Good day, and welcome to the KVH Industries, Inc. Q1 2022 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Roger Kuebel. Please go ahead, sir.
Thank you, operator. Good morning, everyone, and thank you for joining us today for our KVH Industries first results, which are included in the earnings release we published this morning. Joining me on the call is the company's Interim Chief Executive Officer, Brent Bruun. Before we dive in, a couple of quick announcements. First, if you would like a copy of the earnings release, it is available on our website and from our investor relations team.
If you would like to listen to a recording of today's call, it will be available on our website. If you are listening via the web, feel free to submit questions to ir@kvh.com. Finally, this conference call will contain certain forward-looking statements that are subject to numerous assumptions and uncertainties that may cause our actual results to differ materially from those expressed in these statements.
We undertake no obligation to update or revise any of these statements. We will also discuss certain non-GAAP financial measures, and you'll find definitions of these measures in our press release, as well as reconciliations of these non-GAAP measures to comparable GAAP measures. We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading Risk Factors in our 2021 Form 10-K, which was filed on March 11. The company's other SEC filings are available directly from the investor information section of our website. Now, to walk you through the highlights of our Q1 , I'll turn the call over to Brent.
Thank you, Roger, and good morning, everyone. I'm happy to report that we recorded several positives that I want to share. Total revenue for the quarter was $41.1 million. That's a 3% decrease from the Q1 of last when we shipped a large TACNAV order. However, if we exclude TACNAV sales, our results show growth in our core businesses. Excluding TACNAV sales, we had year-over-year increase in revenue, driven by double-digit growth in our core strategic businesses, Airtime, AgilePlans, and Inertial Navigation. Consolidated gross margins and Airtime margins were both up versus Q1 of last year. While our net loss for Q1 was $4.7 million or $0.25 a share, this included a significant portion of restructuring costs.
Without the restructuring charge, we achieved an adjusted EBITDA of $1.9 million, an $800,000 increase over the Q1 of 2021. As with most companies, supply chain issues continue to impede shipments of some of our products. That contributed to a $25 million backlog across our Mobile Connectivity and Inertial Navigation businesses.
Overall, sales into our core strategic markets are strong, and we continue to see demand in these markets. This is encouraging, and I have confidence that we will continue to do well here. Our expense model was our most significant challenge, both in the short term and the long term. This led us to our restructuring in early March. The effort included a reevaluation of our operating expenses to align with our expected revenue. It has also meant that we needed to make a difficult decision, which resulted in reduced personnel.
This was one of the most challenging and personal decisions we had to make. We are committed to evaluating our product prices on an ongoing basis and adjust as necessary. As a result of that commitment, we increased prices on some of our products and services in January. That is why effective May 1, we made incremental price increases to a select group of products in response to increased cost of goods. By focusing on areas where we are industry leaders, we are well-positioned for success in the long term. It is that long-term vision that has guided us to refine our strategic goals for 2022. We will drive profitability and shareholder value by focusing on our core businesses and by continuing to stay disciplined in our new product initiatives.
Part of the plan also included divesting ourselves of assets that don't align with our core business. As an example, we finalized the sale of our retail radio business two weeks ago. This resulted in a $25 million unbudgeted cash benefit for Q2. Other strategies include acceleration and build-up of new subscribers via AgilePlans. We're also targeting higher ARPU leisure customers and expanding our base in industry where autonomy is a significant value add. Our employees worldwide are critical to achieving these goals. We are committed to limiting disruptions following the restructuring. I have recently met in person or virtually with our employees in every region, from Middletown, Rhode Island, to Athens, Greece, and Singapore. I have listened, and I have received feedback that is crucial to keeping our core strong.
Steps we have taken include realigned reporting structures to gain efficiencies among teams, new opportunities for star performers to shine, and we are sharing weekly updates on our internal and external successes and highlighting progress on new product development efforts. While I was on the road, my primary focus was to emphasize our commitment to our employees and to our customers and service providers around the world.
