Good day, and thank you for standing by. Welcome to the KVH Industries Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. .

I would now like to hand the conference over to Roger Kuebel, Chief Financial Officer. Please go ahead. .

Thank you, operator. Good morning, everyone, and thank you for joining us today for our KVH Industries' Fourth Quarter Results, which are included in the earnings release we published earlier this morning. Joining me on the call are the company's Chief Executive Officer, Brent Bruun; and our Corporate Controller, Anthony Pike.

As you probably saw in our press release, Anthony will be taking over as CFO as of April 1..

Before we dive in, the usual announcements. First, if you would like a copy of the earnings release or if you would like to listen to a recording of today's call, both will be available on our website. If you are listening via the web, feel free to submit questions to ir@kvh.com. .

Further, this conference call will contain certain forward-looking statements that are subject to numerous assumptions and uncertainties that may cause our actual results to differ materially from those expressed in these statements. We undertake no obligation to update or revise any of these statements. .

We will also discuss adjusted EBITDA, which is a non-GAAP financial measure. You'll find a definition of this measure in our press release as well as a reconciliation to comparable GAAP numbers.

We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading Risk Factors in our third quarter Form 10-Q filed on November 9, 2023, and our 2023 Form 10-K, which we plan to file later today.

The company's other SEC filings are available directly from the Investor Information section of our website. Now to walk you through the highlights, I'll turn the call over to Brent. .

Thank you, Roger, and good morning, everyone. In March 2022, we kicked off a transformative period in our company. We did this because we recognized that we needed to change how we operated. We focused on our core business, mobile connectivity, and we have made excellent progress in 2022 and throughout 2023. .

Last year, we expanded our multi-orbit multichannel portfolio with the addition of OneWeb to our service offerings and look forward to launching the service in the second quarter of this year. We entered into an exclusive maritime distribution agreement with Kognitive Networks resulting in our new CommBox Edge, which I will discuss shortly. .

Thanks to our Starlink service provider agreement, we are delivering Starlink hardware, airtime and our OneCare service to support end users and OEMs. And we successfully renegotiated our Intelsat contract to sustain our global GEO network on more favorable financial terms. .

But we also experienced competitive headwinds in 2023. Changes in the market impacted our VSAT and satellite TV terminal sales, which have been an essential element of our offerings, but are no longer contributing toward achievement of our profitability goals.

At the same time, demand for LEO service began to accelerate, putting pressure on GEO airtime services. .

We did have a sequential subscriber contraction in the fourth quarter due to competitive factors, with quarterly airtime revenue of $25.9 million, down 4% from Q4 last year. We expect to offset that contraction and resume subscriber growth in Q2 with additional Starlink activations and with the launch of our OneWeb Service.

Annual airtime overall was up 4% to $107 million. While airtime margins have softened, they remain strong and our subscriber levels at the end of 2023 were even with year-end 2022. However, our annual airtime revenue growth was offset by decline in hardware sales, which require a high fixed cost dedicated manufacturing facility. .

Airtime revenue is core to our business, and we are confident in its future as we increase our Starlink airtime sales and add exciting new services such as OneWeb to our portfolio. At the same time, we believe that demand for our hardware products no longer justifies a dedicated manufacturing facility.

In February, we began a reorganization that allows us to focus on our commitment to deliver world-class integrated services using our multi-orbit, multichannel network. These changes also accelerated our transition from a capital-intensive hardware-focused business to a more nimble integrated-services-oriented organization.

Between now and the end of June, we plan to build sufficient TracNet and TracVision inventories to meet anticipated demand for the foreseeable future, after which, we will wind down our manufacturing operations. .

In addition, we have ample inventory of AgilePlan VSAT terminals, which we will continue to refurbish and use to support new AgilePlan VSAT subscriptions for years to come. We also own our satellite terminal intellectual property and would investigate outsourcing future manufacturing should the demand warrant it.

Because of the reduced need for manufacturing and support services, we are in the process of reducing our head count across several departments, a process that began last month and will continue until the end of June.

I do not expect these reductions to impair our ability to deliver products worldwide or to provide 24/7/365 services and support to our customers and partners. Although we will have a smaller team, we will continue our innovative research and development approach for new products and third-party solutions that we can add to our profit portfolio.

Separately, we've expanded our sales team globally, in particular in Japan and South America. .

I'm excited about the prospects ahead of us and believe that our growing product and service portfolio will strengthen our position as a world-class integrated solutions provider. Our newest addition is the CommBox Edge, a result of our exclusive distribution agreement with Kognitive Networks.

CommBox Edge offers intuitive network and bandwidth management tools and onboard edge computing, simplifying the multi-orbit, multichannel connectivity found on commercial vessels and yachts.

CommBox Edge is an outstanding resource for maritime IT professionals, who want to control the growing array of communication options such as VSAT, LEO and 5G cellular. .

We are also working closely with OneWeb to introduce their global LEO network with custom KVH airtime plans in the second quarter of this year. We are eager to offer this fast, affordable, enterprise-great solution as a new option for mariners considering LEO services for their vessels.

