Peter Rendall - Chief Financial Officer Martin Kits van Heyningen - Chief Executive Officer.

Rich Valera - Needham & Company Chris Quilty - Raymond James.

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 Web site 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 Web site.

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 Web site.

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

Thanks Peter, thank you all for joining us this morning. I'm pleased to report KVH's second quarter results, met or exceeded our guidance in all key areas of our 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 the every area of our mobile broadband business, including hardware, airtime and content services. Our guidance and stabilization business 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 services and satellite TV systems lead the maritime market and offer significant differentiating benefits that continue to win customers.

Our FOG sales and 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 of 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.

And 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 revenue of $38 million were up 28% [technical difficulty].

This growth was driven by our content services offering which were up over 100% compared to Q2 of 2014, TV and VSAT hardware which increased 14% and VSAT maritime which was up 11% year-over-year. Note that the content 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’re seeing encouraging signs of a rebounding yachting market, with 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 SeaRay brand for many years, reported sales of boats in the 41 to 62 foot range were up more than 20% in Q2.

We’re also seeing increased activity from the in-house marine electronics company for Viking, the world's premier manufacturer of large sport fishing boats an 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’re optimistic that the much larger 25 foot to 40 foot segment will soon follow, which would be great news for TracVision TV series product line.

Sales to our core and merchant shipping market remain solid as important new customers like Polsteam Shipping Company and long-term customers like V.Ships and [Faroone] continue to rollout many VSAT broadband hardware and services to their fleets.

The lead pipeline is strong and we’re 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 American which we're just not seeing this year.

While we’re 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 sales forces in our e-Learning, media, maritime VSAT businesses through a series of customer events in major shipping cities around the globe, combined with joint sales calls to leading customers.

Ideas 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 similar events planned for the fall.

I'm happy to report we’re seeing signs of the strategy is paying off, we’re 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 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 new sports, movies, TV and music entertainment to their cruise and the efficiency of KVH's content delivery service in removing the huge amount of traffic from the vessel's network.

They understand the impact of the individual crew members 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’re also doing well in another 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 many VSAT systems and immediately signed up for the service.

I feel we’re clearly seeing momentum and receiving positive referrals from our early adopters which will help our efforts to both differentiate many 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’re 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.

And moving on to our inertial business, which includes our fiber-optic gyros products and TACNAV military NAV systems, revenue was 6.9 million in the second quarter of 2015, that’s 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 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 gyros business, our commercial sales continue to grow.

The autonomous platform market which includes everything from drones to self driving cars and robot, has been very receptive to our new series of INUs and sensors. For the self driving car market, we’re 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 $2,000 or more today offer advantages in terms of accuracy and stability that simply can't be achieved by lower cost solutions.

To give you an idea of some of the other places KVH products are being used, some you may have read about the DARPA Robotics Challenge where semi-autonomous humanoid robots were given a series complex task to complete in a simulated emergency response scenario. The winner received $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 for a fetch but consider the previous DARPA grand challenge was the inspiration for the current self-driving car market.

And other interesting application is Sportvision's new augmented-reality software for the golf broadcasting industry, where KVH IMU's are used in hand-held broadcast cameras, they're able to digitally illuminate the path of a golf ball and slight tell 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 that technology fits into a back-pack 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. And moving on to our military land map business, we continue to see very good opportunities ahead for our TACNAV systems. We have over $24 million in backlog now, and we're 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 we have in hand that they're 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 delivering 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 that enables us to quickly ship once the order is received. As reported last quarter, our FOG based TACNAV system has also been designed into a new U.S.

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 U.S.

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 system.

Now in the past they've adapted, they've accepted the GPS is the only source for accurate PNT, but concerns about operating in areas where GPS is jammed have creating 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're very happy with our results for the second quarter and believe that we're in great position going forward. We've got a good leadership position in the maritime satellite markets but we're not resting on our laurels. We have some exciting new services that we'll be launched in 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, otherwise 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'd 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 for the upper end of our guidance range we previously gave and with 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 had 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, or ARPUs for our metered plans continue to run slightly lower than we have seen previously between $500 and $600 per month. And as Martin also explained the decline in ARPUs for the oil and gas offshore vessels sector continues to be the main contributor.

Our content and service revenues in the quarter, which includes 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've 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 year. Again, primarily due to lower ARPUs, the meter plans, the customer servicing and 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've 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 includes discrete tax items, acquisition related costs intangible amortization and stock-based compensation expense was $0.13 which was $0.01 better than the prior year and higher than 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 previous 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 cash 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 mentioned on earlier calls, we anticipate the 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 that revenues and cost are denominated in pound sterling and we've seen significant currency fluctuations over the past year.

Our guidance assumes that there are no significant fluctuations in exchange rates between the U.S. 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 $0.03 profit.

We also expect our 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 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 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 operation 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]. And we’ll go first to Rich Valera of Needham & Company..

Thank you. 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 had previously targeted that being up 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?.

We don’t have specific growth rate -- we haven't given specific guidance for the airtime revenue growth but I think that you're 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 of times -- the reason for that is primarily the variable component of meter plans and day rate business which is used in the oil and gas.

And that's really the area, the only area where we've seen any softness..

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

Yes, they're still in that range and historically although it varies a bit quarter-to-quarter between -- you know between what we're doing in the gulf, in South America and Brazil and to some extent, some of the offshore business in Singapore, it was approximately 20% to 22% of the total VSAT sort of hardware and airtime..

Great.

And last quarter you talked about having nicely dealed 11 order in backlog and thinking that might help sort of reaccelerate the -- I think both the airtime and the hardware sales as you moved into the back half of the year and any update on where that stands?.

Yes, I mean we had -- we did a good growth in the hardware year-over-year, so we're 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 that it had 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 we're moving in that direction, but now it looks like it's going the other way.

So that's -- we're just assuming that we won't see any improvement in that part of the business, but I think we're encouraged that we're still able to get net adds and growth rate -- that's ahead of where we were year ago despite what's going on in this one sector.

So, we're pretty well diversified, so I don't want to give the impression that we're totally focused on oil and gas -- right now probably 100% or 90% of our growth is in other sectors..

Just hoping if 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 together is something that you're still expecting later this year to next year?.

In terms of the net revenue, it's still small compared to the total content delivery business, so we're seeing a number of things happening. One is, somebody installed DVD based customers or switching which is fantastic because that's what we want to do.

We're seeing that in new V11 contract we talked a little about last time, it's a key part of the selection which is our most expensive product and the V11 carries our highest ARPUs in addition to that we're adding IP-MobileCast revenue on top of that.

So, we're seeing the early adaptors are our existing customers who are big fleet customers and they've been trialing it, now rolling it out across their fleets.

So, I think the performance of the product and the reaction and everything is -- it's just been terrific, it's doing exactly what we expected which is a help to differentiate our product and help us win the VSAT business which is our number one goal..

Just in terms of the guidance on stabilization business overall, it sounds like you had -- specifically turns out a little bit in your annual guide, what was that change due to?.

Partly, FOG business was really soft in Q1 and we're still optimistic we can make that back in the back of the year.

We saw pretty good recovery this quarter sequentially and year-over-year but still little below where we had expected to be at this point so we've trimmed the estimates for the FOG business and that's really the only change in the guidance -- in terms of our guidance..

When would you need to receive the very large TACNAV follow-on order in order to make the year, any sense of it, the timing of when you'd hope to receive that?.

I think, it really has to come - it could come as late as mid-winter Q4, we've bought the long lead parts. So there's really - we don’t have any concern that we're not going to get the order which is why we've gone ahead and purchased the material but there is always a risk of that, 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, which incidentally is exactly what happened a year ago..

[Operator Instructions] And we'll go next to Chris Quilty of Raymond James. My Quilty your line is open, please go ahead..

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

Just keep in mind that the change in the British pound has been about 11%, so that biz is actually up year-over-year in local currency. .

And can you give us some more details on where -- perhaps penetration rate amongst the 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’re seeing that also in the deal we did with Insmarsat where they want to have access to our content like our training product and our NEWSlink service. So it's just -- we've really changed the whole basis for competition.

I think now everybody is looking at content services, 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. .

And what’s driving the decision for content, is it regulatory? Is it crew 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. And outside of fuel, which is declining, the operating cost, the single largest item is crew cost.

So the cost of attracting and retaining a training crew is their number one expense now. .

And have you noticed any meaningful split amongst the hardware options for customers, the V3, V11, V7?.

Not really. From quarter-to-quarter we see sometime big swings -- one quarter will have a huge V11 and then V3 in the next quarter, but in general we’re seeing a pretty constant mix, roughly half of it is V7 and the other part is split between the V3 and V11. .

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

Got you. And 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're looking at?.

We certainly, we’re 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 IP-MobileCast costs.

So there are incremental costs in the first half of the year that certainly impacted a margin, but nothing else is expected to be significant for the remainder of the year beyond those..

And 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 are in that process?.

We've implemented a new billing system for our Videotel business, that is up in 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 are talking about is sort of pay-per-view or onboard, where the crew pays, and when that's done -- a lot of these crew don't actually have credit card.

So the way we handle that is through prepaid cards that we sell to the vessel master. So we sell the cards and if it doesn't involve credit cards by the crew on board. That’s part of our crew link product and is part of crew calling system that enables them to access the internet and make phone calls, but it doesn't allow them to purchase content. .

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

No, we've definitely seen deactivations. .

Ok. .

Lot of these vessels have been tide-up. So we've seen -- whether a suspension or deactivation, the net result is zero revenue from that, that's all for the month. That's the only part…. 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 breakthrough that sort of 1000 vessels a year you've been stuck out for the past several years?.

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

And that concludes are question and answer session. At this time I would turn the conference back to management for any additional or closing remarks..

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

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