I continually reinforce what our brand stands for, quality, innovation, and dedication to superior service. It is important that we understand this is a transition period for KVH. The full benefits of the restructuring may not make an impact until the Q3 . However, I believe that KVH is on firm footing for growth and long-term value. I am confident in what we do, and I know we have a bright future ahead.
I'd like to touch on a few updates in our core markets to show where we stand and how we plan to move forward. In our Mobile Connectivity business, our quarterly airtime revenue increased $2.7 million to $24 million. That's a 12% increase versus Q1 of 2021. New customer shipments of VSAT terminals were up 5%, and total Mobile Connectivity revenue was up more than $2.6 million versus Q1 last year. We achieved this growth even as we saw a 1% decrease in our total active subscriber base. This was due to the shutdown of our legacy satellite network. As anticipated, some of the remaining legacy subscribers at year-end are migrating to our HTS systems due in part to the spring refit season for leisure boaters.
Even with that slight decline in subscribers, our efforts are paying dividends. Our airtime margins are increasing due to the elimination of the expense of our legacy network, and we are serving more customers on our HTS network. I'd also like to recognize and applaud the first anniversary of our award-winning TracPhone V30 terminal. The V30 ended its first year as our most successful VSAT product in company history. The V30 accounted for almost as much hardware revenue as our best-selling TracPhone V7 HTS. That's impressive and an incredible achievement. In the commercial market, revenue driven by our AgilePlans plans increased roughly 10% sequentially from Q4 2021 and 48% from Q1 2021. Looking at TracVision satellite systems in Q1, the limited availability of select components impacted shipments. Our purchasing team was diligent and dedicated to build and ship.
However, we did enter Q2 with a $3.6 million backlog. Moving forward, our priority is to increase efforts and make components available for higher value, higher margin systems. We're also expanding the scope of our commercial marine business. There is significant demand for our recently approved service in India. In South America, we are working with our regional airtime service partners to support commercial fishing, shipping, and river transport in several countries. The leisure market also remains strong with seasonal demand for our satellite communications and TV products. We're also pleased to see the continued demand for KVH Elite, which is our unlimited streaming service. Subscriptions in the Caribbean and Bahamas remained solid in Q1, and our seasonal Mediterranean service launched at the start of April, and bookings are gaining momentum.
Seasonal service along the eastern seaboard of the United States and Canada just went live a few days ago, and we are looking forward to serving more Elite customers there this year. Turning to inertial navigation, we did not see the unusually large TACNAV sales that we did in Q1 of last year. TACNAV sales declined from $4.5 million in Q1 of 2021 to $700,000 in Q1 of 2022. This is a prime example of the inconsistency of our military navigation business and why we no longer include uncontracted TACNAV revenue in our guidance. However, sales of our OEM inertial navigation systems increased 13% in Q1 compared to the same quarter last year. Here again, supply chain issues impacted shipments, and as a result, we began Q2 with roughly $20 million in backlog for our inertial sensors.
The good news, demand remains steady in many of our traditional applications, including remote weapon stations and commercial products, as well as platform stabilization systems. We are seeing growing momentum in applications for autonomy, in which autonomy is critical and now represents 30% of our inertial sensors revenue. Autonomous trucking is a very exciting industry, and we're working closely with several leading developers. Currently, we are involved in comprehensive testing of a photonic chip-based fiber optic gyro in a number of autonomous trucking platforms. Our product is being put up against competing technologies, and I'm thrilled to report that we're seeing very positive results. We entered Q1 with an array of challenges. We came out of the quarter having taken decisive steps to align our operations with our areas of strength and revenues.
Our goal is to grow the business and make adjustments that will guide us to long-term success and profitability. I look forward to the quarter and the year ahead. With that, I'll turn it over to Roger.
Thanks, Brent. As Brent mentioned earlier, our Q1 revenue came in at $41.1 million compared to $42.3 million recorded in the Q1 of last year. Brent also discussed TACNAV and that we had a very large order for the product last year. The sales of TACNAV, total sales of TACNAV in Q1 of last year were $5.3 million. As he mentioned, this product line is very lumpy, and this past quarter was quite light with, as he said, $700,000 of revenue, and as a result, a drop from last year of the $4.5. Also, as you can see, a drop in the total revenue year-over-year. You can see that collectively, as Brent mentioned, we had year-over-year growth and collectively in our other businesses.