As part of this initiative, we expect to announce a new distribution agreement for commercial-grade maritime panel terminals to support the OneWeb service. .

We also believe that the expanding coverage and capabilities delivered by 5G cellular service will bring tremendous value to mariners in coastal waters. 5G connections offer low per gigabyte cost and data speeds as fast or better than LEO services.

Additionally, the compact affordable technology is well suited for smaller vessels and integration with VSAT and LEO systems on ships of all sizes. We look forward to sharing more news about our developments later in the second quarter. .

So to wrap things up, we are firmly focused on the future following the recent changes in our organization. We are making excellent progress in our evolution as a world-class integrated solutions provider. We are expanding our multi-orbit, multichannel capabilities with LEO connectivity and we'll be adding a new 5G service.

Our goal is to continue to grow our service revenue and resume growth of our subscriber base following the launch of OneWeb. We have a strong business built on global airtime and value-added services. We have an outstanding team, and I am confident in our company's future growth and success. .

Now with that, I'll turn it over to Roger for additional insights into our results. .

Thanks, Brent. As a reminder, I would like to note that similar to our call for Q3, I will not restate data that is in the earnings release or are clearly described in our 10-K. I will focus my comments on information that either elaborates on or clarifies the published data.

First, in the process of completing our audit, we concluded that a correction was required in how we recognize revenue for certain product sales to our commercial customers.

Back in 2018, we adopted accounting standard ASC 606 and as a result, for certain product sales, we deferred both revenue and cost over the expected life of the customer, treating the product sale and the related airtime service as a single performance obligation..

In discussions with our auditors during our 2023 audit, we concluded that these product sales should not be deferred, but rather taken as revenue at the time of the sale. This has resulted in a nonmaterial correction to our financial statements for 2022 and the first 9 months of 2023.

The exact impact of this can be seen by quarter in the footnote 16 of our 10-K. But at a high level, we are reporting total revenue for 2023 of $132.4 million. And on the prior basis, that would have been $133.4 million, so a reduction of $1 million for this accounting change. Gross profit would have been $130,000 more under the prior method. .

Related to our decision to wind down manufacturing, we took 2 charges related to raw materials. First, we took a $5.2 million write-down to our inventory to account for inventory on hand that is in excess of what we anticipate our future need will be.

Second, we took a reserve of $3.6 million to account for purchase order obligations for raw materials that are not on hand, but for which we've placed noncancelable orders that we do not anticipate needing. This primarily relates to orders placed in the first half of 2023 for components with extremely long lead times due to supply chain shortages.

As demand softened, these delivery schedules were pushed out, and it was ultimately concluded that a portion of these orders will not be needed. .

The charges totaling $8.8 million are both included in cost of product sales and account for all but about $600,000 of the $9.4 million Q4 gross margin loss for products. However, we believe that we are now fully reserved for both of these issues, and hopefully, will recover some of that later this year.

Also related to our decision to wind down manufacturing was the reorganization we announced and the elimination of 75 positions. As noted in our press release and related 8-K filing, we expect to incur approximately $3.3 million in severance charges and realize annualized cost savings of approximately $9.3 million from the head count reductions.

Of that $9.3 million, approximately $3.7 million relates to cost of goods sold and $5.6 million relates to OpEx. .

With respect to our fourth quarter financial results, airtime gross margin, which is not reported in our earnings release was 34.9%, down from 43.5% last year. The decline being due to lower average revenue per subscriber and higher bandwidth commitments. Total subscribers were roughly flat with Q4 of last year.

The Q4 operating expenses of $13.0 million include a $2.1 million write-off of a discontinued software project but also benefited from an accrual reversal of approximately $1 million. So the run rate exiting the year on a normalized basis was around $12 million per quarter. .

Our adjusted EBITDA for the quarter was a positive $2.3 million, and our earnings release has the usual reconciliation of that. Capital expenditures for the quarter were $3.5 million, and so adjusted EBITDA less CapEx was negative by about $1.2 million for Q4.

For the full year, adjusted EBITDA was $14.3 million, and CapEx was $10.6 million, so the net result was a positive $3.7 million. Our ending cash balance of $70 million was up approximately $0.5 million from the beginning of the quarter.

Our earnings release provides our guidance for 2024, which is revenue of $125 million to $135 million and adjusted EBITDA of $11 million to $17 million. .

This concludes our prepared remarks, and I will now turn the call over to the operator to open the line for the Q&A portion of this morning's call.

Operator?.

[Operator Instructions] Our first question will come from the line of Chris Quilty with Quilty Space. .

So first, I just wanted to follow up on guidance. And what should we assume for product sales is sort of the Q4 exit rate? And obviously, there's a lot of seasonality to product. I'm just trying to figure out how much we should expect that to wind down by the end of the year. .

Yes, I can answer the specific question. We're not going to wind down product sales. We're winding down our build, and we're going to have ample inventory for 2025 and going into '26. It all depends on how much the demand is, but we won't have any changes as far as wind down as far as the availability of hardware. .

Is that for both the TracVision and TracNet product lines? Or is TracVision -- do you intend to keep those refurbished and running as long as there's demand? Or is the TracVision being shut [ down ] altogether?.

