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Operator: Good day and thank you for standing by. Welcome to the Q1 2025 KVH Industries, Inc. Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Anthony Pike, Chief Financial Officer. Please go ahead.

Anthony Pike: Thank you, Stephen. Good morning, everyone, and thank you for joining us today for KVH Industries first quarter results, which are included in the earnings release we published earlier this morning. Joining me on the call is the company’s Chief Executive Officer, Brent Bruun. Before I get into the numbers, a few standard statements. Firstly, 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. And if you are listening via the web, please 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 will 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 2024 Form 10-K, which was filed on March 10. The company’s other SEC filings are available directly from the Investor Information section of our website. Now to walk you through the highlights of our first quarter, I’ll turn the call over to Brent.

Brent Bruun: Thank you, Anthony, and good morning, everyone. Our first quarter results reflect the positive impact of our strategic initiatives and our commitment to managing costs. Compared to the fourth quarter of last year, our gross profit grew sequentially. We increased our subscriber base by 5% and operating expenses and capital expenditures were both in check. Revenue declined year-over-year in the first quarter to $25.4 million, primarily due to lower revenue from our VSAT airtime service, which includes the loss of the U.S. Coast Guard revenue. However, airtime gross margin was up roughly 3% from the fourth quarter, thanks to solid margin contribution from Starlink. We saw Starlink revenue continue to increase as a percentage of our total revenue over the course of the quarter.

We also increased quarterly shipments of connectivity terminals to more than 1,300 units, our fifth consecutive record quarter. These shipments include a significant increase in Starlink terminals, continuation of orders for our TracNet and TracFone VSAT terminals and for the first time, OneWeb terminals. Our subscriber growth also accelerated in the first quarter as we increased our subscribing vessels by 5% compared to the fourth quarter of 2024. I’m pleased to report that we have more than fully recovered from the decline in subscribing vessels that we experienced in 2023 in the first quarter of 2024. We now have more than 7,400 subscribing vessels. Starlink drove this growth as we experienced strong demand in the commercial and leisure markets in the first quarter.

Roughly 30% of Starlink activations in Q1 were hybrid configurations, illustrating the value of our ability to deliver a multi-orbit managed solution for vessels. We also added the new Starlink Mini terminal to our product portfolio for land and maritime applications. Our Commbox Edge Communications Gateway also continued to thrive in the first quarter due in part to its versatility in managing Starlink Communications. Product shipments were up 33% from the fourth quarter of last year, and we increased our active CommBox Edge subscribers by 35% from last quarter. We are working diligently to expand the capabilities, features and value offered by CommBox Edge. Earlier today, we announced the launch of CommBox Edge Secure Suite. This new feature set is designed to detect, prevent and report on cybersecurity threats.

Thanks to its advanced intrusion prevention system, Security Suite actively identifies and blocks harmful traffic in real time to reduce the risk of vessel communications, operations and network security. To achieve this, Security Suite employs some of the most advanced cyber security and proactive monitoring technology available, including Cisco Talos, which focuses on identifying emerging and existing cyber threats and Cisco Snort, which monitors, analyzes and responds to malicious network traffic in real time. As discussed in our Q4 earnings call, we began shipments and activations of OneWeb terminals in late January. We are seeing significant interest in the service, especially outside the U.S. We are very pleased that OneWeb has been added to our product and service portfolio.

Looking at our overall business operations, the sales of both our headquarters and factory facilities remain pending, subject to closing conditions. We expect to close the sale of our headquarters before the end of the quarter and anticipate that the factory sale will close in Q3 following zoning approvals. During Q1, we bought back shares under the terms of the stock repurchase program approved by our Board of Directors in December 2024. Through the end of Q1, we purchased more than 30,000 shares at a cost of roughly $163,000. And finally, we are keeping an eye on tariffs, but their status and potential impact are uncertain. our exposure to potential tariffs on imports from China is reduced, thanks to the purchase of components we carried out in 2024 as part of our manufacturing wind-down efforts.

