Martin Kits van Heyningen - Chairman, President, CEO Peter Rendall - CFO.

Rich Valera - Needham & Company.

Good day and welcome to the KVH First Quarter 2015 Earnings Call. Today's conference is being recorded. At this time, I 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@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'd like to turn the call over to Martin..

Thanks Peter, and thank you all for joining us today. We have 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 of 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 are 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’re 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 will 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 win 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 especially 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 a part of fleetwide rollouts which take time to coordinate. And overall our backlog of mini-VSAT hardware is larger than it has ever been and it 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 the people use the servers they love it.

Seafarers working on ships equipped with IP-MobileCast servers 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 endorsement, 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 sliding up for IP-MobileCast service, and it is 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 that is 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 in a better perceived value than our competitors’ offerings.

IP-MobileCast is the type of service that needs to be experienced to really be appreciated, we are also fielding custom 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 have 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 the service.

Overall the adoption rate seems faster for IP-MobileCast than it was for the original mini-VSAT broadband communication service when we started, and we are confident that we will see ramping demand as more and more people experience IP-MobileCast. Our lead pipeline is also looking very good.

We are currently pursuing a dozen different fleet sales opportunities representing more than 600 vessels and a full three quarters of these potential new 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 integrate everything together with IP-MobileCast and V11. We are definitely seeing the halo effect of our strategy to offer a 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 in a faster rate now than when we acquired it last year.

We have added a selection of Videotel training videos to our IP-MobileCast training link service, and we’re offering a preview video on Videotel as part of our 30 day free trial to expose our mini-VSAT customers to high-quality of Videotel programs.

We have just completed our 500th computer-based training course adding to our extensive video based training as part of the Videotel library. We have now exceeded over 12,000 vessels using Videotel training today. Combined our students completed 660,000 training events during Q1.

Though e-learning is a very exciting market and our Videotel solutions are in a 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 are 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 this event 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 will 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 this will provide important networking opportunities amongst a combined pool of customers from each of our groups, prospects of KVH and each of our application partners as well.

It will also give us a chance to bring our collective sales forces 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 through 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 have also developed and will be 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 are 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.

We recently rolled out our new TracVision TV8, which is an 80 cm 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 deciding 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 a multi-year malaise.

As the market leader, we benefit directly from an 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 Sunseeker.

While Q1 sales were slowed a bit by the unusually cold winter, we expect to see increases in Q2 as the US market benefits from a late spring, which delayed the sales up tick we normally enjoy at the end of the first quarter.

Moving onto our guidance and stabilization business, our revenues were $5.1 million in the first quarter and that is down 36% year-over-year, which was somewhat more than we had predicted. This decline reflects the uneven sales created by large orders that come in on a near regular 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 are also optimistic that we will 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.

A 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 is in our guidance, there is always risk of some delays with foreign military sales.

But perhaps the most important thing that happened recently in our defense business that we have been designing 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 to the US Army has been a major strategic objective for us.

While we have been on US vehicles dating all the way back to Desert Storm, this would be our first major contract with the US Army for TACNAV in quiet 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 FOGs continue to do well, we had disappointing sales in our standalone 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, robotics market and are doing well in an 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’re optimistic that we will 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 through our global dual band system, and cross selling content and connectivity seems to be a winning combination that is 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 in a 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 are optimistic that one of our customers – when one of our customers emerging applications in self driving cars, or robotics or drones our stabilized platform takes off we will see a strong rebound in our fiber-optic gyro sales as well.

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

Peter?.

Thank you, Martin. Now I would 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 $1800 to $1900 per month, while the ARPUs for our metered plans continued to run slightly lower than we have seen previously of $500 and $600 per month.

Our content and service revenue in the quarter, which include subscription revenues associated with the entertainment and e-Learning content as well as 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 last year offset by a reduction in non-recurring engineering primarily related to the Saudi Arabia 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 last year.

A good portion of this decrease can be attributed to the unusually cold winter that we have 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 had 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 inline with our expectations and higher than the 39% we reported in the first quarter of 2014.

Our overall services margin was 49% compared to 42% in the first quarter 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 and marketable securities were only $400,000 than that on hand as of December 31 of $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 will turn to our outlook for the second quarter and update for the full year guidance. As we have mentioned on earlier calls, we anticipate that TACNAV shipments will be significantly skewed towards the backend 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 to have 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 to have 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 will turn things back to the operator for the Q&A portion of this morning's call..

[Operator Instructions] We will take our first question from Rich Valera with Needham & Company..

Thank you.

You have 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, if you maintain the full year guidance, so is there something that we expect to make up for those sort of near-term headwinds of should we think about maybe shading the guidance below the mid-point at this point for the year?.

Yes. Some of the FOG business miss were for contracts that we feel we have won, but we 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, like normally that sort of a shift. Today we get the order we ship it.

So it is a little bit unusual for us to have backlog, and that has been growing. So we are in pretty good shape for some of these larger fleet deals. So we are 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 are – 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 are still running around that 250 range. But again we do have backlog in terms of new unit sales, but we do have a fairly significant backlog on top of that now..

That is helpful, and then airtime revenue growth of up 12%, I’m just trying to understand what is behind that, you have been adding subs roughly an annualized rate of 1000 per year and if you add that on top of a base of say a 1000 subs roughly from last year, I’m sorry, 4000 subs, you would expect that business to maybe be growing, north of 20%, ex-churn or any kind of compression of ARPU, but you are running about half that, so 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, you are expecting that to see acceleration for the balance of the year and roughly how fast you think that can grow?.

Yes. So it is a – it is a little bit complicated. So the factors that are playing off here, we are adding – we are continuing to add subs at the normal pace, but we have some meter plan customers, particularly in the oil and gas that are on either day rates or they are on plans with overages, and that is where we have 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 as those – if the rigs get tied up, the vessels get tied up at the dock and your usage can fall dramatically.

So that has really been the key factor. And then on the leisure 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 is where we are seeing variability..

Just to get back to my question, can you say roughly what is baked into the guidance at the mid-point for airtime growth this year, I mean I would think you would have to see an acceleration from 12% to make the mid-point of your guidance?.

Well, I will let Peter answer that. But I don’t think we give specific guidance for airtime, but I think a little of it, it does depend on what happens in these variable meter plan markets. So, 60% of the customer base is fixed and that is very predictable because they are planned long-term contracts, and 40% is variable..

And Rich, this is Peter. Also remember that historically the year starts out, the first quarter is the low point and there is 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 is 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 should be a light first quarter of ’14, so I’m not sure how seasonality should weigh into the year-over-year growth, it sounds like you expect acceleration in year-over-year growth as we move through the year, is that fair?.

That is correct..

Okay. That is it from me. Thank you gentlemen..

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

I will give people just another few seconds here if there are any additional questions or follow up questions?.

[Operator Instructions] It looks like we do have a follow-up from Rich Valera with Needham & Company..

Thank you.

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

In terms of the revenue split?.

Yes, please. Thank you..

So, it would be – it is under 20% of TACNAV..

Did you say under 20% of 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 the feeling last quarter I think we talked about in aggregate guidance and stabilization being sort of flattish for the year obviously with a much stronger second half, is that still how you think about that business?.

Yes, I think that is right and – but don’t forget last quarter and 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 is 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 of that – how much could that actually contribute in 2015?.

Very little in 2015. So this is – and it is not currently in our guidance for 2015. So it would be more of a 2016 event. So it is LRIP type thing this year and production beyond. So it is really important to contract strategically and the opportunity it represents is on the order of 3000 to 5000 vehicles something like that. So it is very material..

Could you give any sense of the kind of content per vehicle that you might be able to get or like what you have a TACNAV unit in each vehicle?.

Yes, 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 is significant..

Got you, helpful.

And just on MobileCast Martin, trying to get a sense of the potential revenue impact this year, do you think this year it is more about the enabling of broadband sales and kind of pulling in essentially or 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?.

Yes, 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 differentiable product. We don’t want to become commoditized and see the margins get eroded, and the ARPUs get eroded.

So we are really focusing on having something that is truly unique, and I think we are being very successful in that. So that is helping us as I mentioned in the prepared remarks is that about 75% of the new deals that we are working on, they want IP-MobileCast as part of the proposal, and it is part of the things that they are trialing.

So, that is better than we expected. Now we haven’t yet seen that kind of a take up rate, but the point is that we are winning deals that we never would have won if we didn’t have it. That is sort of direct feedback from the sales team..

And 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 250ish a quarter installs as you move into the back half of the year?.

I think so, and I think we will have to probably be clear 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 is it from 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..