TracVision will have [ there ] again, that's more what we're looking at. We'll have ample inventory to sustain the business and demand through '25 and into '26. .

Great.

And should we assume that most of or all of the charges related to the manufacturing wind-down, the employee reductions are complete as of Q4? Or might we expect additional charges or follow-on charges associated with those actions going into next year?.

Yes. We think we're fully reserved as far as charges. I mean, we will continue to have sort of product-related operations. They won't be manufacturing, but we'll still have a warehouse. We're going to be having the LEO systems coming in and out of that. We're also going to be continuing doing repair and refurbishment.

So there will be activity around the operations -- product operations side, but they won't be manufacturing. But all of the charges, we believe we're fully reserved for everything that would be a charge. .

From an inventory perspective, that's absolutely correct. Since we're going through a staged wind-down, we'll have additional severance charges in both the first and second quarters, right? Because... .

Yes. So the severance charges I mentioned, the $3.3 million of severance charges, that's going to occur over Q1 and Q2, but the majority of that will -- probably 2/3 of that -- more than 2/3 will be in Q2, but... .

Okay. Good. A question on the gross margins. I think you had said last quarter, we should expect about 500 basis point drop or sort of mid-30s gross margin range.

Is that still a good range to use? And associated with that, when we're looking at the Starlink services, that all fall into the product sales category or are there associated services with that?.

What we had said previously was we expected airtime margins in the high 30s, I think there's -- right now, we reported roughly 35%. I think that's probably in that sort of mid -- sort of high end of the mid, low end of the highs sort of range is probably about right.

With respect to Starlink, I mean there are other services that we're going to be providing in association with that. And in fact, as we go forward, you can't really think about it, it's just -- it's not just one or the other. It's going to be VSAT combined with LEOs is what we really see sort of the future being. So it's going to be a combination.

That's what we're really focused on, as well as the 5G that Brent talked about. We think particularly for everything close to shore, 5G is going to become a big part of that. .

Great.

And are there competing products out there with 5G that other resellers are offering?.

Well, 5G services are just starting to take hold, and there will be competitive services. And there's a number of companies that are offering it now. .

So -- but one thing I think that's key not to forget is, it's not just a matter of having 5G. It's a matter of how you integrate 5G with everything else that you've got. So if it's just a leisure customer and that's all they've got is 5G, that's one thing.

But for commercial customers, it's going to be 5G integrated with VSAT and also integrated with LEO. And it's how you're going to manage all those together is going to be very critical for commercial customers. And that's one of the things that we think the CommBox Edge is going to do, we think, better than anything else. .

Yes.

And I actually wanted to ask you, is there a version of that CommBox Edge that would be appropriate for a leisure market? Or is that purely a commercial?.

No, it is definitely -- it's leisure, and it depends on how far down the chain you want go in leisure, but absolutely for both leisure and commercial we offer 2 different tiers of services, which all can be found on our website. And I'm happy to send those to you as well. .

Okay. And the CommBox Edge is the product you codeveloped with Kognitive, where -- I mean... .

Yes, they're doing all the -- yes, they developed it. We have an exclusive maritime distribution agreement. They're going to be doing additional development with some of our suggestions and guidance, but they're doing the development. .

Great.

And so when is that product -- is it commercially released now?.

Yes. .

And I haven't seen any marketing materials on it, and I know there are similar products out in the market. How do you position that relative to other integrated systems in terms of its performance or speed or cost? Or how does it compare with what's currently... .

We think it's highly -- I'm sorry, I interrupted you. We think it's highly competitive. The services and the elements that come along with the offering are highly competitive and not better than others that are introduced in the market. Additionally, the user interface is incredibly user-friendly. And that's one of the things that we're very focused on.

I can set it up, on my own desk in our office, and I'm not overly technical. So it's really about -- it's about the services that we're able to offer with that, but also the ease of use and integration. .

Got you. And you had mentioned a OneWeb terminal distribution.

Can you inform me who has maritime OneWeb terminals available at this point besides Intellian?.

Yes, they're being developed and released and it's Intellian as well as Kymeta. Yes, I was going to say Kognitive, Kymeta, other K name. .

I didn't know they had a maritime product. So, okay, that's good. You had talked about sales and distribution.

You mentioned Japan where you've had a pretty long-standing market presence, but why the emphasis on South America?.

With South America, there's a tremendous amount of business. We have a presence in Brazil. As you know, Brazil is Portuguese-speaking, we felt the need to have a local person who's actually out of Colombia, who speaks Spanish and can really cater to the rest of the market.

And we've been managing South America outside of Brazil, from Brazil, but also from the U.S., and we felt that we were best suited, and we felt there's more opportunity if we actually had a dedicated resource in region. .

Great. And I guess a final question. You had mentioned a focus on R&D and developing more products and services or delivering connectivity.

Should we expect a step-up in R&D on a go-forward basis? And if so, how much?.

No. It's a step-down, it's a scaled-back team, but the point of the comment was that we're still focused on it and we're not ignoring it altogether. .

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect..