Martin Kits van Heyningen - CEO Peter Rendall - CFO.

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

Good day everyone and welcome to the KVH Industries Q4 2015 Earnings Conference Call. Today's conference is being recorded. And at this time, it is my pleasure to turn the call over to Peter Rendall, Chief Financial Officer. Please go ahead, sir..

Thank you for joining us today to discuss KVH Industries fourth quarter results and 2016 guidance. With me on this call is, Martin Kits van Heyningen, the company's Chief Executive Officer. We issued our fourth quarter earnings and 2016 guidance press release this morning. It 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. Or 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 previous 10-Q filed on November 9. The company's SEC filings are directly available from us, from the SEC or from the Investor Information section of our website.

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

Martin?.

Thank you, Peter. Good morning, everyone and thank you for joining us today. 2015 was another great year for KVH. We finished the year with a strong fourth quarter generating record revenues and profits and coming in at the high end of our guidance.

Strategically, we reinforced KVH's position as a leader in each of our major markets by winning important new contracts, while also introducing new products and services that will help support continued growth in 2016 and beyond.

From a financial perspective, we had a record setting revenues of $54.0 million in the fourth quarter, that's up 7% year-over-year.

Non-GAAP earnings of $0.43 per share were up almost 60% from $0.29 per share from the same period of 2014, with quite finish [ph] contributed to our record setting year with revenues of $184.6 million, up 7% from $172 million in 2014. And non-GAAP earnings of $0.73 per share were up 18% from $0.62 per share in 2014.

I'll let Peter cover the numbers in more details. But first, let's take a look at our key business areas, starting off with mobile broadband. In 2015, KVH increased our revenues and strengthened our competitive position in our mobile broadband markets.

For the full year we recorded revenues of approximately $148 million, and that's up almost 14% from a $130 million in 2014. Our mobile broadband business growth came during a very challenging year at our key maritime markets.

Our oil and gas customers face the lowest crude prices in over a decade, and commercial shipping customers are battling over capacity and the global economic slump which has reduced demand for their services. This has clearly impacted our growth rate, particularly in Airtime.

Nevertheless, KVH's sales increased, we outsold our competitors, and we improved our market share. KVH has now fielded over 600,000 mini-VSAT Broadband terminals and have by far the largest installed base of any maritime VSAT provider.

KVH's lead in the mobile satellite markets also includes their TracVision satellite TV antennas, and overall, we've now produced more than 200,000 stabilized mobile antennas used on land, sea, and in the air.

According to latest market research from the firm COMSYS, KVH's market share in the maritime VSAT market exceeds that of our next two largest competitors combined. Our network, which is the only true global VSAT service in the maritime market delivered 630 terabytes of data and more than 25 million minutes of voice calls in 2015.

We've rolled out our new mini-VSAT 2.0 service which is being very well received by both new and existing customers. This new service promotes use of spaced airtime plans with service delivery at multi-megabit per second data rates while also offering our customers industry-leading web-based tools to help them manage their connectivity.

In a market where most of our competitors reserve fast data speeds and high quality service, we're a small percentage of their highest paying customers. KVH's lower priced usage plans, lower priced usage based plans are proving to be disruptive at a much better value and we're winning sales as a result.

Almost 70% of our new subscribers in the past quarter selected the new usage based plans and they now account for almost half of our overall VSAT business.

These new plans benefit our customers with higher quality service, while also helping improve our airtime margins by enabling us to serve a larger customer base with our existing satellite capacity. But this can only work with proper tools and capabilities.

Two key things make this possible; one, we have a new portal where owners and managers can log-on and set usage limits by individual person on each shift, that way they can guarantee there won't be any bill shock at the end of the month.

And second, we've moved all the heavy video files off their network by sending those out for free using IP-MobileCast. So the combination of excellent usage controls with text message alerts, and separate delivery of video entertainment content makes our new mini-VSAT 2.0 plans feasible.

Last year, we used our subscription-based IP-MobileCast to deliver over 6 terabytes of news, sports, movies, music and entertainment to each vessel, all but no transmission cost to the customer. KVH pioneered this new type of service and now enjoys first mover advantage and a commanding lead in this new market.