Our consolidated gross profit margin was 37% for the Q1 of both this year and last. That's a particularly good result as last year benefited from the high margin TACNAV sale, and this year did not. Revenue from our Mobile Connectivity segment increased $2.6 million, with a gross margin of 39%, up four percentage points. Revenue from our Inertial Navigation segment decreased $3.8 million year-over-year, with gross margin decreasing 12 percentage points to 32%. TACNAV falls within Inertial Nav and was the driver for this decline. Service revenue for the Q1 was $26.7 million, an increase of $2.9 million or 12% from $23.9 million in the Q1 of last year. By segment, service revenue in Mobile Connectivity increased by $3.0 million or 13%.
This increase was primarily due to a $2.7 million increase in mini-VSAT Broadband airtime revenue. As Brent noted, airtime revenue grew to $24.0 million or approximately 12% over the Q1 of last year, despite a 1% decrease in active subscribers as a result of the shutdown of our legacy network on December 31, 2021. Total subscribers, which includes those who have temporarily suspended, was up 1%. To explain that difference a bit, suspended subscribers are typically recreational customers who aren't using their boats during the colder months. While we refer to them as suspended, they still have access to voice services for which they pay by the minute. In addition, suspended AgilePlans customers pay a modest monthly fee for the equipment that KVH owns that's on their vessels.
Airtime gross margin was 41%, which is up 7 percentage points from a year ago. This increase is due to a combination of factors, primarily the shutdown of the legacy network, but also a number of one-time benefits. Going forward, we continue to target airtime margin in the high thirties. Product revenue for the Q1 was $14.4 million, a decrease of $4.1 million or 22% from $18.4 million in the Q1 of the prior year. By segment, Mobile Connectivity decreased by $0.3 million or 5%, primarily due to a decrease in satellite TV product sales. This decline was partially due to supply chain issues, which prevented us from manufacturing as much as we could have shipped. Inertial Navigation product revenue decreased approximately $3.7 million or 32%.
Again, this was driven by the drop in TACNAV sales. For our other Inertial Nav products, combined FOG and OEM revenues increased by $0.8 million or 13%, and revenue for our Inertial Nav service business was down by $0.1 million. Operating expenses for the quarter were $20.1 million or $0.8 million up from the Q1 of last year. However, both this year and last year, we had a significant amount of non-recurring expenses in the Q1. Last year, we had $0.9 million in legal costs related to a shareholder matter, and this year we had a total of $2.3 million related to our reduction in force and CEO retirement. As such, on a recurring basis, this quarter was $0.6 million less than the Q1 of last year.
Given the timing of the recent changes, the full impact of these changes won't be seen until Q3, and we expect the full year operating expenses to be between $5 million and $6 million less than 2021 on a recurring basis. At the operating income level, the changes in revenue margins and operating expenses resulted in a loss from operations of $4.7 million, which was up $1.1 million compared with the $3.6 million loss reported in the Q1 of 2021. Our Mobile Connectivity segment generated an operating profit of $1.3 million compared with an operating loss of $0.4 million last year. While our Inertial Navigation segment had an operating loss of $0.5 million for the quarter compared with an operating profit of $2.1 million last year.
Our unallocated loss was $5.6 million compared to last year's $5.3 million. These losses include the non-recurring operating expenses just mentioned, and after adjusting for those, our consolidated operating loss was $0.3 million less than last year. For the Q1 , our net loss was $4.7 million, compared with a net loss of $4.0 million recorded in the same quarter last year. On a non-GAAP basis, which excludes amortization of intangible stock-based compensation and other non-recurring costs such as unusual non-operating fees, foreign exchange, transaction gains and losses, employee termination costs and CEO separation, related tax effects and changes in our valuation allowance and other tax adjustments, after all those adjustments, we had a net loss of $1.0 million compared with a net loss of $0.9 million last year.
