KVH Industries Inc (KVHI) 2015 Q2 法說會逐字稿

Good day and welcome to the KVH Q2 2015 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Peter Rendall, Chief Financial Officer. Please go ahead, sir.

Thank you and good morning, everybody. Thank you for joining us today to discuss KVH Industries' second-quarter results and our updated 2015 guidance. With me on this call is Martin Kits van Heyningen, the Company's Chief Executive Officer.

We issued our second-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@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 would 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 Information section of our website. At this time, I would like to turn the call over to Martin. Martin.

Thanks, Peter, and thank you all for joining us this morning. I am pleased to report KVH's second-quarter results met or exceeded our guidance in all key areas of operating performance. Our revenues were $44.9 million, up nearly 10% year-over-year from the second quarter of 2014.

And for the quarter, our adjusted non-GAAP earnings were $0.13 per share, also ahead of our guidance and up from $0.12 in 2014 Q2. This growth in revenue and profits was driven by improved performance in every area of our mobile broadband business, including hardware, airtime, and content and services.

Our guidance and stabilization business results were also in line with our forecast. KVH is seeing increasing demand in most of our major markets. Overall, our fully updated portfolio of broadband connectivity, content and services, and satellite TV systems lead the maritime market and offer significant differentiating benefits that continue to win customers.

Our FOG sales are rebounding as we continue to win new customers in emerging markets, especially for a variety of applications on autonomous platforms. We've also received some indications that the pending TACNAV orders we've been pursuing may even be larger than we expected, although the timing of these programs is always difficult to predict.

Now Peter will cover the numbers in more detail shortly, so let me provide operating highlights for each of our key business areas. Beginning with our mobile broadband business, our Q2 revenues of $38 million were up 28% (technical difficulty) '14. This growth was driven by our content and services offering which were up over 100% compared to Q2 of 2014; TV and VSAT hardware which increased 14%; and VSAT airtime, which was up 11% year-over-year. Note that the content and services sales now include $5.8 million from Videotel, which we acquired in July of last year.

So let's take a look at each major market segment. First, we are seeing encouraging signs of a rebounding yachting market where strong sales of large boats are helping to drive our TracPhone sales and our TracVision satellite TV system sales, which were up 12% year-over-year. One of our customers, Brunswick, who has used us as their exclusive supplier of satellite TV and communication systems for their market-leading Sea Ray brand for many years, reports sales of boats in the 41 to 62-foot range were up more than 20% in Q2.

We are also seeing increased activity from the in-house Marine Electronics Company for Viking, the world's premier manufacturer of large sportfishing boats and another important KVH customer who uses TracVision and TracPhone products exclusively. It appears that the high end of the yachting market is leading the recovery, and we are optimistic that the much larger 25 to 40-foot segment will soon follow, which will be great news for (technical difficulty) TracVision TV series product line.

Sales to our core merchant shipping market remains solid, as important new customers like Polsteam Shipping Company and long-term customers like V.Ships and [Proone] continue to roll out mini-VSAT Broadband hardware and services to their fleets. The lead pipeline is strong and we are seeing a lot of interest in our innovative IP-MobileCast services from our existing customers.

However, the oil and gas offshore vessel sector continues to be slow due to low oil prices. Last year, we were seeing solid revenues in the Gulf and in South America market, which we're just not seeing this year. So while we are still seeing double-digit growth rates, service suspensions in the oil and gas industry have impacted the headline growth rate.

Our focus this year has been to leverage the reach of our global salesforces in our e-learning, media, and maritime VSAT businesses through a series of customer events in major shipping cities around the globe, combined with joint sales calls to leading customers. The idea is to introduce customers to our IP-MobileCast content delivery as a way to cross-sell our mini-VSAT, media, content and training services.

This past quarter, we held customer events in Copenhagen, Cyprus, Singapore and Seattle, with five similar events planned for the fall. I am happy to report we are seeing signs that the strategy is paying off, and we are beginning to win significant new orders as a result. This type of collaboration between sales teams and our media, e-learning, and mini-VSAT sales groups is occurring around the globe, and we've got a large number of existing customers trialing new services from us as a result.

The early adopters of IP-MobileCast have been customers with sophisticated IT departments who understand both the benefit of bringing great news, sports, movies, TV and music entertainment to their crews and the efficiency of KVH's content delivery service in removing the huge amount of traffic from the vessels' networks. They understand the impact of the individual crewmembers downloading videos or accessing streaming audio or video services for their personal entertainment. We've got several shipping industry customers now rolling out IP-MobileCast services to their fleet, and several dozen trials ongoing.