IP-MobileCast has proven to be a significant differentiating advantage for our mini-VSAT service and we are seeing a clear trend of accelerating sales.

For example; we are currently rolling out IP-MobileCast news and entertainment services to two large tanker fleets including one that's adding a mini-VSAT antenna in addition to their existing competing VSAT service just so they can provide accruals with IP-MobileCast news and entertainment.

Overall, our e-Learning and content businesses were up significantly in 2015 over the prior year. We're seeing the benefits of being a true global company as we leverage our diverse resources around the world to run coordinated sales campaigns, creating new products and services and support customers.

In our media business, our news, sports, music and movies are delivered to about 8,000 vessels. Our news team has produced over 100 different versions of our NEWSlink digital papers in 20 different languages with a combined monthly circulation of over 1.4 million newspapers.

Our Videotel training service is now used in more than 12,000 vessels and we've provided over 100 million hours of training to hundreds of thousands of seafarers making us the clear leader in the maritime training market.

We see a big demand for seafarer training driven by younger, less experienced mariners, high turnover, more complicated equipment on ships and significant new international regulations that mandate specific types of training on an ongoing basis.

We've been leveraging our leadership position in the maritime e-Learning market to cooperate with other industry leaders in new partnerships to reach expanded customer base. For example; we're developing a new computer animated engineering training series that will be endorsed by IMarEST, the industry-leading society for maritime engineers.

We're also leveraging our onboard content delivery and training platform in cooperation with industry leader, Safebridge, to bring their specialized electronic chart systems training to Videotel customers.

Looking forward to 2016, our mobile broadband business looks very strong with a solid backlog from existing customers and several large fleet deals of hundreds of vessels in their opportunity pipeline.

Large customers like Polsteam and Seaspan continue their fleet rollouts, and large customers we've won in the past like Veyron and Navigator Gas are renewing their contracts and agreeing to roll out additional KVH content services to their fleets. We see vessels that are still on legacy LBAN [ph] systems as a significant opportunity for KVH.

To get them to switch to our mini-VSAT, the sales strategy is to use the differentiating benefits of mini-VSAT service including true global coverage, higher value airtime plans, smaller easier to install hardware, better network management tools, and IP-MobileCast content delivery to win a growing number of subscribers.

Given the large number of ships addressed by the various parts of our maritime group, our sales team from Mobile Broadband, KVH Media Group, and Videotel, have access to virtually every significant commercial customer in the maritime industry.

We're linking them together with new cloud-based sales tools and giving them attractive bundles of services to help them win new customers and cross-sell our services to their customers. Regarding [ph] they have a great portfolio of products and services presented by such an extensive and experienced group of professionals.

Moving on to our guidance since stabilization business, our fourth quarter revenues were $18 million, also setting a new record for the company, that's up almost 17% year-over-year driven by strong shipments of our TACNAV products which were up over a 33% quarter-over-quarter.

As you might recall, our guidance since stabilization revenues in 2014 were also heavily weighted towards the end of the year when we set our previous quarterly sales record. 2016 is shaping up with a similar pattern where for the third year in a row most of the revenue for TACNAV will come in the second half of the year.

In the fourth quarter we received initial orders from BAE for the U.S. Army AMPV Program which is an important contract for KVH, and it's our first major U.S. contract for TACNAV in several years. The AMPV vehicle provides the U.S. Army with a highly survivable fleet of vehicles that addresses the critical need to replace the Vietnam-era M113s.

the AMPV capitalizes on the proved and Bradley design and it meets the army's force protection at all terrain mobility requirements. The army's new fleet will provide a substantial upgrade over the current personal carriers increasing their survivability, force protection, and mobility.

There is also substantial growth potential with the program projected to deliver up to 2,900 vehicles over the life for the program. There is a new focus in the U.S. Military on assured position, navigation, and timing, also known as PNT.

In the past military has assumed GPS would provide this capability but new understanding of the vulnerabilities of both GPS signals and even the GPS satellites themselves has created new interest in complimenting GPS with a navigation system backup which is exactly what KVH provides with a new TACNAV 3D.

