARPUs during the quarter for fixed rate plans were between $1,800 and $1,900 per month while ARPUs for our metered plans continue to run slightly lower than we've seen previously, between $500 and $600 per month. Our content and service revenues in the quarter, which includes subscription revenues associated with the entertainment and e-learning content as well is any professional service fees was $10.2 million, which was up 112% higher than a year ago.

Most of this increase was attributed to revenues from our Videotel e-learning business which was acquired in July of last year, offset by a reduction in nonrecurring engineering primarily related to the Saudi Arabian National Guard contract which was completed midway through 2014. We were pleased with the level of subscription-based service revenues in the quarter, which were at a record 61% of total revenues compared to 47% in the prior year first quarter.

Now moving on to our product revenues, our mobile broadband hardware revenues of $10.6 million in the first quarter were 5% lower than the first quarter of last year. A good portion of this decrease can be attributed to the unusually cold winter that we've seen. Our guidance and stabilization hardware revenues of $4.8 million were $2.1 million lower than the first quarter of 2014, or 30%. This decrease resulted from lower TACNAV revenues, which we have predicted, together with some softness in our FOG business.

Turning to our gross profit margin in the first quarter, our consolidated gross profit margin was 43%, which was in line with our expectations and higher than the 39% reported in the first quarter of 2014. Our overall services margin was 49% compared to 42% in the first quarter of last year while our VSAT airtime gross profit margin was 35% in the first quarter.

For product hardware, we recorded a gross profit margin of 32% compared to 37% a year earlier primarily driven by the lower FOG margins. As it relates to our first-quarter operating expenses we reported $19.5 million in the first quarter which was up 20% year over year. Almost all of this increase was attributed to the addition of Videotel's operating expenses, which includes intangible amortization.

Our non-GAAP EPS for the first quarter, which excludes discrete tax items, acquisition-related and stock-based compensation expense, was $0.06. This compared favorably with the breakeven comparative non-GAAP EPS recorded in the first quarter last year. For a complete reconciliation between GAAP and non-GAAP measures, please refer to our earnings press release that was published this morning. Our adjusted EBITDA for the first quarter was $2.8 million compared to $1.1 million recorded in the same period last year.

We were also pleased with our cash flows from operations during the quarter. Although we funded the $6 million escrow related to the Videotel acquisition during the quarter and we paid down $1.6 million in debt our cash, our cash and marketable securities were only $400,000 lower than that on hand as of December 31 at $49.4 million.

Capital expenditures during the first quarter were $1.1 million as we previously anticipated. Backlog for our guidance and stabilization products and services at the end of March was approximately $26 million, as Martin had mentioned, which was comparable to that on hand at December with a slight increase. And of this amount approximately $12 million is scheduled to be delivered during 2015.

Now, I'd like to turn to our outlook for the second quarter and update for the full-year guidance. As we've mentioned on earlier calls we anticipate that TACNAV shipments will be significantly skewed towards the back end of 2015 in a similar way to what we experienced in 2014. As a result of this, TACNAV revenues are expected to be less than $1 million in the second quarter while operating expenses are expected to be flat compared to the first quarter. Our guidance also assumes that there are no significant fluctuations in exchange rates between the US dollar and the pound sterling.

With this context our revenue guidance for the second quarter is in the range of $41 million to $45 million, and we expect our GAAP EPS for the second quarter to be a loss in the range of $0.08 to $0.03 per share. And non-GAAP EPS is expected to be in the range of $0.05 to $0.10; non-GAAP EBITDA for the second quarter is expected to be in the range of $3 million to $3.7 million.

For the full year, guidance remains the same as we previously stated with revenue in the range of $190 million to $210 million, and we expect our GAAP EPS for the year to be in the range of $0.30 to $0.40 per share and non-GAAP EPS to be in the range of $0.81 to $0.91 per share.

Non-GAAP EBITDA for the year is expected to also continue to be in the range of $25 million to $27.5 million.

In wrapping up my thoughts on the financial performance of the Company in the first quarter, our operating results were solid and this year is shaping up to be a really exciting year for KVH. And I certainly look forward to what lies ahead.

With that, I'll turn things back to the operator for the Q&A portion of this morning's call.

(Operator Instructions)

Rich Valera, Needham & Company.

Thank you. You've identified a couple of headwinds, including the oil and gas pressure on some of your customers and then lighter than expected FOG in the first quarter, yet you maintained the full-year guidance. So is there something that we expect to make up for those sort of near-term headwinds, or should we think about maybe shading the guidance below the midpoint at this point for the year?

Yes, some of the FOG business miss were for contracts that we feel we've won but haven't received the order yet, so we do expect to make that up. As far as the rest of the business, we have backlog now in our VSAT which we normally don't have. Normally that's sort of a shipped -- the day we get the order we ship it, so it's a little bit unusual for us to have backlog, and that's been growing. So we're in pretty good shape for some of these larger fleet deals. So, we're pretty confident in the full-year number, especially given the fact that we have some specific contracts that are back-end loaded. So, overall, I think we continue to be where we expected we would be when we gave our guidance for the year.

I don't think you mentioned, Martin, in your prepared remarks roughly how many subs you added in the quarter. Can you talk about that number?

Yes, we generally don't talk about subs. We're still running in around that 200, 250 range but again we do have backlog that -- in terms of new unit sales. But we do have a fairly significant backlog on top of that now.