We are also doing well in other markets where vessels operate in remote areas. For example, we held a customer event in Seattle attended by many companies in the commercial fishing industries that operate in Alaska, outside of the traditional coverage for satellite TV services. These smaller operators quickly understood the benefit of getting content delivery over their mini-VSAT systems and immediately signed up for the service.

I feel we are clearly seeing momentum and receiving positive referrals from our early adopters, which will help our efforts to both differentiate mini-VSAT Broadband service from our competitors and increase our incremental content and service sales to our existing customers.

While our competitors focus almost exclusively on winning a relatively small number of large, low-margin contracts for big fleets, we believe KVH has a fundamentally better solution for all customers by combining access to extremely fast, high-quality service at every price point, delivering huge amounts of entertainment and operational content for little or no cost via IP-MobileCast. We are changing the basis of competition in a way that clearly favors the extensive end-to-end solution we've built over the past five years.

Now moving on to our inertial business, which includes our fiber optic gyro products and our TACNAV military nav systems, revenue was $6.9 million in the second quarter of 2015. That is down 39% year-over-year, which was anticipated and in line with our guidance. TACNAV product revenues were just under $1 million, down from $5.7 million in the 2014 quarter when we had a large shipment as part of an order to a customer in the Middle East. FOG sales of $4.9 million were up significantly from Q1 and were up 10% from Q2 of 2014.

In our fiber optic gyro business, our commercial sales continue to grow. The autonomous platform market which includes everything from drones to self-driving cars and robots has been very receptive to our new series of IMUs and sensors. For the self-driving car market, we are pushing our FOG technology to a goal of being affordable, once self-driving cars reach automotive scale mass production.

Our target price is on the order of $200 and our sensors, which typically sell for $2000 or more today, offer advantages in terms of accuracy and stability that simply can't be achieved by lower-cost MEM solutions. To give you an idea of some of the other places KVH FOGs are being used, some of you may have read about the DARPA Robotics Challenge where semi-autonomous humanoid robots were given a series of complex tasks to compete in a simulated emergency response scenario. The winner received a $2 million prize.

KVH IMUs were used on almost half of the 25 robots entered in the competition, including the winning entry from South Korea.

Humanoid robots may sound far-fetched, but consider the previous DARPA grant challenge was the inspiration for the current self-driving car market.

Another interesting application is Sportvision's new augmented reality software for the golf broadcasting industry, where KVH IMUs are used in handheld broadcast cameras that are able to digitally illuminate the path of a golf ball in flight to help viewers understand the golfer's shot. Sportvision is a company that overlays graphics on television coverage of just about every major sporting event, including NFL football, baseball, hockey, NASCAR, sailing and the Olympics.

It used to require a semi-trailer full of equipment to create these computer overlays. Now the technology fits into a backpack with a handheld camera. As the world moves to HD, especially with the new 4K ultra high def resolution, stabilization of moving cameras will be even more critical than before, and that's exactly what KVH FOGs are doing for a lot of our customers today.

Although some of these programs may take time to develop, we believe they represent significant future opportunities for our technology.

Moving on to our military land nav business, we continue to see very good opportunities ahead for our TACNAV systems. We have over $24 million in backlog now, and we are working on two additional large orders. It's difficult to discuss the specifics of these orders due to customer requirements for confidentiality, but we can say on the contract that we have in hand, they are progressing well. We're completing development and expect to be ready to deliver on schedule in the fourth quarter.

Another contract is expected in time for delivery in the fourth quarter, and it's from the same customer and program that we delivered against at the end of last year. The good news is that this order appears to be larger than originally anticipated, and we've purchased the long-lead inventory items in advance to enable us to quickly ship once the order is received.

As reported last quarter, our FOG base TACNAV system has also been designed into a new US Army vehicle program, and we anticipate receiving this order in the next few quarters. Deliveries are not anticipated in the current year and have not been in our guidance. The US military has defined PNT, the ability to access accurate, trusted position navigation and timing information, as a critical requirement for almost all the Army's war-fighting functions and systems. Now in the past, they've accepted that GPS is the only source for accurate PNT, but concerns about operating in areas where GPS is jammed have created new requirements for backing up GPS. This is exactly what TACNAV was designed to do, which is why the overall prospects for TACNAV continue to look very good.

In conclusion, we are very happy with our results for the second quarter and believe we are in a great position going forward. We have got a good leadership position in the maritime satellite markets, but we are not resting on our laurels. We have some exciting new services that we will be launching later this year. Our FOG technology is finding good niches in emerging markets, and although some of these have been slow to develop the advancement of the technology they represent, will create a wide range of new opportunities for us to pursue.

And the short-term prospects for large TACNAV orders continues to look very good, although as always the timing of military contracts can be challenging. Longer-term, our military customers appear to know that they've got a vulnerability relying exclusively on GPS, which is exactly why we invented our TACNAV solution.

So now I would like to turn the call back over to Peter for detailed financial results. Peter.

Thank you, Martin. I'd now like to discuss in more detail the financial results of the Company for the second quarter. As Martin mentioned earlier, our second-quarter revenues of $44.9 million were at the upper end of our guidance range we previously gave, and were 10% higher than the second quarter of 2014. The primary drivers for this growth were the incremental contribution of Videotel revenues, higher VSAT airtime revenues, and higher mobile broadband product revenues, which were somewhat offset by lower TACNAV revenues as we'd expected.

Our second-quarter service revenues of $26.9 million increased 35% year-over-year, mainly due to the addition of Videotel in conjunction with our VSAT airtime revenue growth.

Looking at our airtime subscription revenues more closely in the second quarter, airtime revenues were $16.2 million which was up 8% from the prior year and included an 11% increase year-over-year of VSAT airtime. Our VSAT ARPUs during the quarter for fixed rate plans were between $1800 and $1900 per month, while ARPUs for our metered plans continue to run slightly lower than we've seen previously at between $500 and $600 per month. And has Martin has also explained, the decline in ARPUs for the oil and gas offshore vessel sector continues to be the main contributor.

Our content and service revenues in the quarter, which include subscription revenues associated with the entertainment and e-learning content, as well as any professional service fees, was $10.7 million which was 117% higher than a year ago. Almost all of this increase was attributed to revenues from our Videotel e-learning business, which we acquired in July of last year.

We were pleased with the level of subscription-based service revenues in the quarter, which was 56% of total revenues, up from 45% in the prior year second quarter.

Now moving on to our product revenues, our total product revenues fell by 15% to $17.9 million in the second quarter. Most of this decline was actually attributed to the TACNAV revenues, which was offset by increases in both FOG revenues, VSAT hardware revenues, and sales of our maritime satellite TV products.

Our mobile broadband revenues of $11.8 million in the second quarter were 14% higher than the second quarter last year. This increase was specifically attributed to higher VSAT product sales and higher marine satellite TV sales. Our guidance and stabilization hardware revenues of $6.2 million were $4.5 million lower than the second quarter of 2014, or 42%. Again, as we've discussed, this decrease was primarily due to the expected lower TACNAV revenues.

Turning to our gross profit margin in the second quarter, our consolidated gross profit margin of 43% was in line with our expectations and the same as we had reported in the second quarter of 2014. Our overall service margin was 49% compared to 43% in the second quarter of last year, while our VSAT airtime gross profit margin was 34% in the second quarter which was down by 1 percentage point from what we reported in the prior year. Again, primarily due to lower ARPUs for metered plans for customers servicing the oil and gas industry.

For product hardware, we recorded a gross profit margin of 33%, which compared to 42% a year earlier. This decrease was primarily driven by the lower TACNAV revenues.

As it relates to our second-quarter operating expenses, we recorded $19.4 million in the second quarter which was up 15% year-over-year. Almost all of this increase was attributed to the addition of Videotel's operating expenses, which included intangible amortization.

Our non-GAAP EPS for the second quarter, which excludes discrete tax items, acquisition-related costs, intangible amortization and stock-based compensation expense, was $0.13, which was a penny better than the prior year and higher from the $0.05 to $0.10 guidance we previously gave. Our adjusted EBITDA for the second quarter was $4.6 million compared to $3.7 million recorded in the same period last year, and again higher than the $3 million to $3.7 million guidance we previously gave. For a complete reconciliation between GAAP and non-GAAP measures, please refer to our earnings press release that was published earlier this morning.

Capital expenditures during the second quarter were a little over $2 million. Backlog for our guidance and stabilization products and services at the end of June was approximately $26 million, which was comparable to that on hand at the end of December. Of this amount, approximately $12 million is scheduled to be delivered during 2015.

Now I'll turn to our outlook for the third 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 of 2015, in a similar way to what we saw in 2014. As a result of this, TACNAV revenues are expected to be less than $1 million in the third quarter.

Our projections for the year still assume that we receive one particular significant TACNAV order, which Martin has previously referenced. A portion of our revenues and costs are denominated in pounds sterling, and we've seen significant currency fluctuations over the past year. Our guidance assumes there are no significant fluctuations in exchange rates between the US dollar and the pound for the remainder of the year.