Interest in our new TACNAV products is also international, and as I mentioned in the last call, we're pursuing several large orders with elite countries in the Middle East. Our TACNAV 3D system has proven to be the best performing military navigation product we've ever produced.

Our sales pipeline, which we define to include only funded programs that have already selected TACNAV as their navigation solution has never been better. Our TACNAV backlog at the end of the year was around $12 million.

To-date we've produced over 19,000 navigation systems for military vehicles and we see an uptake in this business that should last for several years as we win some of these big multi-year multi-million dollar contracts.

The difficult business to forecast due to uncertainties and the timing of the contracts, and the magnitude of the order but we're very excited about these opportunities. We're also making good progress in our Fiber Optic Gyro business where we've now supplied over 80,000 gyros.

Our new IMUs were selling well, and we're seeing both, an increasing number of new customers buying units for trials and existing customers increasing their orders for production quantities as their products go into production. The result of this progress should start to show up in our numbers later in the year.

To speed up the adoption cycle for our IMUs, we've developed a new developer's kit that provides sophisticated tools that help design engineers evaluate and configure our IMUs for their application which we hope will help them understand the benefits of our new product and more easily incorporate them into their products.

We're also developing new low-cost FOGs that can be mass produced for use in self-driving cars. In the fourth quarter we also introduced a new high-end system, the GEO-FOG 3D, the new hybrid inertial navigation system, that couples our IMU with a survey grade GPS.

It will be a great compliment to our portfolio addressing commercial customers with mission critical need for extremely accurate navigation and pointing data. So in summary, 2015 was a very successful year for KVH, and we're feeling very good about our future. Our sales pipeline has never looked better.

We've got a great portfolio of innovative products and services across the Board in our mobile broadband and guidance and stabilization businesses, each of which has significant advantages over competing solutions.

We're also positioned to take advantage of big trends that should help drive demand for our products and services directly or the case of our Fiber Optic Gyros, products that use our products.

And finally, we've got a great team of experienced and dedicated people around the world who help win new customers, support them and help KVH create even better products and services in the future. So we believe we're in an excellent position to continue our successful growth and deliver long-term shareholder value.

Now I'd like to turn the call back over to Peter who will review the numbers in more detail.

Peter?.

Thank you, Martin. Now I'd like to discuss in more detail the financial results of the company for the fourth quarter. As Martin mentioned earlier, our fourth quarter revenues of $54 million which was within the guidance range we previously gave and was 7% higher than the fourth quarter of 2014.

The primary drivers for this growth were the expected higher TACNAV and VSAT airtime revenues. Our fourth quarter service revenues of $26.8 million increased by 6% year-over-year, mainly due to the growth in VSAT airtime and our e-learning revenues.

Looking at our airtime subscription revenues more closely, in the fourth quarter airtime revenues were $15.7 million, up 4% from the prior year period.

Our VSAT ARPUs during the quarter remained pretty constant with fixed rate plans recording between $1,800 and $1,900 per month while the metered plans continue to run slightly lower than what we've historically seen between $400 and $500 per month.

Our content and services revenues in the quarter, which includes subscription revenues associated with the entertainment and e-Learning content, as well as any professional service fees was $11 million, which was 13% higher than a year ago.

Almost all of this increase was attributed to record revenues from our Videotel e-Learning business as we continue to add new subscribers. We were also pleased with the level of subscription-based service revenues in the quarter, which amounted to 47% of total revenues, which were similar to the prior year fourth quarter.

Moving on to our product revenues, our total product revenues increased by 8% to $27.2 million in the fourth quarter or $2 million from the prior year quarter mainly due to the expected increase in TACNAV revenues.

While our VSAT hardware revenues were flat year-over-year, our total mobile broadband hardware revenues declined 6% to $10.1 million in the fourth quarter, most of the decrease relating to marine and land TV products and accessories.

Our guidance and stabilization hardware revenues of $17.3 million were $2.7 million higher than the fourth quarter of 2014 or 18%. As we've discussed, this increase was primarily due to the expected higher TACNAV revenues which increased 33% year-over-year.

Turning to our gross profit margins in the fourth quarter, our consolidated gross margins of 48% were in line with our expectations and higher than the 45% gross margin we reported in the fourth quarter of 2014.