At this time, we don’t expect tariffs to have a material impact on our costs. So in conclusion, we are very pleased with the results driven by our strategic initiatives. We achieved record-breaking subscriber growth, increased product shipments and successfully added OneWeb to our portfolio. While there are still challenges ahead, I am confident in our path going forward. And now I will turn the call back to Anthony to discuss the numbers. Anthony?

Anthony Pike: Thank you, Brent. As a reminder, I would like to note that similar to our call for Q4, I will not restate data that is in the earnings release are clearly described in our 10-Q. I will focus my comments on information that either elaborates on or clarifies the published data. With respect to our first quarter financial results, airtime gross margin, which is not reported in our earnings release, was 31.5%, which is up compared to the prior quarter gross margin of 28.2%. Excluding depreciation, our airtime gross margin for the first quarter was 44.1% compared to 41.4% in the prior quarter. This improvement in gross margin can be mainly attributed to 2 things: firstly, a reduction in our 2025 GEO bandwidth commitment, resulting in the first quarter cost being $1.4 million less than the prior quarter and secondly, because the proportion of airtime revenue derived from LEO is increasing, and we are seeing strong margins from our LEO revenue.

Total subscribing vessels at the end of Q1 were just above 7,400, which, as Brent mentioned, is approximately 5% up from the prior quarter. GEO churn was in line with our expectations, but LEO shipments were actually higher than predicted. Reported Q1 product gross profit was breakeven compared to a positive $0.3 million, excluding nonrecurring charges in the prior quarter. We expect product margins to remain about breakeven and view the real value of our hardware shipments is coming from the airtime revenue they generate in the future. The Q1 operating expenses of $9.7 million were $0.4 million or 5% higher than the prior quarter and $2.3 million or 19% lower than the first quarter of 2024 on a like-for-like basis, excluding nonrecurring charges.

Our adjusted EBITDA for the quarter was $1 million as our earnings release has a usual reconciliation of that. Capital expenditures for the quarter were $1.1 million, and so adjusted EBITDA less CapEx, which we believe is a good proxy for free cash flow generated from our ongoing business was negative $0.1 million. This compares to an adjusted EBITDA less CapEx of negative $0.3 million in the fourth quarter of 2024, with adjusted EBITDA of $0.5 million less capital expenditure of $0.8 million. Our ending cash balance of $48.6 million was down approximately $2 million from the beginning of the quarter, which was driven by movements in working capital. Overall, we believe the first quarter results are positive with our LEO business growing at an unprecedented rate and our GEO business transitioning as expected.

We continue to closely manage our GEO bandwidth commitments, which run until the end of 2026 as GEO demand decreases. This will continue to put pressure on our GEO margins. However, we are very pleased with our strong LEO margins as we transition the business away from being GEO focused and into a primarily LEO-based mobile connectivity market. This ongoing double-digit annual growth in subscribers combined in line with strong LEO margins and careful cost control leaves us confident that the company will be in a solid position to generate positive cash flow moving forward. 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: [Operator Instructions] Our first question comes from the line of Chris Quilty of Quilty Space.

Christopher Quilty: I had a question to begin with on the LEO margins. Obviously, you did a prepurchase of capacity, which has helped. But when you look at your LEO margin, how much of that — like if you were to break it down into a pie is the actual margin on the airtime versus the contribution from the services that you’re pulling along on top of that?

Anthony Pike: Yes, sure. Chris. So yes, the vast majority of the margin is both in terms of dollar, but in percentages really coming from the actual airtime. I’m assuming you’re referring to the kind of the One Care support that we add on to that.

Christopher Quilty: Yes, either warranty or care or cyber or service sort of add-ons to the core airtime revenue?

Anthony Pike: Yes. So the add-ons are similar to the margins we received them similar add-ons in the rest of the business. But the actual underlying LEO bandwidth margin is still very strong. So when we’re talking about the strong margins, that’s actually for the bandwidth. We’re not just really deferring to the value-added services in that regard.

Christopher Quilty: Great. And obviously, SpaceX has fairly frequent changes in their plans over time. Where do you sit now in terms of — are the plans fairly well optimized for your customers? Or do you think there are still changes that you’ll see coming?