With this context, our revenue guidance for the third quarter is in the range of $44 million to $47 million, and we expect our GAAP EPS for the third quarter to be between a $0.03 loss and a $0.03 profit. We also expect to have non-GAAP EPS to be in the range of $0.11 to $0.17, and our non-GAAP adjusted EBITDA to be in the range of $3.8 million to $5 million.

For the full year, we expect our revenues to be in the range of $185 million to $205 million, which is a $5 million reduction in what we previously guided which relates primarily to slight reductions in our expectations around FOG for the rest of the year, as well as some of the headwinds we saw on the VSAT in the oil and gas industry. But again, it's only a $5 million reduction in our guidance this quarter.

Our GAAP EPS for the year is expected to be in the range of $0.20 to $0.30 per share, and we also expect our non-GAAP EPS to be in the range of $0.75 to $0.85, and our non-GAAP adjusted EBITDA to be in the range of $23.5 million to $26 million.

So in wrapping up my thoughts, we were very pleased with the solid operational results we recorded in the second quarter and believe that this provides a great foundation to meet our annual goals. Now 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.

A question on the mini-VSAT revenue growth up 11%, I think, in the quarter after a 12% increase in the first quarter. I think you'd previously targeted that being high teens for all of calendar 2015. It would appear that's ambitious at this point. Do you have an updated target for that business this year?

No, we don't have a specific growth rate. We haven't given specific guidance for the airtime revenue growth, but I think that you are right in saying that the current growth rate is less than we had going into the year. And I think we've mentioned a couple times the reason for that is primarily the variable component of metered plans and dayrate business which is used in the oil and gas. And that's really the area, the only area where we've seen any softness.

A couple follow-ups, I guess. I mean can you say historically how significant or what percent oil and gas has been of that business? And can you talk about what your quarterly unit ads were, if they were in that historical range you've talked about of 200 to 250?

Yes, they are still in that range. And historically, although it varies a bit quarter to quarter, between what we are doing in the Gulf, in South America and Brazil, and to some extent some of the offshore business in Singapore, it was approximately 20%, 22% of the tonal mini-VSAT hardware and airtime.

Great. And last quarter you talked about having a nice V11 order in backlog and thinking that might help re-accelerate, I think, both the airtime and the hardware sales as you moved into the back half of the year. Any update on where that stands?

Yes. We did have good growth in the hardware year-over-year, so we are in that low double-digit growth rate for hardware this quarter compared to a year ago. So it is accelerating. It's just that at this point, we don't see the oil and gas recovering. For a while there, our customers tell us it has to be sort of in the $60 to $70 range before that business, the offshore business, recovers. And it looked for a little while like it was moving in that direction, but now it looks like it's going the other way.

So we're just assuming we won't see any improvement in that part of the business. But I think we are encouraged that we are still able to get net ads and growth rate that's ahead of where we were a year ago, despite what's going on in this one sector. So we are pretty well diversified. So I don't want to give the impression that we are totally focused in oil and gas. Right now, probably 100% or 90% of our growth is in other sectors.

Great. Was just hoping you could give a little more color on the IP-MobileCast rollout in terms of how it may be helping to leverage new wins and new actual hardware unit sales and if there's been any meaningful revenue impact from it yet, or is that something you are still expecting later this year into next year?

In terms of the net revenue, it is still small compared to the total content delivery business. So we are seeing a number of things happening. One is some of the installed DVD base customers are switching, which is fantastic because that's what we want to do. We are seeing that in new like the V11 contract we talked a little bit about last time was a key part of the selection, which is our most expensive product, and the V11 carries our highest ARPUs.

In addition to that, we are adding IP-MobileCast revenue on top of that. So we are seeing the early adopters are existing customers who are big fleet customers, and they've been trialing it and now rolling it out across their fleet. So I think the performance of the product and the reaction and everything has just been terrific. It's doing exactly what we expected, which is it helps differentiate our product and helps us win the VSAT business, which is our number one goal.

Got it. Just in terms of the guidance and stabilization business overall, it sounds like you had implicitly trimmed that a little bit in your annual guide. What was that change due to?

Well, partly the FOG business was really soft in Q1, and we were still optimistic we could make that back in the back half of the year. We saw a pretty good recovery this quarter sequentially and year-over-year, but it's still a little below where we had expected to be at this point. So we've trimmed the estimates of the FOG business, and that's really the only change in the guidance (inaudible) in terms of our guidance.

Just one more from me and I will yield the floor. When would you need to receive the very large TACNAV follow-on order in order to make the year? Any sense of the timing of when you would hope to receive that?

Yes, I think it really has to come -- it can come as late as midway through Q4. We bought the long lead part, so there's really -- we don't have any concern that we are not going to get the order, which is why we've gone ahead and purchased the material. But there is always a risk that it pushes out from the quarter. But right now, we're expecting to have it in hand by the beginning of Q4 and we should be able to ship it in Q4.

Got it, okay. Thanks, that's it for me.

Which, incidentally, is exactly what happened a year ago.

Thanks.

Chris Quilty, Raymond James.

Martin, a question on the content business. It looks like if you back out the Videotel business, content was actually down on a year-over-year basis. Can you confirm that and perhaps discuss what issues are going on there?

Yes. No, just keep in mind that the change in the British pound has been about 11%, so that business is actually up year-over-year in local currency.

Okay. Can you give us some more details on perhaps penetration rate amongst existing customers or indications with new customers, what percent are looking at content versus just buying access to a network?

I think almost all the customers are looking at content now. So it's really an important part of the product offering. I think we are seeing that also in the deal we did with Inmarsat where they want to have access to our content like our training product and our news link service. So it's just -- we've really changed the whole basis for competition, and I think now everybody is looking at content services and training as part of the total solution. So they may not all have budgets for it in the current year, but I would say we aren't talking to anybody who says, oh, I'm not interested in that because we don't need it.

Okay. What's driving the decision for content? Is it regulatory; is it career retention; combination of the both?

It's more the latter. The regulatory stuff is not specific enough to force people to buy any particular type of solution, but the challenges of attracting and retaining crew is significant. Outside of fuel, which is declining, the operating costs, the single largest item is crew cost. So the cost of attracting and retaining and training crew is their number one expense now.

Got you. Have you noticed any meaningful split amongst the hardware options for customers: V3, V11, V7?

Not really. From quarter to quarter, we see sometimes big swings. One quarter we will have a huge V11, and then a V3 the next quarter. But in general, we are seeing a pretty constant mix where roughly half of it is V7 and the other part is split between the V3 and the V11.

Got you.

Just to clarify, Chris, normally when I talk about it, I put the V11s and V7s together, and the current quarter represents about 60% of the unit sales which is consistent with this same time last year.

Got you. Peter, in the past, you had talked about 60% incremental margins on new customers. That's clearly fallen back, and I think that was due to some added network capacity. Should we expect to move back to that higher incremental contribution on a go-forward basis, or what are the dynamics we are looking at?

We certainly -- we are expecting Q3 to tack a little higher and then steady off in Q4, but we've certainly added some costs in the current year around the MPLS network as well as our IPMC cost-out, IP-MobileCast cost. So there are incremental costs in the first half of the year that certainly impacted the margin, but nothing else is expected to be significant for the remainder of the year beyond those.

Peter, you had also talked about implementing some billing systems. I think right now, most of your content business is acquired simply at the shipping company level, creating the ability for actually crew to swipe a credit card. Where you at in that process?

We have implemented a new billing system for our Videotel business that is up and running. In fact, it's been up and running since the beginning of this year.

And have you seen any pickup from that at the individual crew level?

No. What Peter is talking about is our back-office billing system, which is integrated into the financial system. I think what you're talking about is sort of a pay-per-view or an onboard where the crew pays. And that's done -- a lot of these crew don't actually have credit cards. So the way we handle that is through prepaid cards that we sell to the vessel master.

So we sell the cards, so it doesn't involve credit cards by the crew onboard. So it's part of our crew link and it's part of a crew calling system that enables them to access the Internet and make phone calls, but it doesn't allow them to purchase content.

Got you.

If that's your question.

Yes. And a clarification, Martin; have you seen actually any deactivations in the oil and gas side, or is it simply the ARPU and the dayrate going down?

No, we have definitely seen deactivations. A lot of these vessels have been tied up. So we've seen, whether it's a suspension or a deactivation, the net result is zero revenue from that vessel for the month. So that's the only part --.

Got you.

Right, go ahead.

I was going to say in light of that, should we expect that 2015 is not going to be the year where you break through that 1000 vessels a year you've been stuck at for the past several years?

Well, I think we're at the point now where we feel pretty confident we'd be over the 300 a quarter if the offshore business was where it was a year ago. But that's not reality and we don't control that. So I think we still are on a growth path that we think that we will get there this year. But for the full year, given that we are halfway through it, I think it's unlikely that we'll exceed the 1000 for the full year. But it's hard to say at this point.

Great, thank you.

That concludes our question-and-answer session. At this time, I will turn the conference back to management for any additional or closing remarks.

Okay. Well, thanks again for joining us and as always, you can reach us after the call either directly or via email. Thank you.

This does conclude today's conference. We thank you for your participation. You may now disconnect.