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

Rich Valera – Needham & Company Jim McIlree – Chardan Capital.

Good day everyone and welcome to the KVH Industries' Q1 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I’d like to turn the conference over to Peter Rendall. Please go ahead, sir..

Thank you very much and good morning everybody. Thank you for joining us today to discuss KVH Industries' first quarter results and an update to our 2016 guidance. With me on this call is Martin Kits van Heyningen, the company's Chief Executive Officer.

We issued our first quarter earnings and 2016 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, go 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’ll 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 which was filed on March 14. The company's SEC filings are directly available from us, the SEC or from our Investor Information section on our website.

With that, I would like to now turn the call over to Martin.

Martin?.

Thank you Peter, and thank you all for joining us today. KVH has got after reasonable start in 2016 and I am happy to report that we are starting to see the benefits of several of our important strategic initiative, in both our mobile broadband and our guidance and stabilization business which I’ll cover in a moment.

From a financial perspective, our revenues were $40.4 million in the first quarter, down 2% from the $41.3 million in Q1 of 2015. This decline was a result of continuing economic challenges impacting our customers in the commercial shipping industry, the depressed oil and gas market, and the unfavorable exchange rate created by the strong U.S. dollar.

Our non-GAAP loss in Q1 was at the low end of our guidance at $0.04 per share down for a profit of $0.06 per share a year earlier.

Now looking more deeply in our Q1 results, chose that our new business initiatives in the mobile broadband market are succeeding, helping to partially overcome the economic headwinds are also providing good foundation for our future success.

We feel our leadership in the Maritime VSAT market is secure, we’re also seeing promising signs that our guidance and stabilization business will meet our expectations of wrapping sales throughout the rest of the year, so we’re still confident that we will be able to meet our projections.

Peter will cover the numbers in more detail shortly, so let me provide operating highlights for each of our key business areas and explain why we feel our strategic initiatives are gaining traction. Now beginning with our mobile broadband business, our Q1 revenues of $35.3 million were down 3% from Q1 of 2015.

This decline was primarily due to loss of larger time customers in the oil and gas and shipping markets were selling vessels or taking them out of service due to economic challenges they are facing. As a result, we saw average ARPUs declined in the first quarter.

At the end of last year, we launched a new pricing plan and business model will be called mini-VSAT Broadband 2.0. We are very pleased with the customer feedback we’ve received people are really like being able to get the highest network speeds even for entry-level packages.

The good news is that we’re seeing ARPUs that are significantly higher than our average ARPUs. With these meter plans where customers pay for overages, we’re also seeing excellent gross margins.

So far we have close to 400 customers on these new types of plans, and as this becomes the majority of our customers – the majority of our airtime customers, eventually, we expect to see continued improvement in our financial performance. At the end of last quarter, 49% of our airtime plans were built on some type of usage basis.

Now with usage based billing, we’re able to offer all levels of customers the fastest data we can deliver creating a significant differentiating advantage over our LBAN services in our maritime VSAT competitors who limit their faster speeds to small number of their highest revenue customers.

Overall, our airtime business was down 3% from Q1 of 2015 to $15.2 million for the quarter that the largest part of this decline was due to a loss of Inmarsat airtime.

In January, Inmarsat raised prices on their entry-level services for the third time in four years, which is upset many customers in the commercial maritime market, we’re still struggling with these economic conditions, as well as causing some of our leisure customers to cancel their Inmarsat service.

With a series of price increases is resulting in a high churn, and that 38% decrease in our Inmarsat airtime revenues for Q1 versus the previous year, of course this creates a great sales opportunity to convert FleetBroadband customers to our new mini-VSAT plans that are specifically designed to meet the needs of these types of customer groups.

Our TracPhone V3 is very well positioned for those customers, and in fact a larger percentage of our sales in Q1 came from V3 compared to previous quarters and we expect those to be activated in the coming months. So overall, unit sales for your mini-VSAT hardware are comparable to previous quarters.

Our subscriber count continues to grow, even though some customer groups are really struggling were able to maintain our churn rates at acceptable levels. We just announced that we now fielded over 6000 mini-VSAT Broadband terminals, which is more than double that of any of our maritime VSAT competitors.

So, despite some of the worst economic conditions in memory in the commercial maritime markets were continuing to gain market share. In our training and content and services business, revenues were down slightly to $9.8 million. This decline was almost exclusively caused by currency exchange rate as our training services are built in British pound.