That's helpful. And then the airtime revenue growth of 12% -- I guess trying to understand what's behind that. You've been adding subs at roughly an annualized rate of 1,000 per year, and if you add that on top of a base of say 1,000 subs roughly from last year -- sorry, 4,000 subs, you would expect that business to maybe be growing north of 20% ex-churn or any kind of compression of ARPU, but you're running at about half that. So I just want to try to understand why is it growing at only 12%, and how should we think about that revenue growth rate for the entire year? Are you expecting that to see acceleration for the balance of the year? And roughly how fast do you think that can grow?

Yes. So it's a little bit complicated. So the factors that are playing off here -- we're adding -- we continue to add subs at a normal pace but we have some metered plan customers, particularly in the oil and gas that are either day rates or they are on plans with overages, and that's where we've seen a decline. So oil and gas isn't that big a part of our business. All offshore vessels -- of all types, not just oil and gas -- put together are about 20% of our subscriber base. But sometimes those can be very significant users and if the rigs get tied up, the vessels get tied up at the dock and your usage can fall dramatically so that's really been the key factor.

And then on the ledger side, sort of a late spring didn't help either. So even though most of our customers are on fixed rate plans, we do have probably 40% on what we call metered plans, meaning that their usage determines what their bill is every month. So that's where we're seeing variability.

Just to get back to my question, can you say roughly what's baked into the guidance at the midpoint for airtime growth this year? I would think you'd have to see an acceleration from 12% to make the midpoint of your guidance?

I'll let Peter answer that, but I don't think we give specific guidance for airtime. But I think a little bit it does depends on what happens in these variable metered plan markets. So the 60% of the customer base is fixed and that's very predictable because they've signed long-term contracts and 40% is variable.

Rich, this is Peter. Also remember that historically the year starts out -- the first quarter is the low point spend. There's usually an acceleration in Q2 with Q3 being significantly higher and then pulling back again in Q4. So you should start to see the acceleration increase in airtime growth over the next six months. And that's baked into our projections, which is slightly below the 20% year over year.

Okay. I mean because the comps obviously have the same seasonality. You are comping off of what should be a light first quarter of 2014 so I'm not sure how seasonality should weigh into the year-over-year growth. But it sounds like you expect acceleration in year-over-year growth as we move through the year. Is that fair?

That's correct.

Okay. That's it for me. Thank you, gentlemen.

And at this time there are no other questions in queue. I'll turn it back to our presenters for any closing remarks.

I'll give people just another few seconds here if there are any additional questions or follow-up questions.

(Operator Instructions)

On guidance and stabilization, just wanted to try to -- first of all on the quarter I wondered if you could give the split of FOG versus TACNAV, Peter?

In terms of the revenue split?

Yes, please. Thank you.

It would be just under 20% for TACNAV.

Sorry -- did you say 120% TACNAV?

Just under 20% would be TACNAV.

Got you. And then just looking at the full year for that segment, obviously expect significantly better results in the back half, particularly for TACNAV. Just wanted to get a feel -- last quarter I think we talked about, in aggregate, guidance and stabilization being sort of flattish for the year, obviously with a much better second half. Is that still how we think about that business?

I think that's right. And don't forget last quarter in Q4 was very strong for TACNAV as well. So really what we're forecasting here is kind of a repeat of what happened in 2014. So that's just sort of the order pattern that our customers have gotten into related to vehicle deliveries and larger programs. We are a small part of these multibillion-dollar programs.

And could you talk about the Army vehicle program? Any sense on the size of that or magnitude and how much that could actually contribute in 2015?

Very little in 2015 and it's not currently in our guidance for 2015, so it would be more of a 2016 event. So with LRIP type thing this year and production beyond. So it's a really important contract strategically, and the opportunity it represents is on the order of 3,000 to 5,000 vehicles, something like that. So it's very material.

Could you give any sense of the kind of content per vehicle that you might be able to get? Do you have a single TACNAV unit on each vehicle?

Our TACNAV systems typically sell for in the $10,000 to $20,000 range. This would be towards the higher end of that, so it's significant.

That's helpful. And just on MobileCast, Martin, trying to get a sense of the potential revenue impact this year. Do you think this year it's more about the enabling of broadband sales and kind of the pulling in essentially more broadband sales via MobileCast versus actual direct contribution from the service itself from a revenue perspective, or just how do we think about how MobileCast affects the numbers this year?

No. I think you are right. I think as you start out the big thing with all our value-added services is really to have a [differentiate-able] product. We don't want to become commoditized and see the margins get eroded and the ARPUs get eroded. So, we're really focusing on having something that's truly unique, and I think we're being very successful in that. So that's helping us -- as I mentioned in the prepared remarks is that about 75% of the new deals that we're working on, they want IP-MobileCast as part of the proposal and as part of the things that they are trialing. So that's better than we expected. Now, we haven't yet seen that kind of a take-up rate, but the point is that we're winning deals that we never would have won if we didn't have it. And that's direct feedback from the sales team.

Martin, based on the significant backlog you have in the mini-VSAT business which you said is pretty atypical, do you think you would see above your historical kind of 250-ish per quarter in stalls as you move into the back half of the year?

I think so, and I think we'll have to probably be clearer about how we communicate that -- if items that are ordered in prior periods get installed, just so that everybody is on the same page. But, yes, we will start to see installations and activations from these prior periods as we roll through the year.

Got it. Okay. That's it for me. Thanks, gentlemen.

And at this time there are no other questions in queue.

Okay. As always, if anyone has a follow-up question feel free to call us or email us here at KVH. Thank you.

And that does conclude today's conference call. We appreciate your participation.