Brent Bruun: That’s a very good question. And the plans that we have currently are very well optimized for our customers. However, Starlink has changed some pricing that can be seen on their website where they’re implementing a terminal access charge on a monthly basis. Now we will be also responsible for charging a fee similar — well, we will be responsible for charging a terminal access charge at some point later this year as we renegotiate our follow-on pool for Starlink. The market is driving what’s optimal for our customers, and we feel that we’re in a good position to provide them a robust service now as well as in the future after we have a follow-on pool better access.

Christopher Quilty: So obviously, I think in the land market, you’re seeing up charges for capacity-constrained areas. Do you see the access charge here on the maritime? Is that related to capacity issues or literally just pricing strength of SpaceX?

Brent Bruun: I mean, I guess you can call it pricing strength. It’s — there’s still a load on their network on a terminal that’s not even transmitting any significant amount of data. So they wanted to control the load on their network. And in turn, they can ensure themselves, and I’m speaking for them, obviously, a certain level of revenue on a per terminal basis versus having virtually nothing of [indiscernible] just the 50 gigabyte plan.

Christopher Quilty: Understand. And I mean, again, this is, what, 5 straight quarters of record shipments and the vast majority being Starlink terminals. Do you see a slowdown? I mean you’re adding terminals on a quarterly rate more than you would on an annual basis historically. Are there concerns around like are you still seeing large pools of demand and customers out there? Or is the maritime market going to eventually reach some kind of a saturation point?

Brent Bruun: Yes. That’s a multipronged question. One, the rate at what we’ve been selling terminals very well may not keep up. However, we will continue to sell them, which we anticipate increasing our installed base. As far as saturation with some of the price points with this mini terminal as well as being able to get data plans in hundreds of dollars, it’s opened up the market completely, not only to take on existing VSAT service or L-band services, but just services that weren’t provided at all. So the market is so much larger. I don’t envision saturation at any point in the foreseeable future with how much larger the addressable market has gotten over the last year or 2.

Christopher Quilty: And you’ve talked about the fact that you’re starting to see some expansion beyond the maritime market. Has that gotten to the point where you’re actually hiring in people to target applications outside of maritime?

Brent Bruun: Are you referring to land-based communications?

Christopher Quilty: Yes, for some of the land apps.

Brent Bruun: Right now, our existing sales team is handling all land-based application sales. It’s not large enough to report on at this juncture. They are working with service providers that are specific to land-based opportunities versus we work with a number of maritime service providers. So we’re not hiring, but we are identifying new and signing up service providers, which are specifically focused on land opportunities.

Christopher Quilty: Great. And I guess just a final question here. The Coast Guard contract, how does that roll off through the balance of the year where those headwinds finally lift? Is it all the way out to the fourth quarter of ’25 or more like the third quarter?

Brent Bruun: We had — and Anthony can talk about the specific numbers. We had a small amount of revenue in the fourth quarter. excuse me, Anthony, between the first, second and third quarters, that was all very consistent revenue. And so we’ll see a negative variance through the third quarter for that and still a negative variance, but much smaller in the fourth quarter.

Anthony Pike: Yes. I was just going to add to that, Chris. So for the first 3 quarters last year, it was around $2.5 million revenue per quarter. And then in the last quarter, there was a final contractual payment of around $0.5 million. And of course, there’ll still be nothing in this year, certainly nothing of any significant value. There’s still a small amount of business with them, but less than $100,000 a quarter.

Christopher Quilty: Got it. And actually, final question. You did a small, maybe symbolic buyback here in the quarter. But given the fact that the company is expecting to be free cash flow positive in ’25, is that something that you think you’ll put more effort into on the buyback?

Brent Bruun: We’re putting the appropriate amount of effort into it. Although the numbers sound rather small, that was just in the first quarter. We’re continuing to buy back every day. And so we should — we’ll see a much larger number disclosed next quarter.

Operator: Thank you. I am showing no further questions at this time. We’d like to thank you for your participation in today’s event, and have a great day. This does conclude the program. You may now disconnect.