We have a lot of exciting new initiatives underway in e-Learning and content delivery services we believe we’ll be creating exciting future growth opportunity. Sales of our leisure satellite TV products are doing well, up 5% in Q1 versus the prior year.

The feedback we received for the winter boat shows is that larger yachts was selling well and important customers like Viking, we use KVH TracVision and TracPhone products exclusively on their new vessels and doing very well.

KVH dominates the global yachting market for satellite products and we’re encouraged to see signs of strength at the consumer level to help offset the decline in commercial markets.

Moving on to our guidance and stabilization business, revenues were $5.1 million in the first quarter, which although flat with last year was in line with our expectations. Our backlog for the guidance and stab business is $17 million, $5.1 million of which should ship in Q2.

KVH's FOG revenues were $3.7 million, that's up 7% year-over-year and we also saw encouraging growth in our IMU sales, inertial measurement units those were up 50% over the same quarter last year. We also had good sales with our new GEO-FOG 3D inertial navigation system which we just launched.

In the past, spikes in our FOG system sales have been created by large orders from a small number of customers, which is now what we’re seeing with our current IMU sales and encouraging number of new customers are testing and verifying the performance of our IMUs in their new did product design, which we hope will result in steady production orders over the next 6 to 12 months.

We’re seeing lots of interest from manufacturers and integrators of serving equipment, mobile mapping systems and autonomous platforms. Many of these new customers will only order 10 to 20 IMUs per quarter with the broader base should provide a more stable and predictable growth for this business.

During the first quarter, KVH announced a new initiative to produce a low-cost fiber-optic gyro system for the emerging self driving car market. This market could grow quickly and we got very good penetration in most of the prototypes being tested.

We want to make sure that we’re able to meet our customers' price and performance requirements if one of these efforts really takes off and we need to meet automotive quality, requirements in large scale production.

We’ve been investing in ways to streamline our product design by reducing the number of components, as well as exploring ways to enhance our fiber production, Gyro assembly techniques and investing in new machinery. Although it's still early, we do expect sales in the $3 million to $4 million range in this market over the next 12 months or so.

We believe there are a lot of opportunities for companies developed – for developing self driving technologies and applications beyond just the automotive market; this might include self driving trucks, construction equipment, tractors and military vehicles.

Like any other exciting new technology, the first applications may not be the obvious ones that we’re working hard to stay close to our customers and let them know we’re ready to meet their needs for navigation and guidance systems. Our TACNAV products continue to be well received and during the quarter we now think KVH was part of the new U.S.

Army AMPV vehicle, the armored multipurpose vehicle. This is the replacement vehicle for the M113 armored personnel carrier, for the projected fleet of just under 3000 vehicles be built over the life of program.

We feel our current TACNAV projections for the year are still achievable and there are other potentially large orders out there that are too uncertain to put into our forecast which can be a real windfall for our guidance and stabilization business.

So in summary, the first quarter finished at the low-end of our expectations due to the economic challenges faced by important customer segments. In the maritime market, we feel our competitive position is never been better and we’re ready to capture even larger market share as the shipping and oil and gas markets rebound.

Our maritime market leadership position in enabling KVH asking very interesting discussions with satellite providers who are upgrading their services or interested in launching new services.

So that we’re confident they we’ll have an exciting upgrade path for our customers that will enable us to remain at the forefront for the maritime market three years to come.

Our trading and content businesses continue to do well, contributing high margin sales and providing KVH with broad access to maritime companies worldwide where customers are one of our many services. We’re also seeing exciting new future applications for these businesses, which we hope to bring the market toward the end of the year.

Our new fiber-optic gyro products are gaining traction with a wider group of customers and we feel we’re in a better position to grow our FOG sales at a predictable rate.

And as I mentioned, we’re preparing ourselves for success by developing new mass producible designs that will allow KVH to meet the potential demand if one of the emerging markets were serving like self driving cars really takes off.

The prospect for TACNAV in military land vehicles continues to look good and we’re confident that the guidance we have provided for this business will ramp significantly in the second half of the year. And now I’d like to turn the call back over to Peter for the numbers.

Peter?.

Thank you, Martin. I’d now like to discuss in more detail the financial results of the company first quarter. As Martin mentioned earlier, our first quarter revenues were $40.4 million which was 2% lower than the $41.3 million we reported in the first quarter of 2015, approximately $500,000 of this decline can be attributed to the strength of the U.S.

dollar compared to the pound sterling year-over-year.