EPS for the Q1 was a net loss of $0.25 per share, compared with a net loss of $0.22 per share in the same period last year. Non-GAAP EPS loss for the Q1 was $0.05 per share, the same as last year. Our adjusted EBITDA for the quarter was a positive $1.9 million, compared with a positive $1.1 million in the Q1 of last year. This improvement is particularly noteworthy given that this year's results did not have the benefit of a large TACNAV sale that last year's did. For a complete reconciliation of our non-GAAP measures, please refer to the earnings release that was published earlier this morning.
Net cash used in operations was $3.5 million compared to $5.0 million provided by operations in the Q1 of last year. Capital expenditures for the quarter were $4.4 million, and for the full year, we expect capital expenditures will be in the range of $18-21 million, the majority of which is driven by AgilePlan shipments. Cash provided by financing activities was $0.1 million, resulting in ending cash balance of $16.7 million as of March thirty-first. I'd just like to clarify a comment Brent made earlier about the sale of the radio business. It may not have been clear, as he was coming across. The net proceeds from that were $2.5 million.
Looking ahead, as we said in our earnings release, we continue to expect consolidated annual revenue growth between 2% and 5% and adjusted EBITDA to be between $11 million and $15 million, assuming that supply chain issues don't worsen. In addition, we are still targeting positive operating income for the second half of the year. This concludes our prepared remarks, and I will now turn the call over to the operator to open the line for the Q&A portion of this morning's call. Operator?
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. Once again, that is star one to ask a question. We will take our first question from Ric Prentiss from Raymond James.
Thanks. Good morning, everyone. Can you hear me okay?
Hi, Ric. How are you?
Yeah. Hey, Ric. How are you doing?
Very well, thanks. Hey, a couple questions. One, thanks for that clarification on the radio business. I had written 25 down instead of 2.5.
Yeah, that was a misstatement on my part. I'm glad that Roger caught it.
Yeah. I was like, "Wow." Obviously, your balance sheet's in very good shape. As you guys look at maybe other non-core asset sales, is there anything that you need or want out there? If you look at, like, a SWOT analysis of the strengths, weaknesses, opportunity, and threats out there, is there stuff that you'd like to add that should be part of core, and what might those type things be?
We're always evaluating how to best position our products and services in the market, and how we can increase shareholder value along with that. At the current juncture, as you know, over the years we acquired Virtek and then Headland Media, and then Videotel came and went, and now this radio business actually came from Headland Media. If something comes up that from an opportunistic standpoint that we think can add value and provide incremental value-added services, we'll consider it. There's nothing in particular that we're focused on at the current moment.
I mean, one of the things that there's a lot of talk about is, LEO constellations going up, but that's something that , internally we're sort of keeping up with that. You know, we have the ability to sort of develop what we'll need to do that internally. So I don't think there's any need to sort of go out and do anything around that, but that's obviously something that as you think about what are the needs that we have going forward, the potential ability to, operate on a LEO network is certainly one of the things that we're tracking and staying up on.
That'd be kind of like maybe some antenna design or some things to make sure you're able to acquire signal from LEOs.
Yeah.
Is that what you're thinking?
Yeah. Exactly.
Okay. Great. That makes good sense. Obviously, a lot of concern about interest rates, inflation, supply chain. A lot more also concerned about will we tip into a recession, and what part of the world might turn into a recessionary environment. Can you update us, and Brent, you've been around this business a long time, update us a little bit about how the business has performed in past kind of recessionary cycles that you've seen around the world.
Well, the nice thing about our business, in particular the airtime business, it's a recurring revenue model. With that recurring revenue, we see year-on-year, revenue and typically growth. I don't know if there's a direct correlation to recessionary periods, because we haven't really experienced a lot other than briefly with COVID, since we've had that service up and going, in which we actually saw an increase because of some of the impacts of the crewmen needed to be on board the vessels. You know, prior to that, the most significant impact was back in 2008, 2009, when we had just launched the service, and where the impact we saw there was truly on the leisure side of the business, in particular, the RV business.
The RV business actually imploded, completely. I won't anticipate a significant impact to any of our recurring revenue. As far as sales into leisure marine and hardware in particular, those could be impacted. That's what we have seen in the past.
Okay. One of the things that looked attractive to the quarter, and so we were expecting maybe a little more pressure on equipment margins, given supply chain, maybe having to source from different areas, possibly offset a little bit with the PIC chip. Help us understand a little bit about where you see kind of equipment margins going forward.
Well, as far as the margins and what we experienced, we definitely had our challenges in regard to supply chain, and we did need to source some components at a higher price than we had, than we have in the past. You know, we responded in particular with our TV products with a price increase here in May, which I talked about within my script. We're continuing to see some pricing pressure. We're not necessarily giving direct guidance on what that pressure would be. It is definitely a concern as we move forward into the year. I think Roger has some stuff to add.
Yeah, I was just gonna say that, from a pure, if you look at, what do we have to pay in terms of higher prices, the Q1 wasn't as big of an impact. I actually was digging into this the last couple days. Q1 wasn't as big of an impact as I thought it was gonna be, but we are still gonna see an impact in Q2, and it's hard to say after that, but we are definitely not out of the woods on this yet.
Okay. Yeah, that's what we were thinking too. Maybe it's just a little delayed impact as far as all those costs coming into it, but we should-
Yeah.
still expect some pressure.
Yeah.
Um.
You get the quotes, you find out, the actual impact when it hits the financials is kind of a little bit delayed from when you sort of first find out about it. We know that there's gonna be a bigger impact in Q2 than there was in Q1.
Gotcha. Okay. The last one from me, any update on the CEO search? I think it was about 60 days ago, a little more when we chatted on the year-end results. I think the initial thoughts was maybe the CEO search would take 60-90 days. Or is that still looking like the process, or just an update on the search, both internal obviously as well as external.
Well, the board of directors is still continuing the search process. I can't say for certain what the end date on that is. I'm hopeful that will take place somewhat soon. They're continuing the process, and they're working with an outside recruiting firm to assess both external and internal candidates.
Okay. Appreciate it. We'll stay well.
All right, thanks. Thanks, Rick.
Our next question is coming from Chris Quilty from Quilty Analytics.
Thanks, guys. I was hoping you could perhaps give us a macro overview of what you're seeing in the shipping market. Obviously, some countervailing trends in terms of higher fuel costs and continuing, intermodal containers getting stacked up. Overall, do you see the situation getting better or worse for your customers on the commercial side? What does that imply, as you look out through the balance of the year, maybe on a quarterly basis, do you expect any, large movement in terms of customer uptake?
Well, I think there was a couple questions in there, Chris. As far as the impact with what's going on within the industry, both from a fuel consumption and needing to transport product, it's definitely a maritime industry issue. As far as communications, those companies still require our communications even in regard to shipping, if they're backed up in certain ports. As far as fuel pricing, that's actually benefiting some of our customers, although it's hurting us at the gas pump. You see some of the earnings that are being released from companies in the energy sector, they're all very positive from their perspective, which means they have more money to spend on communications.
What % now, I think you've given in the past, is the energy sector in terms of your subscriber base?
I'd have to go do a reassessment, and I don't think it's probably changed the percentage very much, but I believe that, and I'll double-check after this call, that the number of vessels that are associated with the energy sector is in the 15%-18% range.
Gotcha. Would you expect all the?
I can fully confirm that.
No, that's good.
Okay.
As an order of magnitude. Are there any particular commercial sectors where you're most constructive on? This is a separate question. Can you give us a quick update on, if there is any, on KVH Watch?
Yeah. Well, when we look at energy, it's tankers and it's basically the movement and supply vessels. We're not necessarily on rigs. It's everything that revolves around the energy sector with the exception of rigs. It could be tugs, it could be supply vessels, tankers moving the fuel, et cetera. In regard to KVH Watch, we have the service. We're going to integrate it with our core products. If you're a KVH customer, you'll be able to subscribe to KVH Watch both for remote expert intervention as well as Flow. Cloud Connect, we'll also integrate, but that won't be integrated probably until the 2023 timeframe.