During the fourth quarter we reported a record 50% gross margin on our services business, which compares to 48% reported in the prior year period.

This increase was driven by strong margins from our content businesses and higher VSAT airtime gross profit margins which increased to 36% in the fourth quarter, compared to 33% reported in the prior year quarter. For product hardware, we recorded a gross profit margin of 47% compared to 42% a year earlier.

This increase was primarily by the higher TACNAV revenues which carry a higher margin than our mobile broadband product revenues. As it relates to our fourth quarter operating expenses, we recorded $20.8 million in the fourth quarter which was up 3% year-over-year.

The majority of this increase related to higher third-party commission charges on our higher TACNAV revenues.

Our non-GAAP EPS for the fourth quarter which excludes discrete tax items, acquisition-related costs, intangible amortization, any onetime legal settlement costs and stock-based compensation expense was $0.43 which was at the high end of our previous guidance. Our adjusted EBITDA for the fourth quarter of $9.7 million was 30% higher than a year ago.

For a complete reconciliation of GAAP and non-GAAP measures, please refer to our earnings press release that was published earlier this morning.

Backlog for our total guidance and stabilization products and services at the end of December was approximately $16 million, of this amount approximately $13 million is scheduled to be delivered during 2016 which includes the $12 million of TACNAV. With that, I'll now turn to our outlook for 2016.

As Martin also mentioned similar to what we experienced in 2015, we expect TACNAV shipments to be significantly skewed towards the second half of the year. In addition, a portion of our revenues and costs are denominated in Pound/Sterling, and we have seen some significant currency fluctuations over the past year.

Our guidance assumes 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 full year revenue guidance for 2016 is in the range of $190 million to $210 million and we expect our GAAP EPS for 2016 to be between $0.12 to $0.42.

We also expect our non-GAAP EPS to be in the range of $0.66 to $0.96, and our non-GAAP adjusted EBITDA to be in the range of $21 million to $28 million. For the first quarter of 2016, our revenue guidance is in the range of $41 million to $44 million and we expect to have GAAP loss per share to be between $0.13 to $0.18.

We also expect our non-GAAP earnings per share to be in the range of a loss of $0.04 to a profit of $0.01. And our non-GAAP adjusted EBITDA to be in a range between zero and $1 million.

So in wrapping up my thoughts, we were very pleased with the solid operating results we recorded in the fourth quarter and we are looking forward to a strong year in 2016. And with that, I'd like to turn things back to the operator for the Q&A portion of this morning's call..

Thank you. [Operator Instructions] We'll take our first question from Rich Valera with Needham & Company..

Thank you. I just wanted to get a little more granularity on your service.

Can you give us what the mini-VSAT airtime revenue growth was for both the fourth quarter and for the full year?.

For the fourth quarter Rich it was 5% and for the year it was 8%..

Okay. So I guess just wanted to get a sense of how you see that business trending in 2016, sort of what's baked in to your 2016 guidance. Clearly, that business saw a decelerating growth I think throughout the year, lot of pressure from oil and gas I guess and maybe some from shipping.

But how should we think about hat business as we look into 2016 and kind of what's baked into your guidance there?.

Yes, I think - I'll let Peter answer that specifically but just a little background color, and so - we're being recently conservative and for the reasons that you just outlined, it's just the general market.

I mean the Baltic dry exited [ph] new low here in February and around below 300 and down from 11,000 in 2008 so it’s still, they haven’t seen the increase in global trade which really drives that economic activity in the maritime bay so even though our unit sales are up this quarter and our market share is increasing, we are being conservative because until the market overall starts to recover a bit, we don’t see that return to really rapid growth.

So that's where we are just in terms of the macro-economic environment but competitively we feel really good about where we are and we have new products and services in the pipeline that we think are going to make a big difference. But I will let Peter talk about the guidance..

So Rich, in terms of the VSAT Airtime guidance for 2016, so our mid-point assumes single digit but high single digit..

Okay.