Turning to our product revenues, our total product revenues of $15.4 million were flat year-over-year and breaking that down further our mobile broadband program product revenues of $10.5 million declined 1% year-over-year, while our guidance and stabilization revenues of $4.9 million were up 1% year-over-year.

Regarding our service revenues, we reported first quarter service revenues of $25 million, a decrease of approximately $900,000 or 4% year-over-year, of which $500,000 was attributed to the relative strength of the dollar which I just mentioned.

Looking at total airtime subscription revenues more closely, in the first quarter, airtime revenues were $15.2 million, down 3% year-over-year, most of which that this decline was attributed as Martin discussed to the 38% year-over-year decline in Inmarsat, FleetBroadband revenues due to higher subscriber termination.

Regarding our VSAT airtime for the quarter, the net increase in subscribers’ year-over-year was offset by a decline in our average ARPUs.

As Martin already discussed this decline reflects the continued headwinds we've seen in the commercial maritime market, particularly the offshore oil and gas sector where ship operators are looking to reduce their monthly operational spent.

Our content and services revenue in the quarter which includes subscription revenues associated with the entertainment and e-Learning content, as well as any professional service fees was $9.8 million which was 4% lower than a year ago, of which almost all of this decrease was attributed to the currency weaknesses I mentioned earlier.

We were pleased with the level of subscription based service revenues in the quarter, which amounted to 60% of total revenues. Turning to our gross profit margins for the first quarter, our consolidated gross profit margin of 41.4% was 111 basis points lower than the 42.5% gross margin we reported in the first quarter of 2015.

During the first quarter we reported a 48% gross margin for our services business compared to the 49% we reported in the prior year period. VSAT airtime margins remain strong at 36%, up from 35% a year ago. For product hardware, we recorded a gross profit margin of 31% compared to 32% a year ago.

This slight decrease was primarily driven by higher FOG margins that offset by lower VSAT hardware margin due to product mix.

Although revenue was a little below our expectations which in turn resulted in lower than expected gross profit, our attention to controlling our operating expenses throughout the quarter meant that our GAAP and non-GAAP net loss and our adjusted EBITDA were within our previous guidance.

During the first quarter, we recorded $20.1 million in operating expenses, which was up 3% year-over-year that was favorable from what we had originally forecast. The majority of the year-over-year increase relates to increases in compensation related expenses.

Our GAAP loss per share for the first quarter was $0.18 compared to a loss of $0.09 a year early.

Our non-GAAP loss per share for the first quarter which excludes discrete tax items, acquisition-related compensation costs, intangible amortization and stock-based compensation expense was $0.04 compared to a non-GAAP diluted earnings per share of $0.06 a year ago.

Our adjusted EBITDA for the first quarter was at the high end of our previous guidance of the $1 million compared to $2.8 million a year ago. For complete reconciliation between GAAP and non-GAAP measures, please refer to our earnings press release that was published early this morning.

Backlog for our guidance and stabilization products is already mentioned, at the end of March was approximate $17 million, now this amount $15.6 million is scheduled to be delivered during 2016. With that, I’ll now turn to our outlook for 2016.

Similar to what we experienced in 2015, we still expect TACNAV systems to be skewed significantly towards the second half of 2016.

In addition a portion of our revenues and the costs are denominated in pound sterling, and although we've seen significant currency fluctuations over the past year, guidance assumes there was no significant fluctuations in exchange rates for the remainder of this year.

With this context, we are reiterating our full year revenue guidance for 2016, three 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 and we also expect our non-GAAP EPS to be in the range of $.66 to $0.96, and our non-GAAP adjusted EBITDA to be in the range of $21 million to $28 million.

For the second quarter 2016, our revenue guidance is in the range of $45 million to $47 million and we expect our GAAP loss per share to be between $0.04 to $0.10, we also expect our non-GAAP diluted earnings per share to be in the range of $0.04 to $0.10, and our non-GAAP adjusted EBITDA to be in a range of $2.5 million to $3.7 million.

In wrapping up my thoughts, even though we experienced continued headwinds in the commercial maritime sector, overall we were so pleased with the solid results that we recorded in the first quarter. And with that, I’d now like to turn things back to the operator for the Q&A portion of this morning's call..

[Operator Instructions] And we do have a question from Rich Valera with Needham & Company..

Thank you.

Peter, can you give the actual for the mini-VSAT airtime revenue for the quarter?.

The mini-VSAT airtime revenue was $15.2 million..

Okay.

So that was the overall airtime that included Inmarsat?.

That’s correct. inmarsat was $500,000..

Got it. Okay. I am trying to understand the dynamics going on in this business, I mean were well over a year into this oil and gas downturn and though maybe we’re seeing some signs of stabilization toward the end of last year, but it appears that things have actually taken a turn for the worse at least as it relates to ARPU.

So can you give us a sense for what you're seeing trend wise? I mean how are the ads trending, I think they had get towards the 200 level per quarter at one point last year, have they bounced back at all? And if you can actually give the actual ARPU for the quarter because you typically get out the ARPU for both the contract and the monthly customers and talk about how you're viewing those ARPU for the balance of the year? That would be helpful.

Thanks..

I think that we are still on that 200 to 250 range so we’re still seeing good hardware sales there is no change as far as that go. So, I think what you're seeing the dynamic on the ARPU is that some of the losses were very high revenue customers, so some of those oil and gas, especially the deepwater rigs.

We’re spending a lot of money on the incremental airtime. So it's not enough to look at just the number of sub, so that's why we saw a slight drop in the ARPU from a year earlier. So as to whether that we've reached the bottom there or not, it's really hard to say. I mean we have seen oil prices stabilize a bit now.

They are up 30%, 50% from the low, so that's the good thing, but we really don't have a great visibility into what’s going on in the market overall, because we’re just a small part of what goes on there. So, on the positive side we’re seeing more fleet deals. We’re seeing some other market areas coming up. The tanker market is doing well.

The natural gas, L&G tankers are doing well. We’re getting some good business in offshore tugs, things like that. So, it's not all bad, but the quantity of the revenue that was associated with some of those big oil and gas support vessels, that's really what created the problem this quarter..

And Peter, what were the actual ARPUs the monthly and the subscription ARPU?.

It’s just over $1350 per subscriber a month..

And how about for the monthly ones?.

That’s a blended average. So on the new plans, the new open plans are about roughly $1000 higher than that. So we’re seeing the new plans are working well, but at a small percentage of the total yet so..

I think last call you had talked about targeting high single-digits mini-VSAT airtime growth for the year and it sounds like you’ve start the year down 1% in the first quarter.

So how are you thinking about that mini-VSAT airtime growth number now for this year?.

Right now, obviously we’re down in Q1. We don't have as good visibility as we did a year ago – sorry a quarter ago, because like you we expected this were to flattened out here.

So I think it really depends on what happens in these markets whether we see – if we see them stabilize then we’ll get back to that high single-digit growth because we won't have anything that's offsetting the growth that we’re actually seeing. So I think that's really the key.

So, right now, we are assuming that we should see stability, but no growth in the commercial sectors, and then good growth in leisure and tankers and everything else..

So it’s fair say you're kind of assuming flattish mini-VSAT airtime growth for the year now?.

Yeah. So I think that’s a mid-single-digit growth.

So, the problem as you know is of the revenue, the unlike hardware sales revenue you lose in Q1 carries forward for the balance of the year because it doesn't – obviously it doesn’t compound, it doesn’t grow, because every subscriber you don't have Q1, you know you had planned to have them for the full year or so..

Right.

It that realm mid-single-digit doesn't sound like a layup given the start, I guess we’ll have to see how these markets stabilize?.

You're right. It’s definitely not a layout..

And just looking at the overall guidance for the year, I mean it seems like if the margin clearly mini-VSAT is weaker than you would have expected in entering the year? And when you issue that guidance, but you kept the guidance unchanged, is there anything positively offsetting that or something that's stronger then you had anticipated entering the year?.

Well we’ve got some upside in our FOG business that we didn't expect. We secure the TACNAV order for the U.S.

army, we expect the additional TACNAV orders and some of those are now looking like the same quantities as we had in our original plan, but the amount of equipment they are buying could be significantly larger, so there is some upside there as well..

Got it.

So can you just clarify what have you actually secured relative to the AMPV at this point?.

So, we're designed in, we delivered the first units for their start of engineering and we’ve received the order for their LRIP. So, overall that program is in the 3000 vehicle range, it’s typically our TACNAV type products were in the 10,000 to 20,000 per system price.

So even at the low end that would be more than a $30 million program for us over the coming year, so that's good. And the other thing that’s stronger than expected going in the year is the TracVision product line for both maritime and land-based..

Got it.

And just one more on the mini-VSAT, I mean how would you describe the competitive environment, any change has that been a factor and the tougher performance in that segment?.

It really has it, I think in terms of where we’re competing, I think it’s really the customer's economic situation is what we're up against. We’re not losing business to competitors. We just saw in Inmarsat's results today they were down 4.5% in maritime, so we don't feel like we’re losing any competitive..

And Rich also as we put in the press release this morning, we actually won a pretty retail in the quarter..

Right. Okay. It does it for me. Thank you..

All right. Thanks Rich..

We’ll go next to Jim McIlree with Chardan Capital..

Thank you. Good morning. I don’t want to forge in your mouth, but it sounds like even though the annual guidance is the thing that maybe you’re little less confident or maybe the lower end is more appropriate.

Is that am I hearing that correctly?.

Well, I think that our business is really complicated, so I think if we were giving guidance just on the airtime, we would be much more conservative, but we have a lot of different products to our business, the content business. We’ve seen a little bit of a recovery in the pound since from where it was in Q1, which helped us.

So, I think overall we’re still feeling good about the annual guidance, but as we said in last quarter this really depends on some significant TACNAV orders, just like it did last quarter.

The quarter we just finished Q1 – the quarter before that Q4 was an all-time record quarter for us for both revenue and profit, and big part of that is because we’ve delivered in some of those TACNAV business.

So as a company, we depend on – we have all parts of our business contributing, so in a quarter like this one even though it’s forecast to be very low for defense, you definitely see that in the results.

So our full year guidance assumes that we will get the program that we anticipated or release two out of the three major programs, then we should be at the midpoint or better in our guidance range..

It also sounds like you’re little bit more positive on TACNAV and the guidance and stabilization, shouldn't that result in better margins if that turns out to be the case if you get the same top line as you were expecting, but the mix is more GNS oriented?.

Yeah, that’s true. It’s true for two reasons; one, the hardware margin they are pretty strong and also in our fiber-optic manufacturing facility we have a fair amount of fixed overhead.

So if you come in at a high-end of the revenue range for that component, the margin scales all by itself, but not just due to mix, but just due to the fact we have a fairly fixed overhead base in that factory, so then the margins improve there and then the mix – the benefit of the margin mix is on top of that, so yes..

Can you tell us what percent of the customers are subscribed to the 2.0 pricing plan?.

We have the new 2.0 plans, there is both types of plans have a fixed component a cap, so that’s why we call our 2.0 plans and the sum of those two was around 400 subscribers..

You said 6000 total, so it’s somewhere just 400 divided by 5500 give or take?.

Well, it’s less than that, but the point is that it's margins are improving, the gross margin is much higher on those plans, and the ARPUs are much higher on those plan.

So we made a business model change and there were questions, I think on the last call we assure that we’re not going to generate lower ARPUs with these new plans because they’re now metered and people, so we’re happy to see that that’s not the case..

And even in this environment it seems surprising the customers would be shifting to a higher ARPU plan.

What am I missing in that dynamic?.

The way these plans work is that we've added a portal capability where the fleet manager can assign bandwidth by person. So now they are either allowing people to buy bandwidth on their own or they’re managing their cost, so they still get the fastest speed.

So even though the ARPUs are higher than our average, they are lower than what our competitors are charging for anything close to speed. So for example, if you sign up for a $2000 plan which is one of our open plan, you have a say the 10 gigabyte package, that's a lot less expensive than signing up for a three year $5000 a month VSAT package.

So, it's better for the customer, but it’s also higher ARPU for us..

Is there any fears? Is there any change in operating expenses going forward that I should be aware of either from a development rollout seasonality perspective for the rest of the year?.

I would say that certainly in Q1, we had pretty tight control of our operating expenses, so even though we were little up on our revenue, we were sort of spot on with enough guidance, with our operating profit and net loss and operating loss.

So throughout the course of the year depending on some of these factors, Martin as talked about the upside on some of the TACNAV and versus where we are with VSAT, we are just going to keep a close eye on that a little bit..

Great. I think that will do it for me. Thank you..

Thanks Jim..

And gentlemen, we have no further questions..

As always, Peter and I are available if you wish to contact us directly or via email or give us call. Thanks for your time..

Thank you. And that does conclude today's conference. Thank you for your participation..