Gotcha. You had indicated, I think on the last call, that you had several new products that you expected to launch this year, including the integration of KVH Watch. When should we expect that? Presumably, any of the R&D costs associated with that are baked into your forecast.
We'll release more information in regard to those types of initiatives in 2Q.
Great. Shifting gears, autonomous trucking, I think in the past you had mentioned, I think it was maybe a dozen or more potential customers. When might we expect to see some material movement in those customers? Do you have a sense of when some of these programs might actually get adopted and move forward in a meaningful way?
Well, I think it's in comparison to like a driverless car, it's relatively soon. I don't think we'll see a significant uptake this year. I think as we get into next year and the latter part of next year, we can see some movement.
Great. I know TACNAV is not in the forecast, but the existing programs that you're tracking all remain on track or any delays that you see?
Well, there's a significant number of programs out there, and so as you would expect, there's some that are going a little ahead of what we expected, some a little behind. Overall, it's a defense business, and so because of everything that's going on in Europe, we're actually seeing sort of, I would say, an uptick versus what our expectations were, in last year, end of last year.
Any of those that have the potential to come to light in the next 12 months?
Oh, yeah. Yes.
Okay. A little bit of good news. That's it for me. Thanks, guys.
Well...
Thanks, Chris. No, you're right.
We will take the next question from Ryan Koontz from Needham.
Hi. Thanks for the question. Wanted to ask about supply chain again. Roger, if you can kind of parse out your impacts there between your transient cost impacts of , expedites versus the permanent types of price changes that probably drove your price increases. Maybe give more color there would be helpful. Thank you.
Yeah. Yeah. You know, we had, as you said, we've had sort of like, freight costs where we're, getting things done at the last minute, we have to ship them, and then we've also got product costs. This is the big question is, how long is this gonna last? You know, is any of this stuff permanent or is this. This is kind of like the huge question we've got out there. I don't have an answer on how long it's gonna last. Again, the impacts in Q1 weren't as bad as I had sort of expected based on, what I had sort of heard around things. We think it is gonna be more of an issue in Q2 from a cost perspective.
You know, it's kind of a daily battle on the parts front about trying to, chips and boards that those chips go into. It's just the big unknown for this year for us, as it is probably for a bunch of companies.
Sure. Yeah. Would you say, like, in the quarter, in the books here, that it was closer to kind of 50/50 in terms of the cost impact to the company?
When you say 50/50 of what? I'm sorry.
Between kind of-
Fifty fifty.
Transient costs and price increases from the source.
Well, when you say transient, so the price increases could be transient as well. I mean, there's a couple of things going on out there. There's sort of underlying real , inflation, which tends not to go away. Then there are, the fact that, you're trying to buy the last 100 ships that exist in the world of a particular price, and suddenly you're, the quote is 10x of what it used to be a year ago.
You know, while that's a product cost, I wouldn't necessarily view that as permanent because at some point we think supply will catch up or, scalpers will stop hoarding, and those things are gonna go back to some kind of normal, maybe a little bit higher than they were before, but not really the 10x of what they were before.
Yeah. Got it. All right. Shifting gears, maybe can you let us know where you are in the process of evaluating different product divestitures? You still in the beginning of that process or kinda entering the middle of that process?
Right now, the radio business was a good business, a very solid business, and the one that was most non-core. As far as our remaining businesses, there's no particular business to stand alone such as that we're actually focused on. We may look at different product lines or services within our product line.
Got it. Helpful. Thanks.
As we have no further questions, I would like to turn the conference back to our speakers for any additional or closing remarks.
No, I think, that's all. Operator, thank you. We appreciate everyone's participation on the call, and, we're gonna keep working hard to drive towards being profitable.
Okay, great. Thanks very much, everyone. Have a good day.
This concludes today's call. Thank you for your participation. You may now disconnect.