And what is that, it seems like in terms of the Delta from your original plan 2015, so there were two factors, one was being higher deactivations of insurance and the other was presumably lower ads as well, can you talk about how you think of those two factors as we head into 2016? Do you think you have reached - seen the worst of the churn, I mean obviously you've had I think quite a few of your oil and gas related, certainly on the exploration side already kind of churned off.

And it sounds like you saw some rebound in the actual new ads in 4Q relative to 3Q but - if you could just talk about how you think about those two factors as we head into 2016? That would be helpful..

Right. So we call it churn sometimes but it's not technically churned in the way most people call it because these are, we're not losing these customers to competitors. So, for example if we have a fleet and they lay up half their vessels, they'll deactivate those vessels that are laid up but they're still our customers for the rest of their fleet.

And as those vessels get put back in the service or if they get put back in the service they're still, they're technically we call that churn because they deactivated. But I just want to point out that we're not losing those in the traditional meaning of the word churn.

So I think you're right, I think that we have seen the worst of it in terms of vessel layup. I think that happened pretty quickly throughout 2015 to the point where the vessels that are left are being used. We can tell that from the usage. So we don't see that being significant in 2016, so that's why we're forecasting higher growth year-over-year.

But that's obviously still a concern, but that's what we're thinking right now..

Got it. And then with respect to the guidance stabilization now, last quarter you had talked about, I think it was a $5.8 million TACNAV order that you expected to see sort of deferred revenue recognition on that into the first quarter. And based on your first quarter guide, it doesn't really seem like you got $6 million of TACNAV in there.

I mean I may be wrong on that.

I just wanted to understand what's the disposition of that particular order?.

No, you're absolutely right. That's not in the Q1 guidance but it is in the full year guidance. So I don't want to spend too much time talking about Q1 already because it's not over yet. But it is in our guidance for the year, and just to be clear that wasn't deferred revenue, that was an order that didn't materialize.

So it wasn't like we have the order and couldn't ship it or something. So, but that is extremely high probability order that we have in our current guidance for the year, probably shipping in Q2 or Q3..

Okay. And if you can just give a sense of what you're expecting in that GNS business for the year versus '15, if you can give some sense for TACNAV and FOG, and I think total, I guess, revenue there was I think around $36.5 million in '15.

Can you give a sense of where we expect that to be in '16?.

So in terms of just our guidance, the low end of the guidance assumes a pretty flat year, maybe slightly below and then obviously the high end is assuming a higher TACNAV amount with FOG remaining flat..

So FOG flat kind of, in any case, TACNAV flattish at the low end of the revenue and then something higher than obviously the mid-point?.

Yes..

Okay. Okay, I'll get back in the queue and let some other ask questions. Thanks guys..

Thanks, Rich..

Our next question comes from Jim with from Ardent Capital [ph]..

Thanks, I think that's me.

Can you talk about the dollar content per vehicle on the AMPV?.

I don't want to talk specifically about that particular contract but in general, our TACNAV systems are in the $10,000 to $20,000 range. So it's a pretty significant - so if the whole program were to go forward as envisioned, it would be - our contract would be north of $30 million..

All right, great. And I just want to make sure I understand the high and low end of the guidance correctly, but potentially you're saying that the delta is going to be TACNAV, you have a good TACNAV year, you can hit the high end, you have an okay year, you'll hit the low end.

Is that a fair way to summarize it?.

No, it's a simplification but you're not far wrong.

I mean that - there tends to be - that would be the biggest swing factor but obviously, we've got airtime, we've got content, we've got fiber optics gyros, we have TracVision, so there are a lot of parts to the business but the biggest delta in the guidance range is in fact the TACNAV, you're right..

Understand, okay.

And as far as gross margin go, do you think you're going to have some gross margin pressure on the services side in order to make - in order to keep your airtime sales going?.

I don’t think so. I think right now our margins are increasing so we had a nice increase in the gross margin in Q4. It was up three point's year-over-year to 36%. So we're seeing - I think with our new rate plans, I think we are managing the margin situation well. So we're not concerned about gross margin.

I think the pressure might come more from usage, in other words, if somebody were trying to save money with the new plans they would use less. So the margins would be high but maybe the ARPU would come down. But so far, gross margins look - we're optimistic about that..

Great.

And then lastly Peter, can you talk about operating expenses in 2016? How you think those would fall out either as a percentage of sales or as growth rate over 2015?.

The total OpEx in 2015 was 43% of sales and in 2016 it became more like 44%..

And that increase is a function of what? Why is that going up?.

Just inflationary increases, nothing specific. No big underlying changes to the cost infrastructure..

Okay, great. That will do for me, thanks..

Our next question comes from Chris Quilty from Raymond James..

Thanks, gentlemen. A question for you Martin, can you give us a sense of net ads that you are seeing them. And I think for the past couple of years, you've been hitting about a 1000 vessels a year and you're looking for an upturn.

Are you seeing the headwinds starting to diminish at all that would allow you to see a little bit of an uptick or is it continuation of the same environment you've seen for the past year?.

Well, our guidance assumes that nothing gets better. So that's the short answer. In terms of the global markets which obviously we don't control, I am an optimist, so I'm always expecting things to get better. It's just - I think that as an industry this has lasted longer than people would have thought.

I mean it had to do things like, last year China brought - imported 30% less coal than they did in 2014. That has a big impact on global shipping obviously, so there is some other factors involved here. But for our current guidance we're assuming that status quo in the economy and we continue to grow our units incrementally year-over-year.

We did have incremental unit growth in Q4 over Q3. So we still think that we're pretty much know that we're adding more than anybody else. So after the vessels being laid up, I think if it wasn't for that trade we would have a great shot but its tough environment but we are growing..

Got you.

And how is that environment impacting the competitive dynamics? Do you have any competitors out there doing stupid things or struggling? Playing to your advantage or disadvantage?.

I think there are a couple - some companies that were for sale and they look like they were trying to be aggressive at the ads and scribers right before that happened, post, but we don't see much of that anymore. So I think that the people that we're selling to now are really kind of value what it is that we have, and we're not, if not a price war.

So and I said you can see that in the gross margins now. Our gross margins are increasing which is a good thing. Also looking forward, there is a lot more bandwidth coming in the market so we see some opportunities to reduce our cost over the course of the year. On the supply side we were able to buy capacity at better prices..

And is there anything that you need to do specifically to position yourself for bringing online some of this high-throughput satellite capacity?.

Well, our systems have been architected in the Ku-band basically. So our antennas are already compatible with the high-throughput satellites that are Ku-band, so we've obviously know this is coming for a while.

So that's one area where we have an opportunity to both increase speed and reduce cost and still be compatible with the above decks equipment that were already deployed. So I think there is a lot exciting new technology coming down the pike and we've got some interesting product launches coming up for this year..

That's right.

And can you talk about how the industry has received the new pricing model because I can't think of anybody else in the industry that's pricing capacity in broadband and exactly the way you are?.

Yes, it's definitely - we're alone here. But I think that it's a bit off a risk on our part but the good news is people seem to really like it. Initially people tell you they hate the idea, they'll never ever buy it and then you talk them through the benefits. And then once they've tried it, the experience is so much better.

You're getting 10 times the speed and fixed cost, and you still know what your bill is going to be every month because of the way we set it up. So it's somewhat radical but on the other hand it's really the way the industry needs to go, and we like being first..

Got you.

And one final question, I think you mentioned that you're actually producing or targeting to produce a lower cost FOG version for the automotive market?.

Yes, we're working on, we think that this could be a big market someday and we just want to make sure that we've been in designed into many of the vehicles that are out there today. But obviously these are small quantities and prices isn't a big factor. They just want precision, they just want it perfect.

So they've been buying our products for those applications now. We just want to make sure that we don't get left behind when this becomes a major market. We're really targeting to get something around a couple of hundred dollars through automotive quantities..

And is that something you're pending to develop or do you have customers willing to subsidize that?.

We're paying for the development, because we don't want to be tied in to the single customer..

Great. Thank you very much..

All right, thanks Chris..

And there are no further questions. I'd like to turn the conference back over to our presenters for any additional or closing remarks..

Okay. Thanks for listening and if anyone has any follow up questions, please feel free to call Peter or myself, or e-mail us. Thank you..

And that concludes today's presentation. Thank you for your participation..